-----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, PHbTLBIDIZxrS1of9pvcLpuwzqzQcf680SqOplzFi6wh3RGzIf5eKPR06G4kjYtK rQcknG6eDD98Jnas+5cmdg== 0000950110-96-000756.txt : 19960702 0000950110-96-000756.hdr.sgml : 19960702 ACCESSION NUMBER: 0000950110-96-000756 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08533 FILM NUMBER: 96588870 BUSINESS ADDRESS: STREET 1: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 201-898-1500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 Commission File Number 1-8533 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2632319 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Sylvan Way, Parsippany, New Jersey 07054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 898-1500 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------------ Common Stock, $.01 par value American Stock Exchange 8 1/2% Convertible Subordinated Debentures American Stock Exchange due August 1, 1998 9% Senior Subordinated Convertible Debentures American Stock Exchange due October 1, 2003 Securities registered pursuant to Section 12(g) of the Act: None 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 the filing requirements for the past 90 days. Yes [ ] No [X] The market value of shares of Common Stock held by non-affiliates, based on the closing prices for such stock on the American Stock Exchange on June 24, 1996, was approximately $57,900,000. The number of shares of Common Stock outstanding as of June 24, 1996 was 5,505,207 (exclusive of 463,859 shares of Common Stock held in the treasury). DOCUMENTS INCORPORATED BY REFERENCE 1. Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year ended March 31, 1996), incorporated in Part II. 2. Definitive Proxy Statement, dated June 28, 1996, for the 1996 Annual Meeting of Stockholders, incorporated in Part III. PART I ITEM 1. BUSINESS GENERAL The registrant, Diagnostic/Retrieval Systems, Inc. (hereinafter, the "Company" or "DRS") was incorporated in 1968 and is a diversified, high-technology company serving global government and commercial markets. Principally a developer and manufacturer of a variety of sophisticated, leading edge systems used for the processing, display and storage of data, the Company provides its customers with a broad range of products, including electronic sensor, electronic imaging and electro-optical systems, and offers a full complement of technical support services. The Company is organized into three operating groups: the Electronic Systems Group ("ESG"), which primarily designs, manufactures and markets high-technology computer workstations for military customers and also provides technical support services; the Electro-Optical Systems Group ("EOSG") which produces electro-optical sighting and targeting systems for military customers; and the Media Technologies Group ("MTG"), which designs and manufactures data storage and media technology products for both military and commercial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "Commercial Off-The-Shelf" ("COTS") product designs, whereby commercial electronic components are integrated, adapted, upgraded and "ruggedized" for application in harsh military environments. Using COTS designs, the Company develops and delivers its products with significantly less development time and expense compared to traditional military product cycles, generally resulting in shorter lead times, lower costs and the employment of the latest information and computing technologies. The design and manufacture of COTS-based products is a complex process requiring specific engineering capabilities, extensive knowledge of military platforms to which the equipment will be applied and in-depth understanding of military operating environments and requirements. STRATEGY The Company believes that the nature of modern warfare has changed, dictating increasing reliance on real-time, accurate battlefield information derived from increasingly sophisticated defense systems and electronics. Additionally, the nature of military procurement programs has changed, requiring suppliers to become more efficient and adaptable to current and future market needs. In recent years, the Company has restructured its management team and implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the Cold War, military budget constraints and the COTS mandate. In addition to winning contracts for new programs and supporting existing programs, the Company's strategies include: o designing new products and adapting existing products for use by all branches of the military; o transferring technologies developed in the defense sector to commercial and industrial markets; and o acquiring businesses that will further strengthen and complement the technology, product and market reach in the electronic systems, data storage systems and electro-optical systems segments of the marketplaces targeted by the Company. To effect these strategies, the Company has (i) acquired several businesses with complementary military and commercial products and technologies over the last three years; (ii) entered into strategic relationships with other defense suppliers such as Lockheed-Martin Tactical Defense Systems (formerly, Loral Corporation) and Northrop-Grumman (formerly, Westinghouse Electric Corporation), among others; (iii) emphasized the development of COTS-based products, as well as products and systems that are easily adapted to similar weapons platforms used by all branches of the military; and (iv) implemented cost reduction initiatives to reduce its fixed-cost base, to allow for growth and to maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last three fiscal years. Acquisitions. In October 1993, the Company acquired Technology Applications & Service Company ("TAS"), a designer and supplier of advanced command and control software and hardware. TAS' business, which focuses primarily on radar displays, augments the Company's core expertise in sonar signal processing, allowing the Company to offer complete command and control system solutions to its naval customers. In December 1993, the Company purchased its 80% interest in Laurel Technologies ("Laurel"), then primarily an assembler of wire harness products for aerospace customers. The addition of Laurel provided the Company with the opportunity to consolidate the manufacturing operations of ESG and has enabled the Company to solicit and bid effectively for long-term system development and manufacturing contracts. Also in December 1993, the Company acquired the assets of CMC Technology ("CMC") which provided the Company with a key customer base in the commercial video recording systems industry. In November 1994, the Company acquired Ahead Technology Corporation ("Ahead"), now located with CMC in San Jose, California. Ahead designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. In July 1995, the Company acquired substantially all of the assets of Opto Mechanik, Inc., which now constitute OMI Corp. ("OMI"). This acquisition enables EOSG to expand its electro-optical targeting products and consolidate certain manufacturing activities in a lower cost facility while adding backlog in complementary product areas. In February 1996, the Company acquired substantially all of the assets of Mag-Head Engineering Company, Inc. ("MEC"), a manufacturer of audio and flight recorder heads. This acquisition provides the Company with an established manufacturing capability in the area of magnetic recorder heads and, when coupled with CMC and Ahead, allows the Company to apply its expertise in high-technology recorder head products in select commercial markets. In furtherance of its strategic plan, in February 1996, the Company acquired a 90% interest in DRS Medical Systems, a partnership formed to develop, manufacture and market medical ultrasound imaging equipment. The DRS Medical Systems partnership provides a means for the Company to apply its expertise in sonar and image processing technology to related commercial applications. Adaptable Product Designs. The Company's recent focus has been on the design and development of products that can be used by all branches of the military. This enables the Company to increase revenues, reduce product costs and decrease reliance on U.S. Navy procurement programs. The Company's display systems, originally designed under a U.S. Navy development contract, are open-architecture information processing workstations that can be adapted for use in other branches of the military. Similarly, the Company's boresight products, originally designed for use with the U.S. Army's Apache attack helicopter, were specifically designed to be adaptable to other air, sea or land-based weapons platforms. The boresight system has been successfully applied to the U.S. Marine Corps' Cobra helicopter and to the U.S. Air Force's AC-130 Spectre gunship platforms; recently, proposals have been submitted for its use on F-15 fixed-wing aircraft. Cost-Reduction Initiatives. The Company continues to focus on streamlining its operations and, during fiscal 1996, the Company consolidated several of its manufacturing facilities. COMMERCIAL OFF-THE-SHELF (COTS) PRODUCT DESIGNS The concept of designing and manufacturing military products and systems through the integration and adaptation of existing commercial and military products was developed in response to both decreasing military budgets and the increasing pace of technology. The use of COTS designs entails the purchasing, refitting, upgrading and "ruggedization" (repackaging, remounting and stress testing to withstand harsh military environments) of available commercial components. The Company strives to apply COTS designs to most of its new products. Management believes that the adaptation of available commercial components to existing as well as to new military systems and applications offers two primary advantages over traditional military systems development and procurement cycles: (i) it has the potential to save significant amounts of time and expenditures in the area of research and development and (ii) as commercial product development and production cycles become shorter than their military equivalents, the adaptation of commercial technology to battlefield systems has the potential to shorten military product cycles. MARKET OVERVIEW The Company believes that the market for military electronics and related equipment will be influenced by two primary factors: First, the nature of modern warfare dictates increasing reliance on timely and accurate battlefield information to ensure that increasingly costly assets are deployed efficiently and to minimize destruction of nonmilitary targets. In general, military engagements have evolved from large-scale undertakings, where numerical superiority was the key to dominance, to "surgical strikes" where the ability to observe and strike accurately and at will from afar has become a major means of both deterrence and loss minimization. Advancing technology has been a major factor in increasing the precision strike capability of the U.S. military and has increased the "per shot" cost of arms. These factors combine to produce a military, economic and political environment requiring increased weapons efficiency and accuracy. In addition, real time data is needed for in-theater evaluation, damage assessment and training, as well as to reduce and minimize incidents of U.S. casualties due to friendly fire. Second, it is often more cost-effective to refit and upgrade existing weapons platforms than to replace them. With the development and unit costs of new platforms increasing rapidly amid a political and economic environment demanding decreasing overall military expenditures, Congress and the military have delayed or canceled the implementation of many proposed weapons systems, opting instead to improve the performance, and extend the life, of existing weapons through improved battlefield intelligence and equipment enhancements. This increasing focus on cost efficiencies has manifested itself in the military's COTS program. COMPANY ORGANIZATION AND PRODUCTS The Company is organized into three operating groups: ESG, EOSG and MTG. A description of the groups and their products follows below: ELECTRONIC SYSTEMS GROUP ESG consists of DRS Military Systems ("Military Systems"), located in Oakland, New Jersey, TAS, located in Gaithersburg, Maryland, Laurel, located in Johnstown, Pennsylvania, and DRS Medical Systems, located in Mahwah, New Jersey. Also, under the direction of TAS is the Technical Services Division ("TSD"), located in Virginia Beach, Virginia and San Diego, California. Military Systems designs, manufactures and markets signal processors and display workstations which are installed on naval ships for antisubmarine warfare ("ASW") purposes and in land-based surveillance systems used for underwater surveillance of harbors and coastal locations. These workstations receive signals from a variety of sonar-type sensors, processing the information and arranging it in a display format enabling operators to quickly interpret the data and inform command personnel of potential threats. Major product lines and contracts include: o AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical workstation to be qualified by the U.S. Navy and was designed to comply with the stringent requirements of the Aegis (DDG-51) shipbuilding program. Replacing the sensor displays in the SQQ-89 ASW Combat Suite, it employs dual processors enabling simultaneous I/O and graphics processing. This new approach allows for required high bandwidth processing, while maintaining response times for opera tor/machine interfaces. The system architecture can be adapted to meet various interface, cooling, memory, storage and processing requirements. o AN/SQR-17A(V)3: The Mobile In-Shore Undersea Warfare (MIUW) system is deployed in land-based vans, utilizing sonobuoys and anchored passive detectors for harbor defense, coastal defense and amphibious operations surveillance, as well as to enhance drug interdiction efforts. This system currently is being procured for utilization in 22 field installations. Military Systems is under contract to provide various upgrades to these field installations. o AN/SQQ-TIA: This portable training system is used on board MIUW vans to simulate actual sonar signal processing sets currently used by the U.S. Navy and is employed primarily for Naval Reserve training. o Airborne Separation Video Systems ("ASVS"): In fiscal 1996, Military Systems was selected as the prime contractor on this tri-service (Army, Navy and Air Force) program to develop ASVS for the test and evaluation of weapons separation events on board various fixed- and rotary-wing military aircraft. The systems include an electronically-shuttered, fast-frame, high-resolution, digital imaging camera and a high-density, digital data storage device. Military Systems is also incorporating a color readiness capability and is miniaturizing the system's high-speed, electronic camera to assure compatibility with air platforms, such as the Air Force's F-16. TAS produces tactical (e.g., combat/attack) information systems and training systems. Major product lines and contracts include: o AN/UYQ-70: The AN/UYQ-70 is an advanced, open-architecture display system designed for widespread application through software modification, and is to be deployed on Aegis and other surface ships, submarines and airborne platforms. This system was developed for the U.S. Navy under subcontract with the Government Systems Group of Loral Corporation (currently, Lockheed- Martin Tactical Defense Systems). The AN/UYQ-70 is a self-contained, microprocessor-based unit complete with mainframe interface software offering advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a shipboard mainframe computer at approximately 25% of the cost of the older units. This program is currently in the production phase. Based upon the size of the naval surface fleet and the average number of workstations to be deployed on each ship, the Company believes that the potential market for this workstation product may be in excess of 5,000 units over the next decade. o Military Display Emulators: These workstations are functionally identical to existing U.S. Navy shipboard display consoles built to military specifications, but are manufactured using low cost COTS components suitable for land-based laboratory environments. These Military Display Emulators are used in U.S. Navy development, test and training sites as plug-compatible replacements for the more expensive shipboard qualified units. The Company is currently delivering these Military Display Emulators for use in the Aegis and other U.S. Navy programs. Laurel, which is 80% owned by DRS through a partnership with Laurel Technologies, Inc. formed in December 1993, functions as a cost efficient manufacturing facility and focuses on two areas. First, Laurel provides manufacturing and product integration services for Military Systems, TAS and Photronics Corp. ESG's workstation and simulator systems, among other products, are manufactured in this facility. In addition, in fiscal 1996, Laurel was awarded a subcontract to manufacture AN/UYQ-70 workstations for Lockheed-Martin Tactical Defense Systems. Second, Laurel manufactures complex cable and wire harness assemblies for large industrial customers that are involved in the military and commercial aerospace industry. These products are then installed by the customers in a wide variety of rotary-blade and fixed-wing aerial platforms. DRS Medical Systems is 90% owned by the Company through a partnership with Universal Sonics Corporation and was formed to develop, manufacture and market high-quality, low-cost medical ultrasound equipment. DRS Medical Systems currently manufactures ultrasound and sonographic systems principally for original equipment manufacturers. TSD performs field service and depot level repairs for ESG products, as well as other manufacturers' systems. Principal locations are in close proximity to U.S. Naval yards in Norfolk, Virginia and San Diego, California. Services, including equipment and field change installation, configuration audit, repair, testing and maintenance, are performed for the U.S. Navy and, to a lesser extent, commercial customers. TSD also has performed work for foreign navies, including those of Australia, the Republic of China, Egypt, Turkey and Greece. ELECTRO-OPTICAL SYSTEMS GROUP EOSG consists of Photronics Corp. ("Photronics"), located in Hauppauge, New York and OMI located in Palm Bay, Florida. Photronics produces boresighting equipment used to align and harmonize the navigation, targeting, and weapons systems on rotary- and fixed-wing aircraft and armored vehicles. Multiple Platform Boresighting Equipment (MPBE) is Photronics' main product line. These products can be used on both rotary- and fixed-wing aircraft, as well as on armored vehicles. MPBE currently is used on the Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters and on the Air Force's AC-130 Spectre gunship, the Company's first award for this equipment involving fixed-wing aircraft. Proposals have been submitted to employ the system on the F-15 fighter. This technology is proprietary to the Company. Until the latter part of fiscal 1996, Photronics also produced electro-optical components used in Sidewinder, Stinger and new generation air-to-air and surface-to-air missiles in its Hauppauge facility. In order to reduce its production costs, Photronics consolidated its missile component manufacturing operations to OMI's new facility in Palm Bay, Florida. In addition, the move created space for the expansion of Photronics' MPBE programs in Hauppauge. OMI designs and manufactures electro-optical targeting and sighting systems and missile components. Major product programs at OMI include: o Night Vision Binoculars: OMI is currently under contract to develop and manufacture 1,182 units for the Israeli military. The Night Vision Binocular is a hand-held viewing binocular that incorporates an image intensifier tube, laser rangefinder and digital compass in a compact lightweight system suited for infantry units, special forces and night operations involving forward observers and reconnaissance patrols. The Night Vision Binocular displays range and azimuth data in the soldier's eyepieces, allowing identification of targets and providing essential fire support data for nighttime engagement. These units have a range of 20 to 2,000 meters. o Gunners Auxiliary Sight: This is an electro-optical device used as a primary or backup sight on M-1 Abrams battle tanks and contains a very sophisticated electro-optical train and a laser protective filter. OMI has produced more than 2,000 of these instruments and continues to operate as a repair and retrofit facility for the M-1A2 upgrade program, which will continue through 1997, with options through 1999. o TOW Optical Sight: OMI is currently the only U.S. qualified producer of this device. This complex electro-optical system is the main component of the U.S.'s premier antitank weapons system. o TOW Traversing Unit: This unit provides target tracking accuracy for the TOW antitank weapon, acting as the mount for the TOW Optical Sight and the associated missile launch tube. OMI is currently the only qualified manufacturer of this tightly toleranced assembly, and is currently working on modification and retrofit programs. OMI has also been contracted to modify a version for use by an overseas customer. o Improved TOW Acquisition System: Working with the primary contractor for the TOW sighting system, this antitank system was developed for the U.S. Army's HMVE vehicle. o Day/Night Tank Sighting System: This system was developed in concert with a major primary contractor. OMI is a major subcontractor, currently supplying three of the major assemblies. o Eyesafe Laser Rangefinder: OMI competed against the U.S. Army's historical primary laser supplier for this contract and was awarded an initial contract for preproduction units. o Missile Components: The components originally consisted of primary mirrors used in the nose-mounted infrared seeker of Sidewinder and Stinger missiles. Development efforts have resulted in the ability to provide increased content to include the secondary, tertiary and fold mirrors, housing and nose dome. The Company is currently under contract to produce infrared components and subassemblies on many of the next-generation infrared missile systems. MEDIA TECHNOLOGIES GROUP MTG consists of Precision Echo, Inc. ("PE"), located in Santa Clara, California, Ahead and CMC, located in San Jose, California and MEC, located in Golden Valley, Minnesota. PE manufactures a variety of digital and analog recording systems utilized for military applications including reconnaissance, ASW and other information warfare data storage requirements and is a predominant U.S. manufacturer of 8 millimeter military recorders supplied to the U.S. armed forces. PE's products include: o AN/USH-42: This system was developed originally for deployment in the U.S. Navy's A-6E aircraft. PE is currently under contract to modify the USH-42 for use on the Navy's S-3B ASW aircraft to record radar, infrared, data bus, navigation and voice data. o WRR-818: This ruggedized video recorder has been selected for use in U.S. F/A-18 aircraft and several foreign military aircraft. It also has been selected by the U.S. Army for use in its Kiowa Warrior reconnaissance helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's light armored reconnaissance vehicles. These recorders provide a high-resolution video record of missing data, operators' displays and external imagery. o AN/AQH-9 and AN/AQH-12: These products are high quality helicopter mission recording systems utilized to record sonar and mine hunting information and other intelligence data. Ahead manufactures burnish, glide and test heads used in the production of computer disk drives. These consumable products are used by many U.S. disk drive manufacturers to hone the surface and ensure the quality of magnetic disks used in computer hard drives. Customers include most major computer disc drive manufacturers. CMC manufactures and refurbishes commercial video recording products for broadcasters operating worldwide. CMC can refurbish pre-1993 head assemblies located on these machines at a significant cost savings compared to replacement. CMC is developing, in conjunction with Ahead, the ability to refurbish post-1993 recorders used by its customer base. Ahead also has the capability to manufacture recording heads for CMC. In order to foster operational synergies and to allow space for growth, Ahead and CMC moved into a new joint facility in fiscal 1996. MEC designs, manufactures and refurbishes magnetic broadcast audio heads, magnetic flight recorder heads and magnetic strip card readers for the U.S. Government, defense and commercial markets. CUSTOMERS A significant portion of the Company's products are sold to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or subcontractors thereof. Approximately 78%, 84% and 94% of total consolidated revenues for fiscal 1996, 1995 and 1994, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies. See "Export Sales" below for information concerning sales to foreign governments. BACKLOG The following table sets forth the Company's backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated: March 31, March 31, March 31, 1996 1995 1995 ------------- ------------- ------------- Government Products: U.S. Government....... $120,000,000 $115,200,000 $123,700,000 Foreign Government.... 21,200,000 8,600,000 5,800,000 ------------ ------------ ------------ 141,200,000 123,800,000 129,500,000 Commercial Products......... 4,400,000 2,200,000 5,100,000 ------------ ------------ ------------ $145,600,000 $126,000,000 $134,600,000 ============ ============ ============ "Backlog" refers to the aggregate revenues remaining to be earned at the specified date under contracts held by the Company, including, for U.S. Government contracts, the extent of the funded amounts thereunder which have been appropriated by Congress and allotted to the contract by the procuring Government agency. Fluctuations in backlog amounts relate principally to the timing and amount of Government contract awards. At March 31, 1996, the Company's backlog of orders was approximately $145.6 million compared with $126.0 million at March 31, 1995. The increase in backlog for the fiscal year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $17 million of backlog from the OMI asset acquisition. New contract awards of approximately $104.3 million were booked during the fiscal year ended March 31, 1996. Approximately 60% of the backlog at March 31, 1996 is expected to result in revenues during the fiscal year ending March 31, 1997. RESEARCH AND DEVELOPMENT The military electronics industry is subject to rapid technological changes, and the Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, the Company's technological expertise has been an important factor in its growth. A portion of its research and development activities has taken place in connection with customer-sponsored research and development contracts. All such customer-sponsored activities are the result of contracts directly or indirectly with the U.S. Government. The Company also invests in Company-sponsored research and development. Such expenditures were $600,000, $800,000 and $500,000 for fiscal 1996, 1995 and 1994, respectively. Revenues recorded by the Company for customer-sponsored research and development were $12,100,000, $18,800,000 and $27,500,000 for fiscal 1996, 1995 and 1994, respectively. CONTRACTS The Company's contracts are normally for production, service or development. Production and service contracts are typically of the fixed-price variety with development contracts currently of the cost-type variety. Because of their inherent uncertainties and consequent cost overruns, development contracts historically have been less profitable than production contracts. Fixed-price contracts may provide for a firm-fixed-price or they may be fixed-price-incentive contracts. Under the firm-fixed-price contracts, the Company agrees to perform for an agreed-upon price and, accordingly, derives benefits from cost savings, but bears the entire risk of cost overruns. Under the fixed-price-incentive contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts, the savings are apportioned between the customer and the Company. However, if actual costs under such a contract exceed estimated costs, excess costs are apportioned between the customer and the Company up to a ceiling. The Company bears all costs that exceed the ceiling. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which the Company is committed to deliver without regard to performance cost, cost-type contracts normally obligate the Company to use its best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of the Company's reduced risk. Under cost-plus-incentive-fee contracts, the incentive may be based on cost or performance. When the incentive is based on cost, the contract specifies that the Company is reimbursed for allowable incurred costs plus a fee adjusted by a formula based on the ratio of total allowable costs to target cost. Target cost, target fee, minimum and maximum fee and adjustment formula are agreed upon when the contract is negotiated. In the case of performance-based incentives, the Company is reimbursed for allowable incurred costs plus an incentive, contingent upon meeting or surpassing stated performance targets. The contract provides for increases in the fee to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. In some instances, incentive contracts also may include a combination of both cost and performance incentives. Under cost-plus-fixed-fee contracts, the Company is reimbursed for costs and receives a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. The percentages of revenues during fiscal 1996, 1995 and 1994 attributable to the Company's contracts by contract type were as follows: Year Ended March 31, ---------------------------- 1996 1995 1994 ---- ---- ---- Firm-fixed-price ........... 87% 74% 65% Fixed-price-incentive ...... - - 1% Cost-plus-incentive-fee .... - 6% 17% Cost-plus-fixed-fee ........ 13% 20% 17% The increased percentage and continued predominance of fixed-price contracts is reflective of the fact that production contracts comprise a significant portion of the Company's U.S. Government contract portfolio. The Company negotiates for, and generally receives, progress payments from its customers of between 80-100% of allowable costs incurred on the previously described contracts. Included in its reported revenues are certain amounts which the Company has not billed to customers. These amounts, approximately $8.7 million, $7.9 million and $5.9 million as of March 31, 1996, 1995 and 1994, respectively, consist of costs and related profits, if any, in excess of progress payments for contracts on which sales are recognized on a percentage-of-completion basis. Under generally accepted accounting principles, all U.S. Government contract costs, including applicable general and administrative expenses, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations ("FAR"), incorporated by reference in U.S. Government contracts, provide that Company-sponsored research and development costs are allowable general and administrative expenses. To the extent that general and administrative expenses are included in inventory, research and development costs also are included. Unallowable costs, pursuant to the FAR, have been excluded from costs accumulated on U.S. Government contracts. Work-in-process inventory included general and administrative costs (which include Company-sponsored research and development costs) of $9.9 million and $6.6 million at March 31, 1996 and 1995, respectively. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the foreign government. COMPETITION The military electronics defense industry is characterized by rapid technological change. The Company's products are sold in markets containing a number of competitors which are substantially larger than the Company, devote substantially greater resources to research and development and generally have greater financial resources. Certain of such competitors are also suppliers to the Company. The extent of competition for any single project generally varies according to the complexity of the product and the dollar volume of the anticipated award. The Company believes that it competes on the basis of the performance of its products, its reputation for prompt and responsive contract performance, and its accumulated technical knowledge and expertise. The Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, the Company competes with many first- and second-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. As the size of the overall defense industry has decreased in recent years, there has been an increase in the number of consolidations and mergers of defense suppliers, and this trend is expected to continue. As the industry consolidates, the large (first-tier) defense contractors are narrowing their supplier base and awarding increasing portions of projects to strategic second- and third-tier suppliers, and in the process are becoming oriented more toward system integration and assembly. PATENTS The Company has patents on many of its recording products and certain commercial products. The Company does not believe patent protection to be significant to its current operations; however, future programs may generate the need for patent protection. Similarly, the Company and its subsidiaries have certain registered trademarks, none of which are considered significant to current operations. MANUFACTURING AND SUPPLIERS The Company's manufacturing process for its products, excluding optical products, consists primarily of the assembly of purchased components and testing of the product at various stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors and insulated wire and cables. In addition, many of the Company's products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components are fabricated to Company designs and specifications. The manufacturing process for the Company's optics products includes the grinding, polishing and coating of various optical materials and machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are the Company's sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. The Company has not experienced significant production delays attributable to supply shortages, but occasionally experiences procurement problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to the Company's optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. EXPORT SALES The Company currently sells several of its products and services in the international marketplace to countries such as Canada, Germany, Australia and the Republic of China. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. The Company's foreign contracts are generally payable in United States dollars. Executive Officers of the Registrant The names of the executive officers of the Company, their positions and offices with the Company, and their ages are set forth below:
NAME POSITIONS WITH THE COMPANY AGE - ---- -------------------------- --- Mark S. Newman.............. Chairman of the Board, President, Chief Executive Officer 46 and Director Nancy R. Pitek.............. Vice President, Finance, Treasurer and Secretary 39 Paul G. Casner, Jr.......... Vice President; President of DRS Electronic Systems Group 58 Stuart F. Platt............. Vice President and Director; President of DRS Media 62 Technologies Group Richard Ross............... Vice President; President of DRS Electro-Optical Systems 41 Group
Mark S. Newman has been employed by the Company since 1973, was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of the Company in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of the Company and in August 1995 became Chairman of the Board. Nancy R. Pitek joined the Company in 1984 as Manager of Accounting. She became Assistant Controller in 1985 and Director of Internal Audit in 1988. Ms. Pitek became Director of Corporate Finance in 1990 and Controller in 1993. In May 1994, she was appointed to the position of Treasurer and in August 1995 became Secretary. Ms. Pitek was named Vice President, Finance in May 1996. Paul G. Casner, Jr. joined the Company in 1993 as President of TAS. In 1994, he also became President of DRS Electronic Systems Group and a Vice President of the Company. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. He was the president of TAS prior to its acquisition by the Company. Stuart F. Platt has been a Director of the Company since 1991 and became the President of Precision Echo in July 1992. He was named Vice President of the Company in May 1994. Rear Admiral Platt also serves as President of DRS Media Technologies Group. He is a co-founder and director of FPBSM Industries, Inc., a holding company and management consulting firm for defense, aerospace and other technology-based companies. He also serves as director for Harding Associates, Inc. None of these companies is a parent, subsidiary or affiliate of the Company. Rear Admiral Platt held various positions as a military officer in the Department of the Navy, retiring as Competition Advocate General of the Navy in 1986. Richard Ross was employed by the Company as Assistant Vice President and Director of Sales in 1986 and Assistant Vice President, Corporate Development in 1987. In 1988, he became Vice President of the Company, and in 1990, he became President of Photronics. Mr. Ross also serves as President of the DRS Electro-Optical Systems Group. Employees As of March 31, 1996, the Company employed 809 employees. None of the Company's employees are represented by labor unions, and the Company has experienced no work stoppages. There is a continuing demand for qualified technical personnel, and the Company believes that its future growth and success will depend upon its ability to attract, train and retain such personnel. Item 2. Properties The Company leases approximately 6,000 square feet of office space for its corporate headquarters in an office building at 5 Sylvan Way, Parsippany, New Jersey under a lease that expires in fiscal 2001. The Company leases approximately 25,000 square feet of space for administrative and engineering facilities at 138 Bauer Drive, Oakland, New Jersey. The Company leases the Oakland building from LDR Realty Co., a partnership wholly-owned by Leonard Newman and David E. Gross, co-founders and former executive officers of the Company, under a lease which expires in fiscal 1999. The Company believes that this lease was consummated on terms no less favorable than those that could have been obtained by the Company from an unrelated third party in a transaction negotiated on an arms-length basis. TAS leases 40,000 square feet in a building at 200 Professional Drive, Gaithersburg, Maryland that houses its executive offices and principal engineering and manufacturing facilities under a lease which expires in fiscal 2000. It also conducts field service operations from locations in Virginia Beach and Chesapeake, Virginia and National City, California. These leased facilities, comprising approximately 15,000 square feet and 1,500 square feet, respectively, are covered by leases, which, with respect to the Virginia location, expires in fiscal 1997, and for the California location, expires in fiscal 1999. Laurel's manufacturing facilities and administrative offices are located in a 38,000 square foot building at 423 Walters Avenue in Johnstown, Pennsylvania. The lease for this facility expires in fiscal 1999. DRS Medical Systems operates from an 8,400 square foot facility in Mahwah, New Jersey, under a month-to-month lease expiring in April 1997. The Company also leases approximately 2,000 square feet of office space in Arlington, Virginia under a lease which expires in fiscal 1998. Photronics Corp.'s principal facilities are located in a 45,000 square foot building at 270 Motor Parkway, Hauppauge, New York. The building, which is owned by the Company, was built in 1983. See Note 10 of Notes to Consolidated Financial Statements. OMI leases approximately 54,000 square feet in a building at 2330 Commerce Park Drive, Palm Bay, Florida, for its operations and administration offices. The related leases expire in fiscal 2006. Precision Echo's engineering and principal operations are located in a 55,000 square foot building at 3105 Patrick Henry Drive, Santa Clara, California, under a lease which expires in fiscal 2001. The operations of CMC and Ahead recently have been consolidated and relocated to a new facility in San Jose, California, comprising 32,000 square feet pursuant to a five year lease expiring in fiscal 2001. MEC operates from a 7,000 square foot leased facility in Golden Valley, Minnesota. This lease expires in January 1997. Environmental Protection The Company believes that its manufacturing operations and properties are in material compliance with existing federal, state and local provisions enacted or adopted to regulate the discharge of materials into the environment or otherwise protect the environment. Such compliance has been achieved without material effect on the Company's earnings or competitive position. Item 3. Legal Proceedings The Company is a party to various legal actions and claims arising in the ordinary course of its business. In the Company's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders On February 7, 1996, the Board of Directors of the Company approved and recommended for submission to the stockholders of the Company by a majority vote the consideration and approval of an Amended and Restated Certificate of Incorporation (the "Restated Certificate"), which amended and restated the Company's certificate to (i) effect a reclassification (the "Reclassification") of each share of Class A Common Stock, $.01 par value per share, and each share of Class B Common Stock, $.01 par value per share, into one share of Common Stock, $.01 par value per share, of the Company, (ii) provide that action by the stockholders may be taken only at a duly called annual or special meeting and not by written consent, and (iii) provide that the stockholders of the Company would have the right to make, adopt, alter, amend, change or repeal the by-laws of the Company only upon the affirmative vote of not less than 66 2/3% of the outstanding capital stock of the Company entitled to vote thereon. On March 26, 1996, the stockholders approved the Restated Certificate. The Restated Certificate was filed with the Secretary of State of the State of Delaware and became effective on April 1, 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company has not paid any cash dividends since 1976. The Company intends to retain future earnings for use in its business and does not expect to declare cash dividends in the foreseeable future on the Common Stock. The indentures relating to the Company's 8 1/2% Convertible Subordinated Debentures and 9% Senior Subordinated Convertible Debentures limit the Company's ability to pay dividends or make other distributions on its Common Stock. See Note 6 of Notes to Consolidated Financial Statements for information concerning restrictions on the declaration or payment of dividends. Any future declaration of dividends will be subject to the discretion of the Board of Directors of the Company. The timing, amount and form of any future dividends will depend, among other things, on the Company's results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by the Board of Directors. Item 6. Selected Financial Data The information required by this item is incorporated by reference herein to page 19 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year ended March 31, 1996). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated by reference herein to pages 20 through 23 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year ended March 31, 1996). Item 8. Financial Statements and Supplementary Data The information required by this item is incorporated by reference herein to pages 24 through 39 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year ended March 31, 1996). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III The information required by this Part is incorporated herein by reference to the Definitive Proxy Statement of the Company, dated June 28, 1996, for the 1996 Annual Meeting of Stockholders. Reference is also made to the information under "Executive Officers of the Registrant" in Part I of this report. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report 1. Financial Statements The following financial statements of Diagnostic/Retrieval Systems, Inc. and subsidiaries have been incorporated by reference to the Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year ended March 31, 1996), pursuant to Item 8 of this report: 1996 Annual Report Page(s) -------------- Independent Auditors' Report ....................... 39 Consolidated Balance Sheets -- March 31, 1996 and 1995 ............................ 24 Consolidated Statements of Earnings -- Years Ended March 31, 1996, 1995 and 1994 .......... 25 Consolidated Statements of Stockholders' Equity -- Years Ended March 31, 1996, 1995 and 1994 .......... 25 Consolidated Statements of Cash Flows -- Years Ended March 31, 1996, 1995 and 1994 .......... 26 Notes to Consolidated Financial Statements ......... 27-38 2. Financial Statement Schedules See Appendix A hereto. 3. Exhibits Incorporated by reference to the Exhibit Index at the end of this report. (b) Reports on Form 8-K The following report on Form 8-K was filed during the fiscal quarter ended March 31, 1996: Form 8-K, Amendment No. 2, dated February 6, 1996, File No. 1-8533, containing Item 7(a). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 /s/ MARK S. NEWMAN ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ MARK S. NEWMAN Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman /s/ NANCY R. PITEK Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek /s/ STUART F. PLATT Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt /s/ THEODORE COHN Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn /s/ DONALD C. FRASER Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser /s/ MARK N. KAPLAN Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan /s/ LEONARD NEWMAN Director June 28, 1996 - ------------------------------------ Leonard Newman Director June 28, 1996 - ------------------------------------ Jack Rachleff
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Dated: June 28, 1996 ------------------ Mark S. Newman, Chairman of the Board, President and Chief 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 and on the dates indicated.
Signature Title Date - --------- ----- ---- Chairman of the Board, President, June 28, 1996 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman Vice President, Finance, June 28, 1996 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek Vice President, President of DRS Media June 28, 1996 - ------------------------------------ Technologies Group and Director Stuart F. Platt Director June 28, 1996 - ------------------------------------ Theodore Cohn Director June 28, 1996 - ------------------------------------ Donald C. Fraser Director June 28, 1996 - ------------------------------------ Mark N. Kaplan Director June 28, 1996 - ------------------------------------ Leonard Newman /s/ JACK RACHLEFF Director June 28, 1996 - ------------------------------------ Jack Rachleff
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES Schedule II. Valuation and Qualifying Accounts Years Ended March 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------------------- Description Balance at Additions (a) Deductions (b) Balance at Beginning of ------------------------ ---------------------------- End of Period (1) (2) (1) Period Charged to Charged to Credited to Credited to Costs and Other Costs and Other Expenses Accounts- Expenses Accounts- Describe Describe - ----------------------------------------- ------------------------------------------------------------------------- Inventory Reserve Year ended March 31, 1996 .. $1,400,000 $ 670,000 $ -- $ 8,000 $ 993,000 (c) $1,069,000 Year ended March 31, 1995 .. $2,409,000 $ 439,000 $ -- $ 83,000 (d) $1,365,000 (c) $1,400,000 Year ended March 31, 1994 .. $2,620,000 $ 674,000 $ -- $ 885,000 (e) $ -- $2,409,000 Losses & Future Costs Accrued on Uncompleted Contracts Year ended March 31, 1996 .. $4,555,000 $2,026,000 $ 353,000 (c) $ 945,000 $2,139,000 (c) $3,850,000 Year ended March 31, 1995 .. $3,214,000 $2,168,000 $ -- $ 291,000 $ 536,000 (c) $4,555,000 Year ended March 31, 1994 .. $3,722,000 $1,735,000 $ 254,000 (g) $2,497,000 (f) $ -- $3,214,000 Other Year ended March 31, 1996 .. $ 290,000 $ -- $ -- $ 290,000 $ -- $ 0 Year ended March 31, 1995 .. $ 290,000 $ -- $ -- $ -- $ -- $ 290,000 Year ended March 31, 1994 .. $ 290,000 $ -- $ -- $ -- $ -- $ 290,000
(a) Represents, on a full-year basis, net credits to reserve accounts. (b) Represents, on a full-year basis, net charges to reserve accounts. (c) Represents amounts reclassified and credited to related asset accounts. (d) Represents amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (e) Includes $801,000 representing amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (f) Includes $2,302,000 representing amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (g) Includes an increase to reserves of $111,000 as a result of business combinations and a charge of $143,000 to revenues. EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*)are filed herewith. Certain of the following exhibits, designated with a "P", are being filed on paper, pursuant to a hardship exemption under Rule 202 of Regulation S-T. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits. Exhibit Page No. No. Description Of Paper Filing --- ----------- --------------- 3.1 - Restated Certificate of Incorporation of the Company [Registration Statement No. 2- 70062-NY, Amendment No. 1, Exhibit 2(a)] 3.2 - Certificate of Amendment of the Restated Certificate of Incorporation of the Compa- ny, as filed July 7, 1983 [Registration Statement on Form 8-A of the Company, dat- ed July 13, 1983, Exhibit 2.2] 3.3 - Composite copy of the Restated Certificate of Incorporation of the Company, as amend- ed [Registration Statement No. 2-85238, Exhibit 3.3] 3.4 - Amended and Restated Certificate of Incor- poration of the Company, as filed April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.4] 3.5 - By-laws of the Company, as amended to No- vember 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 - Certificate of Amendment of the Certifi- cate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 - Form of Advance Notice By-Laws of the Com- pany [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] 3.8 - Amended and Restated By-Laws of the Compa- ny, as of April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.8] 4.1 - Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee, in respect of the Company's 9% Senior Subordinated Con- vertible Debentures Due 2003 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 4.1] 4.2 - Form of 9% Senior Subordinated Convertible Debenture Due 2003 (included as part of Exhibit 4.1)[Registration Statement No.33- 64641, Amendment No. 1, Exhibit 4.2] 4.3 - Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P.[Registration Statement No.33-64641, Amendment No. 1, Exhibit 4.3] 4.4 - Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Com- pany, as Trustee [Form 10-Q, quarter ended September 30, 1983, File No. 1-8533, Ex- hibit 4.2] 4.5 - Indenture of Trust, dated December 1, 1991, among Suffolk County Industrial De- velopment Agency, Manufacturers and Trad- ers Trust Company, as Trustee and certain bondholders [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.2] 4.6 - Reimbursement Agreement, dated December 1, 1991, among Photronics Corp., the Company and Morgan Guaranty Trust Company of New York [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.3] 4.7 - Registration Rights Agreement, dated as of March 27, 1996, by and between the Company and Palisade Capital Management L.L.C., acting as investment adviser to the ac- counts named therein [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 4.7] 4.8 - First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee [Registration Statement No. 33- 64641, Post-Effective Amendment No. 1, Exhibit 4.8] 4.9 - First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Company, as Trustee [Registration Statement No. 33-04929, Exhibit 4.9] 10.1 - Stock Purchase Agreement, dated as of Au- gust 6, 1993, among TAS Acquisition Corp., Technology Applications and Service Compa- ny, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(1)] 10.2 - Waiver Letter, dated as of September 30, 1993, among TAS Acquisition Corp., Tech- nology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(2)] 10.3 - Joint Venture Agreement, dated as of No- vember 3, 1993, by and between DRS Systems Management Corporation and Laurel Technol- ogies, Inc. [Form 10-Q, quarter ended De- cember 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] 10.4 - Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Manage- ment Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 - Partnership Agreement, dated December 13, 1993, by and between DRS Systems Manage- ment Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 10.6 - Lease, dated June 28, 1979, between the Company and J.L. Williams & Co., Inc. ("Williams") [Registration Statement No. 2-70062-NY, Exhibit 9(b)(4)(i)] 10.7 - Lease, dated as of June 1, 1983, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1984, File No. 1-8533, Exhibit 10.7] 10.8 - Renegotiated Lease, dated June 1, 1988, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1989, File No. 1-8533, Exhibit 10.8] 10.9 - Lease, dated July 20, 1988, between Preci- sion Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1991, File No. 1-8533, Exhibit 10.9] 10.10- Amendment to Lease, dated July 1, 1993, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.12] 10.11- Second Amendment to Lease, dated October 17, 1995 between Precision Echo, Inc. and Bay 511 Corporation [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.11] 10.12- Lease Modification Agreement, dated Febru- ary 22, 1994, between Technology Applica- tions and Service Company and Atlantic Real Estate Partners II [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.13] 10.13- Amendment to Lease Modification, dated June 1, 1994, between Technology Applica- tions and Service Company and Atlantic Estate Partners II [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.11] 10.14- Triple Net Lease, dated October 22, 1991, between Technology Applications and Ser- vice Company and Marvin S. Friedberg [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.14] 10.15- Lease, dated November 10, 1993, between DRS Systems Management Corp. and Skateland Roller Rink, Inc. [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.17] 10.16- Lease, dated March 23, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.15] 10.17- Amendment to Lease, dated May 21, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1- 8533, Exhibit 10.16] 10.18- Revision to Lease Modification, dated Au- gust 25, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.17] 10.19- Lease, dated January 13, 1995, between the Company and Sammis New Jersey Associates [Form 10-K, fiscal year ended March 31, 1995, File No.-8533, Exhibit 10.18] *10.20- Lease, dated April 3, 1996, by and between the Company and Los Alamos Economic Development Corporation 10.21- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Ex- hibit 28.1] 10.22- Contract No. N00024-92-C-6102, dated Sep- tember 28, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.45] 10.23- Modification No. P00005, dated August 24, 1994, to Contract No. N00024-92-C-6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.22] 10.24- Modification No. P00006, dated September 7, 1994, to Contract No. N00024-92-C6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.23] 10.25- Contract No. N00024-92-C-6308, dated April 1, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.46] 10.26- Modification No. P00001, dated July 30, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.47] 10.27- Modification No. P00002, dated September 25, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.48] 10.28- Modification No. P00003, dated October 22, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.49] 10.29- Modification No. P00004, dated February 24, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.50] 10.30- Modification No. P00005, dated June 11, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.26] 10.31- Modification No. P00006, dated March 26, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.51] 10.32- Modification No. P00007, dated May 3, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.28] 10.33- Modification No. PZ0008, dated June 11, 1993, to Contract No. N00024-92-C-6302 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.29] 10.34- Contract No. N39998-94-C-2228, dated No- vember 30, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.30] 10.35- Order No. 87KA-SG-51484, dated December 10, 1993, under Contract No. N00024-93-G- 6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.31] 10.36- Purchase Order Change Notice Order No. 87KA-SX-51484-P, dated April 21, 1994, under Contract No. N00024-93-G-6336, be- tween the Company and Westinghouse Elec- tric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.35] 10.37- Letter Subcontract No. 483901(L), dated February 18, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Government Systems Group [Form 10- K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.32] 10.38- Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10-K, fis- cal year ended March 31, 1995, File No. 1- 8533, Exhibit 10.37] 10.39- Contract No. N00019-90-G-0051, dated March 1, 1990, between Precision Echo, Inc. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.35] 10.40- Amendment 1A, dated February 26, 1992, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.36] 10.41- Amendment 1B, dated April 23, 1993, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.37] 10.42- Contract No. N00019-93-C-0041, dated Janu- ary 29, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.54] 10.43- Modification No. P00001, dated March 29, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.39] 10.44- Modification No. PZ0002, dated November 12, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.40] 10.45- Modification No. P00003, dated February 1, 1994, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.41] 10.46- Modification No. P00004, dated January 29, 1993, to Contract No. N00019-93-C-0041 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.46] 10.47- Modification No. P00005, dated January 29, 1993, to Contract No. N00019-93-C-0041 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.47] P10.48- Modification No. P00006, dated March 20, 1996, to Contract No. N00019-93-C-0041 10.49- Contract No. N00019-93-C-0202, dated Au- gust 30, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.42] 10.50- Modification No. P00001, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.43] 10.51- Modification No. P00002, dated April 29, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.44] 10.52- Modification No. P00003, dated August 9, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.55] 10.53- Modification No. P00004, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.56] 10.54- Modification No. P00005, dated August 30, 1993, to Contract No. N00019-93-C-0202 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.53] 10.55- Modification No. P00006, dated August 30, 1993, to Contract No. N00019-93-C-0202 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.54] 10.56- Contract No. N00024-93-C-5204, dated No- vember 18, 1992, between Technology Appli- cations and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.53] 10.57- Modification No. P00001, dated May 6, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.54] 10.58- Modification No. P00002, dated August 24, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.55] 10.59- Modification No. PZ0003, dated September 30, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.56] 10.60- Contract No. N00174-94-D-0006, dated Feb- ruary 17, 1994, between Technology Appli- cations & Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.57] 10.61- Modification No. P00001, dated March 7, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.58] 10.62- Modification No. P00003, dated May 19, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.59] 10.63- Purchase Order No. 2285, dated June 6, 1994, between Photronics Corp. and Inter- national Precision Products N.V. [Form 10- K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.73] P10.64- Amendment No. 1, dated January 30, 1996, to Purchase Order No. 2285 10.65- Purchase Order No. 2286, dated June 6, 1994, between Photronics Corp. and Inter- national Precision Products N.V. [Form 10- K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.75] 10.66- Purchaser Order No. CN74325, dated Decem- ber 14, 1994, between Precision Echo and Lockheed Aeronautical Systems Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.76] 10.67- Amendment, dated February 14, 1995, to Purchase Order No. CN74325, between Preci- sion Echo and Lockheed Aeronautical Sys- tems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.67] 10.68- Amendment, dated April 4, 1995, to Pur- chase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.68] 10.69- Amendment, dated June 20, 1995, to Pur- chase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.69] 10.70- Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Preci - sion Echo and Lockheed Aeronautical Sys- tems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.70] 10.71- Amendment, dated November 7, 1995, to Pur- chase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.71] 10.72- Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.73- Contract No. N00019-95-C-0057, dated De- cember 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.74- Employment, Non-Competition and Termina- tion Agreement, dated July 20, 1994, be tween Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Ex- hibit 1] 10.75- Stock Purchase Agreement, dated as of July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10- Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 2] 10.76- Asset Purchase Agreement, dated October 28, 1994, Acquisition by PE Acquisition Corp., a subsidiary of Precision Echo, Inc. of all of the Assets of Ahead Tech- nology Corporation [Form 10-Q, quarter ended December 31, 1994, File No. 1-8533, Exhibit 1] 10.77- Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] 10.78- Contract No. N00421-95-D-1067, dated Sep- tember 30, 1995, between the Company and the Navy [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.78] 10.79- Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.79] 10.80- Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.80] P10.81- Modification No. PZ0001, dated January 24, 1996, to Contract No. DAAH01-95-C-0308 P10.82- Modification No. P00002, dated February 24, 1996, to Contract No. DAAH01-95-C-0308 P10.83- Modification No. P00003, dated March 28, 1996, to Contract No. DAAH01-95-C-0308 10.84- Lease, dated May 25, 1995, between Tech- nology Applications and Service Company and Sports Arena Village, Ltd., L.P. [Registration Statement No.33-64641, 10.85- Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.82] 10.86- Amendment to Contract No. 2025, dated Au- gust 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [Registration Statement No.33- 64641, Amendment No. 1, Exhibit 10.83] 10.87- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Proper- ties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.84] 10.88- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Proper- ties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.85] 10.89- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Proper- ties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.86] 10.90- Memorandum of Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.87] 10.91- Master Lease, dated August 31, 1995, be- tween OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.88] 10.92- Schedule No. 001, dated September 1, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.89] 10.93- Schedule No. 002, dated October 20, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.90] 10.94- Joint Venture Agreement, dated as of Feb- ruary 6, 1996, by and among DRS/MS, Inc., Universal Sonics Corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.91] 10.95- Partnership Agreement, dated as of Febru- ary 6, 1996, by and between DRS/MS, Inc. and Universal Sonics Corporation [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.92] 10.96- Asset Purchase Agreement, dated as of Feb- ruary 9, 1996, by and among Mag-Head Engi- neering, Company, Inc. and Ahead Technolo- gy Acquisition Corporation, a subsidiary of Precision Echo, Inc. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.93] 10.97- Employment, Non-Competition and Termina- tion Agreement, dated March 28, 1996, be- tween the Company and Leonard Newman [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.94] P10.89- Contract No. N00024-95-G-5609, dated January 25, 1996, between Technology Applications and Service Company and the Navy *11 - Computation of earnings per share *13 - Portions of the 1996 Annual Report to Stockholders of the Company *21 - List of subsidiaries of the Company as of March 31, 1996 *23.1 - Consent of KPMG Peat Marwick LLP *23.2 - Independant Auditors' Report Consolidated Financial Statement schedule. EX-10.20 2 LEASE AGREEMENT LEASE AGREEMENT This LEASE AGREEMENT is entered into this 3rd day of April, 1996, by and between LOS ALAMOS ECONOMIC DEVELOPMENT CORPORATION, a New Mexico corporation (Landlord) and DRS, INC. (Tenant). WHEREAS, Landlord owns the land and building located at the Small Business Center-Annex, 127 Eastgate Drive, Los Alamos, New Mexico (the Property); WHEREAS, Tenant desires to lease certain space within the Property for the purposes described herein; WHEREAS, the parties are willing to enter into a Lease Agreement upon the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereby agree as follows: i) LEASE. Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord that certain space more particularly described in attached Exhibit A incorporated herein by reference (the Leased Premises) together with a right to the non-exclusive use, in common with the other Tenants, of the common areas of the property provided, however, that Tenant agrees to abide by all reasonable rules and regulations instituted by or on behalf of Landlord in relation to the common areas. ii) TERM. The term of this lease shall be for a period of 6 MONTHS commencing On JUNE 1, 1996 and terminating at midnight NOVEMBER 30, 1996 both dates inclusive, unless sooner terminated as herein provided. Tenant will give Landlord 30 days written notice before expiration of this Lease Agreement regarding vacating Leased Premises or negotiation of new Lease. iii) RENT. Tenant agrees to pay a total rent of seven thousand five hundred seventy-eight Dollars ($7,578) in lawful money of the United States of America in equal monthly installments of one thousand two hundred sixty-three Dollars ($1,263) due the first day of each and every month in advance to Landlord. iv) LATE PAYMENT CHARGES. Tenant shall be assessed a late payment penalty by Landlord according to the following schedule: LEASE AGREEMENT - Page 1 (a)(a) Should Tenant fail to tender to Landlord its rent payment by the fifth day of the month, a late payment penalty equal to 5% of the monthly rent shall be assessed against Tenant by Landlord which late payment penalties shall accompany the rental payment; and (b)(b) Should Tenant fail to tender to Landlord its rent payment by the fifteenth day of the month, a late payment penalty equal to 25% of the monthly rent shall be assessed against Tenant by Landlord which late payment penalties shall accompany the rental payment. v) SECURITY DEPOSIT. Tenant has paid to Landlord a total security deposit equal to $1,263 which shall be held by Landlord as security for the payment of any rents owed and any other sums of money, repairs and renovation on account of damages for which the tenant is responsible under the terms and conditions of this Lease. Upon termination of this Lease, any balance of the security deposit remaining after deduction by Landlord shall be refunded, without interest, to Tenant within a reasonable period of time following termination of the Lease. A statement of all expenditures made by Landlord pursuant to this paragraph shall be furnished to Tenant within a reasonable period of time following termination of this Lease. vi) USE OF PREMISES. Tenant agrees to operate and maintain the Leased Premises throughout the term of this Lease during ordinary business hours as office space, which shall include the performance of such services as are usually appropriate to such business. Tenant further agrees to conduct no incidental business on the Leased Premises without the prior written consent of Landlord. (a) Tenant further agrees to use the Leased Premises during the term of this Lease only for lawful purposes. Tenant agrees: (b)(a) not to suffer or permit the Leased Premises or the improvements thereon or any part thereof, to be used for any purpose or use violation of any law, ordinance, or regulation of any governmental entity, or in any manner that would constitute a nuisance or any unreasonable annoyance to the owners or occupants of adjoining or neighboring property, or for any extrahazardous purpose or in any manner that might violate any policy or policies of insurance at any time carried on the building by Landlord; (c)(b) not to keep or permit to be kept thereon any gasoline or other combustible petroleum product without first obtaining the written consent of Landlord and all insurance companies carrying fire insurance, rental insurance or other insurance on the Property; LEASE AGREEMENT - Page 2 (d)(c) not to suffer or permit the Leased Premises or the improvements thereon or the part thereof to be used in any manner that will injure or impair the structural strength of any building or improvement construction thereon; and (e)(d) not to suffer or permit to be installed or used on the property or in any of the improvements any machinery or apparatus the weight or vibration of which would tend to injure or impair the structural strength of such improvements. vii) POSSESSION. If Landlord is unable to give possess of the Leased Premises to Tenant on the commencement date of the Lease as provided for in paragraph 2 of this Lease, because of: (a)(a) the holding over or retention of possession by any Tenant, Tenants or occupants; (b)(b) fire, acts of God or other events not under control of the Landlord; or (c)(c) for any other reason, the Landlord shall not be subject to liability to Tenant for the failure to five possession on commencement date. If Landlord is unable to give Tenant possession of the Leased Premises, the rent payments due Landlord by Tenant shall not commence until the Leased Premises are available for occupancy by Tenant. No such failure to give possession at the commencement on the date of this Lease shall affect the validity of this Lease or the obligations of Tenant hereunder, except as to abatement of rent during any such period of non-occupancy, nor shall the same be construed to extend the term of this Lease. viii) SERVICES. Landlords shall provide to or on behalf of Tenant, subject to rules and regulations promulgated by or on behalf of Landlord from time to time, the following described services: (a)(a) A receptionist during regular business hours for directing visitors to the Leased Premises; (b)(b) The use by Tenant of the conference room located on the Property for the total period of two hours per month which period shall be non-cumulative; (c)(c) A photocopier machine which shall be available to Tenant on a first come, first serve basis subject to a per copy charge; (d)(d) A telephone system as more particularly described in attached Exhibit B incorporated herein by reference (It is understood that the Tenant is not obligated to utilize the telephone system provided by Landlord; LEASE AGREEMENT - Page 3 however, the Landlord's system must be utilized by Tenant if Tenant desires to have its phone answered by Landlord's receptionist which answering service shall be subject to the charges set forth in Exhibit (B); and (e)(e) Landlord may, from time to time, provide such other services to Tenant as Landlord, in its sole and absolute discretion shall determine. ix) UTILITIES. Tenant shall be responsible for all utilities allocable to the use of the Leased Premises and such utilities shall be paid to Landlord by Tenant in accordance with the option selected by Tenant below (mark out the options that are not applicable): (a)(a) ____X___(a) The cost of utilities, including gas, electric, water, sewer and municipal garbage removal charges, is incorporated within the Tenant's rent as set forth in paragraph 3 of this Agreement. (SEE EXHIBIT C) x) MAINTENANCE AND REPAIRS. Tenants shall take care of the interior of the Leased Premises and the fixtures and appurtenances therein and at its sole cost and expense make all repairs thereto as and when needed to preserve them in good working order and condition. All damage or injury to the Leased Premises and to its fixtures, glass, appurtenances and equipment caused by Tenant moving property in or out of the Property or by installation or removal of furniture, fixtures, or other property, or resulting by fire, explosion, air conditioning unit or systems, short circuits, leakage of water, stream, or any other cause of any other kind or nature whatsoever due to carelessness, omission, neglect, improper conduct or other cause of Tenant, its servants, employees, agent, visitors, or licensees shall be repaired, restored or replaced promptly by Tenant at its sole cost and expense to the satisfaction of Landlord. All the aforesaid repairs, restorations and replacements shall be in good quality and class equal to the original work or installation and shall be done in a good and workmanlike manner. If Tenant fails to make such repairs, restorations, or replacements, the same may be made by Landlord at the expense of Tenant and all sums to be spent and expenses incurred by Landlord shall be collectable as additional rent and shall be paid by Tenant within thirty (30) days after rendition of the bill or statement therefore to Tenant by Landlord. Tenant further agrees that it shall, at its own expense, furnish all necessary janitorial and cleaning services which are appropriate for the maintenance of the Leased Premises. xi) ALTERATIONS. Tenant shall make no major alterations, decorations, additions or improvements in or to the Leased Premises without the Landlord's prior written consent, but Landlord agrees that such consent shall not be unreasonably withheld. As a condition precedent to the Landlord's consent, Tenant shall deliver to Landlord written plans and specifications for all such work. Tenant shall comply with all LEASE AGREEMENT - Page 4 governmental rules and regulations in connection with such work and shall prevent any lien or obligation from being created against or imposed upon the Leased Premises and will discharge all liens or charges for services rendered or material furnished immediately after said liens occur or said charges become due and payable. (a) All alterations, additions, erections or improvements on or in the Leased Premises at the expiration of this Lease, except trade fixtures shall, at the option of Landlord, become a part of the Leased Premises, and shall remain upon and be surrendered with the Leased Premises as part thereof at the termination of the Lease. Should Tenant fail to remove any furniture or fixtures or personal property of any kind, then the same shall be considered as abandoned and become the property of Landlord. In the event Landlord requests Tenant to remove additions or alterations, Tenant, at its expense, shall, upon expiration of the term of this Lease, restore the Leased Premises to the same and as good an order and condition as when the same when entered upon by Tenant, ordinary wear and tear excepted; and in default thereof, Landlord may affect such removals and repairs and Tenant shall pay Landlord the cost thereof as additional rent, with interest at a rate of 10% per annum from the date of payment by Landlord. xii) LANDLORD'S RIGHT OF ACCESS. Landlord or Landlord's agents shall have the right to enter the Leased Premises at all reasonable hours to examine the same, to show the Leased Premises to prospective purchasers or lessees of the Leased Premises and to make such decorations, repairs, alterations, improvements, or additions as Landlord may deem necessarily desirable either to the Property or to the Leased Premises without unreasonable interruption of Tenant's business in the Leased Premises, and Landlord shall be allowed to take all material into and upon the Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part and the rent shall be in no way abate while the decorations, repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of the Tenant because of the prosecutions of any such work, or otherwise. xiii) ASSIGNMENT AND SUBLETTING. Tenant shall not transfer, assign, sublet, enter into license or concession agreements, change ownership, mortgage or hypothecate this lease of the Tenant's interest in and to the Leased Premises without the prior written consent of Landlord. Any attempt to transfer, assign, sublet, license or concession agreement, change of ownership, mortgage or hypothecation without the Landlord's consent shall be void and confer no rights upon any third party. Without in any way limiting the Landlord's right to refuse to give consent for any other reason or reasons, the Landlord reserves the right to refuse to give such consent, if in Landlord's reasonable business judgment the financial worth of the new Tenant is less than that of the Tenant executing this Lease. Nothing herein contained shall relieve Tenant from its covenants and obligations for the term of this Lease. Tenant agrees to reimburse Landlord's reasonable attorneys' fees incurred in connection with the processing and documentation of any such requested transfer, assignment, subletting, licensing or concession agreement, change of ownership mortgage or hypothecation of this Lease or Tenant's interest in or to the Leased Premises. Each transfer, LEASE AGREEMENT - Page 5 assignment, subletting, license, concession agreement, mortgage or hypothecation of this Lease or Tenant's interest in or to the Leased Premises. Each transfer, assignment, subletting, license, concession agreement, mortgage or hypothecation to which there has been consent shall be by an instrument in writing and in form satisfactory to Landlord. xiv) INSURANCE AND INDEMNITY (a)(a) Duty of Landlord. The Landlord, at its own cost and expense, shall keep the Property insured during the term of this Lease against loss or damage by fire or other hazard. Landlord shall further maintain, at its own cost, liability insurance on the common areas. (b)(b) Duty of Tenant. Tenant may, during the term of the Lease hereof keep in full force and effect a policy of public liability and property damage insurance with respect to the Leased Premises, its contents and the business conducted by Tenant in the Leased Premises. All property of all kind that may be on or in the Leased Premises during the term of this Lease shall be at the sole risk of Tenant, Landlord shall not be liable to Tenant or any other person from any injury, loss or damage to the Property of or to any person on the Leased Premises. (c)(c) Indemnification of Landlord. Tenant will indemnify Landlord and save him harmless from and against any and all claims, actions, damages, liability and expenses in connection with the loss of life, personal injury in/or damage to the property arising from or out of any occurrence in, upon or at the Leased Premises or the occupancy or use by Tenant of the Leased Premises, in common areas or any part thereof, or occasioned wholly or in part by any act or omission by Tenant, its agents, contractors, employees, servants, lessees. In case Landlord shall, without fault on its own part, be made a party to any litigation commenced by or against Tenant, then Tenant shall protect and hold Landlord harmless and shall pay all costs and reasonable attorneys' fees incurred or paid by Landlord in connection with such litigations. Tenant shall also pay all costs, expenses and reasonable attorneys' fees that may be incurred or paid by Landlord in enforcing the convenants and agreements of this Lease. xv) QUIET ENJOYMENT. Landlord represents that: LEASE AGREEMENT - Page 6 (a)(a) Landlord is rightful owner of the Property and the Leased Premises and has the right to make this Lease. (b)(b) Tenant, upon paying the rent herein reserved and upon performance of all terms and conditions of this Lease, shall at all times during the term of this Lease, peacefully and quietly have, hold and enjoy the Leased Premises. xvi) SURRENDER. Tenant shall surrender and deliver the Leased Premises, together with all fixtures and improvements presently in the Leased Premises, at the expiration of this Lease or sooner termination of the term, in good repair and condition, broom-clean and free of Tenant's property. It is agreed that if, after the expiration of this Lease, Tenant shall, with the Landlord's written consent remain in the possession of the Leased Premises and shall continue to pay rent, such Tenant shall be regarded as a Tenant from month-to-month, any monthly rental, payable in advance, equivalent to one hundred fifty percent (150%) of the monthly rental installments called for hereunder or any extensions hereof and shall otherwise be subject to all the terms and conditions of this Lease. Landlord or Tenant may terminate this month-to-month tenancy with 30 day written notice to the other party. xvii) EVENT OF DEFAULT. If any one or more of the following happen (hereinafter called and Event or Events of Default): (a)(a) If default shall be made in the punctual payment of rent payable under this Lease when and as the same shall become due and payable, and such default shall continue for a period of ten (10) days after written notice of default is sent to Tenant; or (b)(b) If default shall be made by Tenant in the performance or compliance with any of the covenants, agreements, terms, or conditions contained in this Lease other than that referred to in the foregoing subparagraph (a), and such default shall continue for a period of ten (10) days after written notice is sent thereof from Landlord to Tenant, or in the case of default for a contingency which cannot with due diligence be cured within such period of ten (10) days, Tenant fails to proceed promptly and with all due diligence to cure the same and hereafter to prosecute the curing of such default with all due diligence (it being intended that in connection with the default not susceptible to being cured with due diligence within ten (10) days that the time of Tenant in which to cure the same shall be extended for such period as may be necessary to complete the same with all due diligence); or LEASE AGREEMENT - Page 7 (c)(c) If Tenant shall file a voluntary petition in bankruptcy or shall be adjudicated bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy code or any other present or any future federal bankruptcy code or any other statutory law, or shall seek to consent to or acquiesce in the appointment of any receiver, or liquidator of Tenant or of all or any substantial part of its properties or of the Leased Premises; or (d)(d) If within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the present or any future applicable federal, state or other statutory law, such proceeding shall not have been dismissed, or within sixty (60) days after the appointment without the consent or acquiescence of Tenant, or of any Trustee, receiver or liquidator of Tenant or of all or any substantial part of its properties or the Leased Premises, such appointment shall not have been vacated or stayed on appeal or otherwise, or if within sixty (60) days after the expiration of any such stay, such appointment shall not have been vacated; (e) THEN, AND IN ANY SUCH event Landlord, at any time thereafter, may give notice to Tenant specifying such Event of Default or Events of Default and stating that this Lease and the term thereof shall expire and terminate on the date specified in such notice which shall be ten (10) days after the giving of such notice, and upon the date specified in such notice, this Lease and the Term thereof shall expire and terminate and Tenant shall remain liable as hereinafter provided, unless before any such notice of termination of this Lease is mailed to, or served Tenant, all arrears of rent and other amounts payable under this Lease, together in each case with interest thereon at the rate of ten (10%) per annum from the date when the same became due and payable and all costs and expenses incurred by or on behalf of Landlord in regard to the Leased Premises, including reasonable attorneys' fees, shall be then fully paid for on behalf of Tenant, and all other defaults at the time existing under this Lease shall have been fully cured and made good or secured to the satisfaction of Landlord, in which event the consequences of such Event of Default shall be deemed to be annulled. (f) Upon any such expiration or termination of this Lease, Tenant shall quietly and peacefully surrender the Leased Premises to Landlord, without any payment therefor by Landlord, then Landlord upon or at any time after such expiration or termination, may without further notice, enter upon or re-enter the Leased Premises and possess and repossess itself thereof, by force, summary proceedings, ejectment, or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Leased Premises without being liable to prosecution therefor. LEASE AGREEMENT - Page 8 xviii) NOTICE. All and any notice required to be given hereunder by the parties shall be either hand delivered or properly mailed, postage prepaid to the parties as follows: (a) (b) Landlord: Los Alamos Economic Development (c) Post Office Box 715 (d) Los Alamos, NM 87544 (e) (f) Tenant: DRS, INC. (g) 127 Eastgate Drive (h) Los Alamos, NM 87544 xix) PARKING. Tenant, its business invitees and licensees shall have the right to use, in common with the other tenants, during normal business hours, the parking lots located on the Property. Tenant shall respect the right of other tenants, their business invitees and licensees to use the parking lot and under no circumstances shall Tenant have the right to park vehicles overnight in the parking lot. Vehicles in violation of this provision shall be towed and their owners shall assume all risk and expense for such towing. No vehicles, including motorcycles, shall be parked in driveways, sidewalks, or patios. Bicycles should not be parked where they affect pedestrian movement, and shall not be left in common areas of the property. xx) COMMON AREAS. Landlord shall keep the common area in good repair and in clean condition. Landlord shall specifically provide all necessary janitorial and cleaning services, care and maintenance of the common areas, including wiring and plumbing for the property. LEASE AGREEMENT - Page 9 xxi) SIGNS. Landlord shall provide, at its own expense, signs on the doors of the Leased Premises. Any additional signs which the Tenant may wish to erect shall only be permitted with the prior written consent of the Landlord. xxii) MISCELLANEOUS. (a) Unenforceable Provisions. If any provisions of this Lease shall be declared invalid or unenforceable, the remainder of this Lease shall continue in full force and effect. (b) Successors or Assigns. The covenants and agreements herein contained shall, subject to the provisions of this Lease, bind and inure to the benefit of the Landlord, its successors and assigns and of Tenant, its successors and assigns except as otherwise provided herein. (c) Expenses of Default; Reasonable Attorneys' Fees. All expenses, including reasonable attorneys' fees occasioned by the default of a party hereunder shall be borne by the defaulting party. Should any legal proceedings be necessary with regard to this Lease, the prevailing party shall be entitled to reasonable attorneys' fees and costs awarded by the court as part of any judgment recovered therein. (d) Additional Provisions. Additional provisions regarding the use, possession and occupancy of the Leased Premises are set forth in attached Exhibit C to this Lease which are incorporated herein by reference. If there is a conflict between the terms and conditions of this Lease and the Additional Provisions, the Additional Provisions shall control. (e) Non-Waiver of Default. The failure of Landlord to take any action with respect to any default by Tenant under this Lease, shall not constitute a waiver by Landlord of any of its respective rights under this Lease. (f) Amendment. This Lease constitutes the total understanding of the parties and no modification hereof shall be effective except when in writing and signed by all parties hereto. (g) Nondiscrimination. There shall be no discrimination based on race, color, creed, national origin or gender in the use and occupancy of the Leased Premises. LEASE AGREEMENT - Page 10 (h) Governing Law. This Lease is made in the State of New Mexico and its validity and the rights and obligations of the parties hereunder shall be determined in accordance with the laws of the State of New Mexico. LEASE AGREEMENT - Page 11 EXHIBIT A SECOND FLOOR FIRST FLOOR LOS ALAMOS SMALL BUSINESS CENTER LEASE AGREEMENT - Page 12 ANNEX LEASE AGREEMENT - Page 13 EXHIBIT B Tenant will provide their own telephone system. LEASE AGREEMENT - Page 14 EXHIBIT C If Landlord determines that tenant usage substantially exceeds nominal operations per unit area utility usage, it will be necessary to review lease rates to compensate for such usage. Tenant agrees to negotiate with Landlord to determine a reasonable surcharge to cover the extraordinary utility usage. If an agreement as to a reasonable surcharge cannot be reached between the Landlord and Tenant, the Landlord shall have the option of having the Tenant's usage metered separately. In such a situation, the Landlord would reduce Tenant's rental rate by $1.00 per square foot per year and the Tenant would assume responsibility for the utility bill for its leased space. LEASE AGREEMENT - Page 15 ACKNOWLEDGMENTS STATE OF NEW MEXICO ) ) ss. COUNTY OF LOS ALAMOS ) This Lease was acknowledged before me this _______ day of _____________, 19____, by James M. Greenwood, Executive Director of the Los Alamos Economic Development Corporation, a New Mexico Corporation, on behalf of said Corporation. --------------------------------------- Notary Public My Commission expires: ------------------------ ACKNOWLEDGMENT FOR CORPORATION STATE OF NEW MEXICO ) ) ss. COUNTY OF LOS ALAMOS ) This Lease was acknowledged before me this _______ day of _____________, 19____, by __________________ (Name of Officer) of ____________________ a ____________________ Corporation, on behalf of said Corporation. --------------------------------------- Notary Public My Commission expires: ----------------------- LEASE AGREEMENT - Page 16 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year above written. LANDLORD: Los Alamos Economic Development Corporation By:___________________________________________ Its Executive Director Tenant:_______________________________________ Its Executive Director EX-11 3 COMPUTATION OF EARNINGS PER SHARE
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES Computation of Earnings per Share Exhibit 11 Years Ended March 31, ----------------------------------------------------------------------------- 1996 1995 1994 ------------------------- ------------------------ ------------------------ Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted ---------- ------------- --------- ------------- --------- ------------- Shares: Weighted average number of shares of Class A and Class B Common Stock outstanding ................ 5,470,028 5,470,028 5,108,296 5,108,296 5,334,477 5,334,477 Effect of dilutive common stock options ......... 177,475 186,486 123,038 131,613 55,836 62,935 Effect of 8 1/2% convertible subordinated debentures (1) ................................ -- -- -- -- -- -- Effect of 9% senior subordinated convertible debentures .................................... -- 1,373,839 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted shares ........................... 5,647,503 7,030,353 5,231,334 5,239,909 5,390,313 5,397,412 ========== ========== ========== ========== ========== ========== Net Earnings: Net earnings for the year ....................... $4,103,000 $4,103,000 $2,604,000 $2,604,000 $1,615,000 $1,615,000 Effect of assumed conversion of 8 1/2% convertible subordinated debentures (2) ......... -- -- -- -- -- -- Effect of assumed conversion of 9% senior subordinated convertible debentures ...... -- 748,000 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted net earnings ....................... $4,103,000 $4,851,000 $2,604,000 $2,604,000 $1,615,000 $1,615,000 ========== ========== ========== ========== ========== ========== Earnings per share (adjusted net earnings divided by adjusted shares) ..................... $ 0.73 $ 0.69 $ 0.50 $ 0.50 $ 0.30 $ 0.30 ========== ========== ========== ========== ========== ==========
(1) The 8 1/2% convertible subordinated debentures are excluded from the calculation of fully diluted earnings per share for fiscal years 1996, 1995 and 1994, as they would have an antidilutive effect on earnings per share. EX-13 4 FINANCIALS SELECTED FINANCIAL DATA DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Years Ended March 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Revenues $101,454,000 $69,930,000 $57,820,000 $47,772,000 $28,925,000 Costs and Expenses 92,907,000 64,836,000 54,372,000 45,461,000 37,032,000 ------------ ----------- ----------- ----------- ----------- Operating Income (Loss) 8,547,000 5,094,000 3,448,000 2,311,000 (8,107,000) Interest and Related Expenses (2,681,000) (1,372,000) (1,574,000) (1,735,000) (2,198,000) Other Income, Net 861,000 534,000 834,000 1,224,000 944,000 ------------ ----------- ----------- ----------- ----------- Earnings (Loss) before Income Taxes (Benefit) 6,727,000 4,256,000 2,708,000 1,800,000 (9,361,000) Income Taxes (Benefit) 2,624,000 1,652,000 1,093,000 715,000 (4,006,000) ------------ ----------- ----------- ----------- ----------- NET EARNINGS (LOSS) $ 4,103,000 $ 2,604,000 $ 1,615,000 $ 1,085,000 $(5,355,000) - --------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA* Primary Earnings (Loss) per Share $ .73 $ .50 $ .30 $ .20 $ (1.01) Fully Diluted Earnings (Loss) per Share $ .69 $ .50 $ .30 $ .20 $ (1.01) Book Value per Share $ 4.86 $ 4.16 $ 3.70 $ 3.40 $ 3.20 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF FINANCIAL POSITION Working Capital $ 33,990,000 $20,317,000 $19,803,000 $17,994,000 $17,747,000 Net Property, Plant and Equipment $ 16,191,000 $ 9,849,000 $ 8,893,000 $ 9,768,000 $11,602,000 Total Assets $ 97,251,000 $64,590,000 $58,836,000 $51,948,000 $53,904,000 Long-Term Debt, Excluding Current Installments $ 32,608,000 $11,732,000 $14,515,000 $17,290,000 $19,958,000 Net Stockholders' Equity $ 26,566,000 $22,509,000 $19,759,000 $18,115,000 $17,047,000 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Pretax Return on Revenues 6.6% 6.1% 4.7% 3.8% (32.4)% After Tax Return on Revenues 4.0% 3.7% 2.8% 2.3% (18.5)% Return on Average Stockholders' Equity 16.7% 12.3% 8.5% 6.2% (27.2)% Current Ratio 2.0 1.9 2.1 2.4 2.3 Long-Term Debt, Excluding Current Installments, to Capitalization 55.1% 34.3% 42.3% 48.8% 53.9% - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL INFORMATION Capital Expenditures $ 6,331,000 $ 2,543,000 $ 988,000 $ 922,000 $ 882,000 Depreciation and Amortization $ 3,170,000 $ 2,480,000 $ 2,558,000 $ 3,202,000 $ 3,714,000 Company-Sponsored Research and Development $ 649,000 $ 795,000 $ 537,000 $ 470,000 $ 661,000 Employees** 809 565 548 296 294 Revenues per Employee*** $ 137,000 $ 130,000 $ 137,000 $ 164,000 $ 91,000 - ---------------------------------------------------------------------------------------------------------------------------
* No cash dividends have been distributed in any of the years in the five-year period ended March 31, 1996. ** Indicates the number of employees at March 31 for each of the fiscal years presented. Included in fiscal 1996, 1995 and 1994 are approximately 155, 46 and 260 employees, respectively, from new operations. (See Note 11 of Notes to Consolidated Financial Statements.) *** Based upon average number of employees. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS The following table sets forth items in the Consolidated Statements of Earnings as a percentage of revenues and the percentage increase or decrease of those items as compared with the prior period. Percent of Revenues Percent Changes ------------------------- ------------------- 1996 vs. 1995 vs. Fiscal Years 1996 1995 1994 1995 1994 - ----------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 45.1% 20.9% Costs and Expenses 91.6 92.7 94.0 43.3 19.2 ------ ------ ------ Operating Income 8.4 7.3 6.0 67.8 47.7 Interest and Related Expenses (2.6) (2.0) (2.7) 95.4 (12.8) Other Income, Net .8 .8 1.4 61.2 (36.0) ------ ------ ------ Earnings before Income Taxes 6.6 6.1 4.7 58.1 57.2 Income Taxes 2.6 2.4 1.9 58.8 51.1 ------ ------ ------ Net Earnings 4.0% 3.7% 2.8% 57.6% 61.2% - ----------------------------------------------------------------------------- BUSINESS OVERVIEW In recent years, the Company has faced the increasing challenge of achieving growth and improving its financial performance, while operating in an industry characterized by consolidation, reduced spending and technological transition. The Company has met this challenge with a four-part strategy aimed at expanding its core technological capabilities in electronic display, data storage and electro-optical systems; winning new programs for products in these areas; transferring technology from the defense to the commercial sector; and acquiring businesses which provide a strategic complement to the Company's existing customers and products. The implementation of this strategy has resulted in increasing revenues and profits over the last four fiscal years. Since the beginning of fiscal 1994, the Company has acquired seven businesses with complementary military and commercial products and technologies. The businesses of Technology Applications & Service Company (TAS), CMC Technology (CMC) and Laurel Technologies (Laurel) joined the Company in the latter part of fiscal 1994. In November 1994, the Company acquired Ahead Technology Corporation (Ahead), now located with CMC in San Jose, California. In July 1995, the Company formed a new subsidiary, OMI Acquisition Corp. (OMI), which acquired substantially all of the assets of Opto-Mechanik, Inc. (Opto). In addition, in February 1996, the Company acquired substantially all of the assets of Mag-Head Engineering Company, Inc. (MEC) and also formed a new partnership, DRS Medical Systems (DRS/MS). All of these businesses have become an integral part of the Company. COMPARISON OF FISCAL 1996 WITH FISCAL 1995 Revenues for the fiscal year ended March 31, 1996 increased 45% to $101.5 million from $69.9 million in fiscal 1995. The revenue growth was due primarily to increased shipments of data storage, display workstation and electro-optical systems, the latter as a result of the acquisition of substantially all of the assets of Opto on July 5, 1995 (the OMI Asset Acquisition), as well as to increases in commercial product sales. Operating income for the fiscal year ended March 31, 1996 increased 68% to $8.5 million from $5.1 million in fiscal 1995. Operating income as a percentage of revenues was 8% for the fiscal year ended March 31, 1996, as compared with 7% for the comparable prior-year period. Higher operating income was due primarily to the overall increase in revenues, together with higher margins on the Company's commercial product lines. Interest and related expenses increased 95% to $2.7 million for the fiscal year ended March 31, 1996, as compared with $1.4 million in the prior fiscal year. The increase for the period was primarily due to the private placement during the year of $25.0 million aggregate principal amount of 9% Senior Subordinated Convertible Debentures due 2003 (the 9% Debentures), offset in part by a reduction in interest resulting from repurchases of the Company's 8-1/2% Convertible Subordinated Debentures due 1998 (the 8-1/2% Debentures), in satisfaction of the August 1, 1995 sinking fund requirement for this debt. Other income, net, increased 61% to $.9 million for the fiscal year ended March 31, 1996 from $.5 million in the prior year. This increase was due primarily to interest earned on higher average cash balances this fiscal year, mainly as a result of the net proceeds from the 9% Debentures. The Company's effective tax rate for the fiscal years ended March 31, 1996 and 1995 was 39%. The provision for income taxes includes all estimated income taxes payable to federal and state governments, as applicable. COMPARISON OF FISCAL 1995 WITH FISCAL 1994 Revenues for fiscal 1995 increased 21% to $69.9 million from $57.8 million in fiscal 1994. The increase during fiscal 1995 was primarily attributable to revenues from the display, manufacturing and video broadcast product lines of TAS, CMC and Laurel, which were included in the Company's results for the full year. In addition, commercial revenues increased $4.3 million to approximately $6.4 million in fiscal 1995, primarily as a result of the Company's November 1994 acquisition of Ahead, which contributed approximately $2.7 million in revenues for the fiscal 1995 period. Revenues from the Company's core signal processing, display, data storage and optical product lines experienced a slight decrease during fiscal 1995, as development efforts on several major programs were substantially completed, and the receipt of certain new awards was delayed into the latter part of the year. 20 Operating income for fiscal 1995 increased 48% to $5.1 million from $3.4 million in fiscal 1994. Operating income as a percentage of revenues was 7% for fiscal 1995, as compared with 6% in fiscal 1994. Such increases were attributable to higher fiscal 1995 revenues, the contribution of higher-margin commercial products to the Company's business base and the positive impact of management's continuing cost reduction efforts. Interest and related expenses for fiscal 1995 decreased 13% to $1.4 million from $1.6 million in fiscal 1994. The decrease was a result of the reduction in the Company's long-term debt. The Company repurchased approximately $2.7 million of its 8-1/2% Debentures during fiscal 1995, which was used principally to satisfy the August 1, 1994 mandatory sinking fund requirement for this debt. Other income, net, for fiscal 1995 decreased 36% to $.5 million from $.8 million in fiscal 1994. This decrease was primarily attributable to lower gains from the redemptions of 8-1/2% Debentures of $.2 million. Substantially all of the 8-1/2% Debentures redeemed during fiscal 1995 were at prices approximating par value. The Company's effective income tax rate in fiscal 1995 and 1994 was 39% and 40%, respectively. FINANCIAL CONDITION AND LIQUIDITY CASH AND CASH FLOW: Cash and cash equivalents at March 31, 1996 and March 31, 1995 represented approximately 23% and 17%, respectively, of total assets. During the fiscal year ended March 31, 1996, cash increased $11.6 million. This increase was primarily due to the addition of approximately $23 million in net proceeds (after underwriters' discounts and related expenses) from the issuance of the 9% Debentures. In addition, approximately $4.9 million was generated from fiscal 1996 operations, and approximately $2.6 million was generated from sales of certain fixed assets, primarily in connection with the OMI Asset Acquisition. These contributions to cash were offset by uses of: (i) approximately $4.7 million for acquisitions and related activities; (ii) approximately $8.3 million for repayments of long-term debt obligations and (iii) approximately $5.9 million for capital expenditures. Working capital as of March 31, 1996 was approximately $34.0 million, as compared with $20.3 million at March 31, 1995. The increase was primarily due to higher cash balances resulting from the 9% Debenture offering. On May 31, 1996, the Company entered into a revolving line of credit loan agreement with Mellon Bank, N.A. for a three-year $15 million unsecured revolving line of credit (the Line of Credit). The Line of Credit will be used for working capital, letters of credit and to refinance certain existing debt obligations of the Company at more favorable interest rates. Interest on borrowings under the Line of Credit will be charged at the prime rate or at the London Interbank Offered Rate plus 175 basis points. The Company continues to seek acquisition opportunities consistent with its business strategy. In June 1996, the Company acquired substantially all of the assets of Vikron, Inc. (see "Acquisitions and Related Activities") and is engaged in preliminary discussions regarding several other potential acquisitions. There can be no assurance, however, that definitive agreements will be reached or that any acquisition will be consummated. The Company believes that its current working capital position and available financing are sufficient to support operational needs, as well as its near-term business objectives. ACCOUNTS RECEIVABLE AND INVENTORIES: Accounts receivable were $22.9 million at March 31, 1996, an increase of approximately $5.5 million from the prior fiscal year. This increase was primarily attributable to additional accounts receivable from entities acquired during fiscal 1996 and to increased volume of shipments at year-end. The Company receives progress payments on certain contracts from the U.S. Government of between 80-100% of allowable costs incurred. The remainder, including profits and incentive fees, is billed to its customers based upon delivery and final acceptance of all products. In addition, the Company may bill its customers based upon units delivered. Generally, there are no contract provisions for retainage, and all accounts receivable are expected to be collected within one year. The net inventory balance at March 31, 1996 was $19.4 million, an increase of approximately $7.7 million from the prior fiscal year. This increase was primarily the result of higher material procurement related to production activity on certain display workstation programs. The increase in net inventories was also due, in part, to acquisitions. LONG-TERM DEBT: Long-term debt outstanding increased by approximately $20.9 million during the fiscal year ended March 31, 1996 to $32.6 million, primarily due to the 9% Debenture offering and, to a lesser extent, from the addition of acquisition-related debt. These increases in long-term debt were offset in part by the early redemption in February 1996 of approximately $5.0 million aggregate principal amount of 8-1/2% Debentures. STOCKHOLDERS' EQUITY: Net stockholders' equity increased by $4.1 million during the fiscal year ended March 31, 1996 to $26.6 million, primarily as a result of net earnings generated for the fiscal year. In July 1994, pursuant to a stock purchase agreement between the Company and David E. Gross, its former President and Chief Technical Officer, the Company purchased 659,220 shares of its Class A Common Stock and 45,179 shares of its Class B Common Stock owned by Mr. Gross at a price of $4.125 and $4.00 per share, respectively, totaling approximately $2.9 million in cash (the Buy-back). Pursuant to a registration statement filed with the Securities and Exchange Commission (the SEC) relating to these shares, the Company sold 650,000 shares of its Class A Common Stock and 45,000 shares of its Class B Common Stock at prices of $4.125 and $4.00 per share, respectively, totaling approximately $2.9 million. 21 BACKLOG: At March 31, 1996, the Company's backlog of orders was approximately $145.6 million, as compared with $126.0 million at March 31, 1995. The increase in backlog for the fiscal year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $17 million of backlog from the OMI Asset Acquisition. New contract awards of approximately $104.1 million were booked during the fiscal year ended March 31, 1996, including approximately $12.3 million of new commercial orders. Significant awards received during the year included approximately $19 million in production and engineering contracts relating to the AN/UYQ-70 Advanced Display System; an additional $11.3 million for the AN/USH-42 Mission Recording Systems; $10.6 million for upgraded Captive Boresight Harmonization Kits and $10.2 million for the design and production of Night Vision Binoculars. Approximately 78%, 84% and 94% of revenues in fiscal 1996, 1995 and 1994, respectively, were derived directly or indirectly from contracts or subcontracts with the U.S. Government, principally the U.S. Navy. Included in revenues for fiscal 1996, 1995 and 1994 were $12.1 million, $18.8 million and $27.5 million, respectively, of customer-sponsored research and development, which were the result of contract agreements directly or indirectly with the U.S. Government. CONTINGENCIES: The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency. The Company is not currently a party to any legal proceedings with the U.S. Government. CERTAIN AGREEMENTS: On March 28, 1996, the Company entered into an employment, non-competition and termination agreement with Leonard Newman, a co-founder, former Chairman and Chief Executive Officer of the Company (the Newman Agreement). Pursuant to the Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0 million. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five-year period and also has agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with the Company. In March 1996, Mr. Leonard Newman and certain members of his immediate family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an investment adviser to several accounts. In connection with this sale, the Company entered into a registration rights agreement with the buyer and filed a registration statement with the SEC relating to these shares. INFLATION: The Company has experienced the effects of inflation through increased costs of labor, services and raw materials. Although a majority of the Company's revenues are derived from long-term contracts, the selling prices of such contracts generally reflect estimated costs to be incurred in the applicable future periods. ACCOUNTING STANDARDS DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: In December 1991, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (SFAS 107). SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash and cash equivalents, accounts receivable, accounts payable and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values as of March 31, 1996 of the Company's 8-1/2% Debentures and 9% Debentures, which are convertible into shares of the Company's Common Stock, have been disclosed in the Notes to the Consolidated Financial Statements. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS: In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The Company will adopt SFAS 121 effective April 1, 1997, and its adoption is not expected to have a material impact on the Company's consolidated results of operations or financial position. ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company, as permitted by SFAS 123, has not yet adopted the recognition provisions of this statement. Pursuant to SFAS 123, the Company may continue to apply the existing accounting rules in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" provided, however, that the Company then also provides certain disclosures of pro forma net income and earnings per share, presented as if the recognition provisions of SFAS 123 had been applied. The Company has not yet determined whether it will adopt the recognition provisions of SFAS 123 and believes that any requirements in connection with SFAS 123 will not have a material impact on the Company's consolidated results of operations or financial position. ACQUISITIONS AND RELATED ACTIVITIES On October 1, 1993, the Company acquired, through TAS Acquisition Corp., a wholly-owned subsidiary of the Company, a 95.7% equity interest in TAS, a Maryland corporation, pursuant to a stock purchase agreement (the TAS Agreement) dated as of August 6, 1993. TAS, headquartered in Gaithersburg, Maryland, was a privately-held company incorporated in early 1991. Under the terms of the TAS Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and outstanding shares of common stock, par value $.01 per share, of TAS. On September 30, 1993, the Company, in anticipation of the acquisition, advanced $1.8 million to TAS pursuant to a demand promissory note. Such advance was converted to an intercompany liability 22 on the date of the acquisition and was eliminated in consolidation. Cash paid by the Company in connection with this transaction was obtained from working capital. On November 1, 1993, Articles of Merger were filed in order to merge TAS into TAS Acquisition Corp. The name TAS Acquisition Corp. was changed to Technology Applications & Service Company. The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $.4 million, which was capitalized as goodwill and is being amortized on a straight-line basis over 30 years, or $14,000 annually. On December 13, 1993, the Company, through its wholly-owned subsidiary, DRS Systems Management Corporation (DRSSMC) entered into a partnership with Laurel Technologies, Inc. of Johnstown, Pennsylvania. Pursuant to a Joint Venture Agreement dated November 3, 1993 and a Partnership Agreement dated December 13, 1993, between DRSSMC and Laurel Technologies, Inc., Laurel was formed for the purposes of electronic cable and harness manufacturing, military-quality circuit card assembly and other related activities. The Company's contribution to Laurel consisted of cash, notes and equipment valued at approximately $.6 million, representing an 80% controlling interest in Laurel. As a result, the financial position and results of operations of Laurel since December 13, 1993 have been consolidated with those of the Company's. The related minority interest in Laurel has been included in Other Liabilities and Other Income, Net, respectively, in the Company's consolidated financial statements. Also during December 1993, the Company acquired certain assets of CMC, located in Santa Clara, California, for approximately $.4 million. CMC primarily refurbishes magnetic video recording rotary-head scanner assemblies for post-production facilities and television broadcast stations worldwide. This acquisition provides the Company with a key customer base in the commercial video recording systems industry. On November 17, 1994, the Company acquired, through a wholly-owned subsidiary of Precision Echo (Precision Acquisition), the net assets of Ahead, pursuant to an asset purchase agreement (the Ahead Asset Purchase Agreement), dated October 28, 1994. Under the terms of the Ahead Asset Purchase Agreement, Precision Acquisition paid, on the date of acquisition, approximately $1.1 million for the net assets of Ahead. In addition, Precision Acquisition entered into a Covenant and Agreement Not to Compete (the Covenant Agreement), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant Agreement, the total cash consideration to be paid by Precision Acquisition consisted of approximately $.4 million payable at the acquisition date and an additional $.5 million, payable in equal monthly installments over a period of five years from the acquisition date. The acquisition has been accounted for using the purchase method of accounting and, therefore, Ahead's financial statements are included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $.9 million and will be amortized on a straight-line basis over five years, or approximately $.2 million annually. On July 5, 1995 (the OMI Closing Date), Photronics Corp., a wholly-owned subsidiary of the Company, acquired (through OMI, a wholly-owned subsidiary of Photronics Corp.) substantially all of the assets of Opto, pursuant to an Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5, 1995, between Photronics Corp. and Opto (the OMI Agreement), and approved by the United States Bankruptcy Court for the Middle District of Florida on June 23, 1995. OMI, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. Pursuant to the OMI Agreement, the Company paid a total of $5.5 million, consisting of $3.7 million in cash and $1.8 million in notes. Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. Total cash consideration paid in the acquisition was obtained from the Company's working capital. The acquisition of the assets of Opto has been accounted for under the purchase method. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. The operating results of OMI, the acquiring corporation, have been included in the Company's reported operating results since the date of acquisition. On February 6, 1996, pursuant to a Joint Venture Agreement, dated February 6, 1996, by and among DRS/MS, a wholly-owned subsidiary of the Company, Universal Sonics Corporation (Universal Sonics) and the shareholders of Universal Sonics, and a Partnership Agreement, dated February 6, 1996, by and between DRS/MS and Universal Sonics, the Company entered into a partnership with Universal Sonics (the Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the Partnership consisted of $.4 million in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in the Partnership. On February 9, 1996, Precision Echo acquired (through Ahead Technology Acquisition Corporation (Ahead Acquisition), a wholly-owned subsidiary of Precision Echo), certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. (Mag-Head), pursuant to an Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head and Ahead Acquisition for approximately $.4 million in cash. Mag-Head produces audio and flight recorder heads. In June 1996, a second-tier subsidiary of Precision Echo acquired substantially all of the assets of Vikron, Inc. (Vikron) for approximately $3.7 million. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. 23 CONSOLIDATED BALANCE SHEETS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
March 31, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents $22,785,000 $11,197,000 Accounts Receivable (Notes 2 and 6) 22,942,000 17,432,000 Inventories, Net of Progress Payments (Note 3) 19,449,000 11,724,000 Other Current Assets 1,464,000 2,445,000 ----------- ----------- TOTAL CURRENT ASSETS 66,640,000 42,798,000 ----------- ----------- Property, Plant and Equipment, at Cost (Notes 4 and 6) 41,935,000 33,661,000 Less Accumulated Depreciation and Amortization 25,744,000 23,812,000 ----------- ----------- Net Property, Plant and Equipment 16,191,000 9,849,000 ----------- ----------- Intangible Assets, Less Accumulated Amortization of $4,027,000 and $3,457,000 in 1996 and 1995, Respectively 8,498,000 8,920,000 Other Assets 5,922,000 3,023,000 ----------- ----------- TOTAL ASSETS $97,251,000 $64,590,000 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Installments of Long-Term Debt (Notes 6 and 11) $ 726,000 $ 2,492,000 Accounts Payable and Accrued Expenses (Note 5) 31,924,000 19,989,000 ----------- ----------- TOTAL CURRENT LIABILITIES 32,650,000 22,481,000 Long-Term Debt, Excluding Current Installments (Notes 6 and 11) 32,608,000 11,732,000 Deferred Income Taxes (Note 8) 2,607,000 4,605,000 Other Liabilities (Notes 10 and 11) 2,820,000 3,263,000 ----------- ----------- TOTAL LIABILITIES 70,685,000 42,081,000 ----------- ----------- STOCKHOLDERS' EQUITY (NOTES 6 AND 9): Class A Common Stock, $.01 par Value per Share. Authorized 10,000,000 Shares; Issued 3,739,963 and 3,699,963 Shares at March 31, 1996 and 1995, Respectively 37,000 37,000 Class B Common Stock, $.01 par Value per Share. Authorized 20,000,000 Shares; Issued 2,223,603 and 2,163,253 Shares at March 31, 1996 and 1995, Respectively 22,000 22,000 Additional Paid-in Capital 13,639,000 13,435,000 Retained Earnings 15,022,000 10,919,000 ----------- ----------- 28,720,000 24,413,000 Treasury Stock, at Cost: 432,639 Shares of Class A Common Stock at March 31, 1996, and 1995; 65,795 and 21,619 Shares of Class B Common Stock at March 31, 1996 and 1995, Respectively (1,918,000) (1,617,000) Unamortized Restricted Stock Compensation (236,000) (287,000) ----------- ----------- NET STOCKHOLDERS' EQUITY 26,566,000 22,509,000 ----------- ----------- Commitments and Contingencies (Note 10) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,251,000 $64,590,000 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 24 CONSOLIDATED STATEMENTS OF EARNINGS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Revenues $101,454,000 $69,930,000 $57,820,000 Costs and Expenses (Note 3) 92,907,000 64,836,000 54,372,000 ------------ ----------- ----------- Operating Income 8,547,000 5,094,000 3,448,000 Interest and Related Expenses (2,681,000) (1,372,000) (1,574,000) Other Income, Net (Notes 7 and 11) 861,000 534,000 834,000 ------------ ----------- ----------- Earnings before Income Taxes 6,727,000 4,256,000 2,708,000 Income Taxes (Note 8) 2,624,000 1,652,000 1,093,000 ------------ ----------- ----------- NET EARNINGS $ 4,103,000 $ 2,604,000 $ 1,615,000 - ----------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE OF CLASS A AND CLASS B COMMON STOCK PRIMARY $ .73 $ .50 $ .30 FULLY DILUTED $ .69 $ .50 $ .30 - ----------------------------------------------------------------------------------------------------------- Weighted Average Number of Shares of Class A and Class B Common Stock Outstanding Primary 5,648,000 5,231,000 5,390,000 Fully Diluted 7,030,000 5,240,000 5,397,000 - -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Common Stock ------------------------------------ Unamortized Class A Class B Additional Restricted Net Years Ended March 31,1996, ----------------- ---------------- Paid-in Retained Treasury Stock Stockholders' 1995 and 1994 Shares Amount Shares Amount Capital Earnings Stock Compensation Equity - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT MARCH 31, 1993 3,674,963 $37,000 2,094,528 $21,000 $12,945,000 $ 6,700,000 $(1,579,000) $ (9,000) $18,115,000 Net Earnings -- -- -- -- -- 1,615,000 -- -- 1,615,000 Stock Options Exercised -- -- 11,000 -- 2,000 -- -- -- 2,000 Compensation Relating to Stock Options, Net -- -- -- -- 23,000 -- -- 4,000 27,000 --------- ------- --------- ------- ----------- ----------- ----------- --------- ----------- BALANCES AT MARCH 31, 1994 3,674,963 37,000 2,105,528 21,000 12,970,000 8,315,000 (1,579,000) (5,000) 19,759,000 Net Earnings -- -- -- -- -- 2,604,000 -- -- 2,604,000 Stock Options Exercised 25,000 -- 57,725 1,000 188,000 -- -- -- 189,000 Compensation Relating to Stock Options, Net -- -- -- -- 388,000 -- -- (282,000) 106,000 Purchase of Treasury Stock -- -- -- -- -- -- (2,900,000) -- (2,900,000) Sale of Treasury Stock -- -- -- -- (111,000) -- 2,862,000 -- 2,751,000 --------- ------- --------- ------- ----------- ----------- ----------- --------- ----------- BALANCES AT MARCH 31, 1995 3,699,963 37,000 2,163,253 22,000 13,435,000 10,919,000 (1,617,000) (287,000) 22,509,000 Net Earnings -- -- -- -- -- 4,103,000 -- -- 4,103,000 Stock Options Exercised 40,000 -- 60,350 -- 250,000 -- -- -- 250,000 Compensation Relating to Stock Options, Net -- -- -- -- 30,000 -- -- 51,000 81,000 Other -- -- -- -- (76,000) -- (301,000) -- (377,000) --------- ------- --------- ------- ----------- ----------- ----------- --------- ----------- BALANCES AT MARCH 31, 1996 3,739,963 $37,000 2,223,603 $22,000 $13,639,000 $15,022,000 $(1,918,000) $(236,000) $26,566,000 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Earnings $ 4,103,000 $ 2,604,000 $ 1,615,000 Adjustments to Reconcile Net Earnings to Cash Flows from Operating Activities: Depreciation and Amortization 3,170,000 2,480,000 2,558,000 Deferred Income Taxes (159,000) 26,000 (15,000) Other, Net (1,003,000) (77,000) (233,000) Changes in Assets and Liabilities, Net of Effects from Business Combinations: (Increase) Decrease in Accounts Receivable (4,640,000) (1,415,000) 1,443,000 (Increase) Decrease in Inventories (4,926,000) (6,408,000) 2,069,000 Increase in Other Current Assets (265,000) (7,000) (133,000) Increase in Accounts Payable and Accrued Expenses 8,630,000 3,640,000 2,928,000 Other, Net (59,000) 1,643,000 (62,000) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,851,000 2,486,000 10,170,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (5,942,000) (2,543,000) (988,000) Sales of Capital Assets 2,638,000 255,000 11,000 Payments Pursuant to Business Combinations, Net of Cash Acquired (4,669,000) (1,514,000) (696,000) Cash Advanced to Company Acquired for Repayment of Debt Prior to Acquisition -- -- (1,800,000) Other, Net -- 8,000 -- ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (7,973,000) (3,794,000) (3,473,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on Long-Term Debt (1,112,000) (275,000) (168,000) Repurchases of Convertible Subordinated Debentures (7,212,000) (2,667,000) (2,354,000) Net Proceeds from Issuance of Senior Subordinated Convertible Debentures 23,127,000 -- -- Other Borrowings (Repayments), Net (163,000) 20,000 325,000 Purchase of Treasury Stock -- (2,900,000) -- Sale of Treasury Stock -- 2,862,000 -- Other, Net 70,000 -- -- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,710,000 (2,960,000) (2,197,000) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,588,000 (4,268,000) 4,500,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,197,000 15,465,000 10,965,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $22,785,000 $11,197,000 $15,465,000 - ------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Diagnostic/Retrieval Systems, Inc., its subsidiaries, all of which are wholly owned, a joint venture consisting of an 80% controlling partnership interest and a joint venture consisting of a 90% controlling parnership interest (the Company). All significant intercompany transactions and balances have been eliminated in consolidation. B. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. In fiscal 1996, the Company obtained a standby letter of credit to secure progress payments received under a certain contract. As of March 31, 1996, this letter of credit was collateralized by $1.2 million in cash. C. REVENUE RECOGNITION Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as shipments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues on contracts with significant engineering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total contract costs at completion (cost-to-cost) with consideration given for risk of performance and estimated profit. Revenues related to incentive-type contracts also are determined on a percentage-of-completion basis measured by the cost-to-cost method. Revenues from cost-reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Revenues recognized under the cost-to-cost percentage-of-completion basis during fiscal 1996, 1995 and 1994 approximated 10%, 16% and 26% of total revenues, respectively, with remaining revenues recognized as delivery of finished units is made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1996, 1995 and 1994 are $12,051,000, $18,771,000 and $27,496,000, respectively, of customer-sponsored research and development. Revisions in profit estimates are reflected in the year in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 78%, 84% and 94% of the Company's revenues in fiscal 1996, 1995 and 1994, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government (principally the U.S. Navy). D. INVENTORIES Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expenses, which include research and development costs, where such costs are recoverable under customer contracts. In accordance with industry practice, inventories include amounts relating to contracts having production cycles longer than one year, and a portion thereof will not be realized within one year. E. DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been provided on the straight-line method. The ranges of estimated useful lives are: office furnishings, motor vehicles and equipment, 3-10 years; building and building improvements, 15-40 years; and leasehold improvements, over the shorter of the estimated useful lives or the life of the lease. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. The cost of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in operations. F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED Intangibles resulting from acquisitions represent the excess of cost of the investments over the fair-market values of the underlying net assets at the dates of investment. All intangibles are being amortized on the straight-line method over five to thirty years. The carrying value of intangible assets periodically is reviewed by the Company, and impairments are recognized when the expected undiscounted future operating cash flows derived from such intangible assets are less than their carrying value. G. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective April 1, 1993, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 was not material to the Company's consolidated results of operations or financial position. Deferred tax expense represents the change in the liability for deferred taxes from year to year. 27 H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). The Company adopted SFAS 106 during the first quarter of fiscal 1994, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. I. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (SFAS 107). SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash and cash equivalents, accounts receivable, accounts payable and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values as of March 31, 1996 of the Company's 8-1/2% Debentures and 9% Debentures, which are convertible into shares of the Company's Common Stock, have been disclosed in the Notes to the Consolidated Financial Statements. J. POSTEMPLOYMENT BENEFITS In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112). The Company adopted SFAS 112 during the first quarter of fiscal 1995, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. K. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. L. EARNINGS PER SHARE Earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of Class A and Class B Common Stock outstanding during each period. In fiscal 1996, 1995 and 1994, the computation of primary earnings per share included approximately 178,000, 123,000 and 56,000 shares, respectively, from the assumed exercise of dilutive stock options computed using the treasury stock method. The computation of fully diluted earnings per share in fiscal 1996, 1995 and 1994 included approximately 186,000, 132,000 and 63,000 shares, respectively, from the assumed exercise of dilutive stock options computed using the treasury stock method. In addition, the fully diluted earnings per share computation for fiscal 1996 included approximately 1,374,000 shares from the assumed conversion of the Company's 9% Senior Subordinated Convertible Debentures due 2003 (the 9% Debentures). For purposes of the computation, net earnings were increased by approximately $748,000, net of tax, relating to interest expense and amortization of debt issuance costs associated with these debentures. Additional shares assumed to be outstanding applicable to the Company's 8-1/2% Convertible Subordinated Debentures (the 8-1/2% Debentures) are not included for any of the periods presented, because their effect on earnings per share was antidilutive. NOTE 2. ACCOUNTS RECEIVABLE The component elements of accounts receivable are as follows: March 31, 1996 1995 - ------------------------------------------------------------------------------- U.S. GOVERNMENT: Amounts Billed $ 6,126,000 $ 5,885,000 Recoverable Costs and Accrued Profit on Progress Completed, Not Billed 2,200,000 7,264,000 ----------- ----------- 8,326,000 13,149,000 ----------- ----------- OTHER DEFENSE CONTRACTS: Amounts Billed 5,224,000 2,316,000 Recoverable Costs and Accrued Profit on Progress Completed, Not Billed 6,453,000 639,000 ----------- ----------- 11,677,000 2,955,000 ----------- ----------- OTHER AMOUNTS: 2,939,000 1,328,000 ----------- ----------- TOTAL $22,942,000 $17,432,000 - ------------------------------------------------------------------------------- Generally, no accounts receivable arise from retainage provisions in contracts. The Company receives progress payments on certain contracts from the U.S. Government of between 80-100% of allowable costs incurred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final acceptance of the product. In addition, the Company may bill based upon units delivered. 28 NOTE 3. INVENTORIES Inventories are summarized as follows: March 31, 1996 1995 - ------------------------------------------------------------------------------- Work-in-Process $44,795,000 $23,017,000 Raw Material 3,680,000 2,573,000 ----------- ----------- 48,475,000 25,590,000 Less Progress Payments (29,026,000) (13,866,000) ----------- ----------- TOTAL $19,449,000 $11,724,000 - ------------------------------------------------------------------------------- General and administrative costs included in work-in-process were $9,865,000 and $6,584,000 at March 31, 1996 and 1995, respectively. General and administrative costs included in costs and expenses amounted to $21,956,000, $17,681,000 and $16,896,000 in fiscal 1996, 1995 and 1994, respectively. Included in those amounts are expenditures for Company-sponsored independent research and development, amounting to approximately $649,000, $795,000 and $537,000 in fiscal 1996, 1995 and 1994, respectively. NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1996 and 1995 are summarized as follows: March 31, 1996 1995 - ------------------------------------------------------------------------------- Land $ 1,350,000 $ 1,350,000 Building and Building Improvements 2,389,000 2,384,000 Office Furnishings and Equipment 3,916,000 3,621,000 Laboratory and Production Equipment 19,946,000 15,639,000 Motor Vehicles 226,000 235,000 Computer Equipment 7,534,000 7,246,000 Leasehold Improvements 6,574,000 3,186,000 ----------- ----------- TOTAL $41,935,000 $33,661,000 - ------------------------------------------------------------------------------- Depreciation and amortization of plant and equipment amounted to $2,311,000, $1,833,000 and $2,061,000 in fiscal 1996, 1995 and 1994, respectively. In fiscal 1996, the Company financed approximately $389,000 of capital expenditures with long-term notes. NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The component elements of accounts payable and accrued expenses are as follows: March 31, 1996 1995 - ------------------------------------------------------------------------------- Payrolls, Other Compensation and Related Expenses $ 3,955,000 $ 2,643,000 Income Taxes Payable 1,887,000 1,821,000 Losses and Future Costs Accrued on Uncompleted Contracts 3,850,000 4,555,000 Other 6,474,000 3,004,000 ----------- ----------- 16,166,000 12,023,000 Accounts Payable 15,758,000 7,966,000 ----------- ----------- TOTAL $31,924,000 $19,989,000 - ------------------------------------------------------------------------------- NOTE 6. LONG-TERM DEBT A summary of long-term debt is as follows: March 31, 1996 1995 - ------------------------------------------------------------------------------- 9% Senior Subordinated Convertible Debentures, Due 2003 $25,000,000 $ -- 8-1/2% Convertible Subordinated Debentures, Due 1998 4,992,000 12,209,000 Variable Rate Industrial Revenue Bonds, Due 1998 1,695,000 1,895,000 Other Obligations 1,647,000 120,000 ----------- ----------- 33,334,000 14,224,000 Less Current Installments of Long-Term Debt 726,000 2,492,000 ----------- ----------- TOTAL $32,608,000 $11,732,000 - ------------------------------------------------------------------------------- On September 29, 1995 (the 9% Debenture Closing Date), the Company issued $20,000,000 in aggregate principal amount of the Company's 9% Debentures pursuant to a private placement. Net proceeds from the private placement of these 9% Debentures were approximately $19,000,000. On November 3, 1995, the Company issued an additional $5,000,000 in aggregate principal amount of the 9% Debentures, upon exercise of the over-allotment option pursuant to the Purchase Agreement between the Company and Forum Capital Markets L.P. (Forum), dated September 22, 1995. Net proceeds from the exercise of the over-allotment option were approximately $4,750,000. Subsequently, the 9% Debentures and the shares of Common Stock which are issuable from time to time upon conversion of the 9% 29 Debentures were registered with the Securities and Exchange Commission (the SEC). In connection with these transactions, the Company incurred approximately $625,000 of professional fees and other costs. These costs, together with Forum's commissions totaling $1,250,000, have been capitalized and are being amortized ratably through the maturity date of the 9% Debentures. Interest on the 9% Debentures is computed on the basis of a 360-day year of twelve 30-day months. The 9% Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock (see Note 9), unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. As of October 1, 1998, the 9% Debentures will be redeemable at the option of the Company, in whole or in part, together with accrued interest to the redemption date, at a redemption price of 105% of face value, diminishing by one percent each year to 100% on or after the fifth anniversary of such initial redemption date. There is no sinking fund requirement associated with the 9% Debentures. The 9% Debentures are subordinated to the prior payment of principal and interest on all senior indebtedness of the Company, and are senior in right of payment to the Company's 8-1/2% Debentures. The indenture for the 9% Debentures contains certain restrictions, including (i) the issuance of additional debt of the Company, (ii) the payment of dividends on the capital stock of the Company, (iii) certain transactions with affiliates, (iv) incurrence of liens, (v) issuance of preferred stock by the Company or its subsidiaries, (vi) stock splits, consolidations and reclassifications, and (vii) sales of assets and subsidiary stock. The indenture also prohibits certain restrictions on distributions from subsidiaries. All these limitations and prohibitions are subject to a number of qualifications, as set forth in the indenture. Under the indenture, the Company also is required to maintain a minimum level of consolidated net worth, as defined therein. As of March 31, 1996, the Company was in compliance with this covenant. The 8-1/2% Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock of the Company (see Note 9), unless previously redeemed, at a conversion price of $15.00 per share, subject to adjustment under certain conditions. The 8-1/2% Debentures are redeemable at the option of the Company, in whole or in part, at face value, together with interest accrued to the redemption date. As of August 1, 1990 and on August 1 of each year thereafter, to and including August 1, 1997, the Company is required to provide for the retirement of the 8-1/2% Debentures by mandatory redemption (sinking fund) in the aggregate annual principal amount of $2,500,000. As of March 31, 1996, the Company had repurchased $20,008,000 of the 8-1/2% Debentures and has satisfied all sinking fund requirements through August 1, 1997. The Consolidated Statements of Earnings for fiscal years 1996, 1995 and 1994 reflect gains resulting from these repurchases of $5,000, $13,000 and $257,000, respectively. The 8-1/2% Debentures are subordinate to the prior payment in full of the principal and interest on all senior indebtedness of the Company, which amounted to $28,342,000 at March 31, 1996. The indenture contains certain dividend and other restrictions. Under such provisions, the Company may not distribute dividends or purchase, redeem or otherwise acquire or retire any of its capital stock in excess of an aggregate amount which, at March 31, 1996, was approximately $6,400,000. The 8-1/2% Debentures and the 9% Debentures are listed for trading in public markets. As of March 31, 1996, the aggregate market values of the principal amount of the outstanding 8-1/2% Debentures and 9% Debentures were approximately $5,017,000 and $27,000,000, respectively, based on closing prices. On December 19, 1991, the Suffolk County Industrial Development Agency (Agency) issued variable rate demand industrial development revenue refunding bonds (Bonds) in the amount of $2,395,000 to refinance a prior bond issue which provided funds for the construction of the manufacturing facilities of Photronics Corp. (Photronics), a wholly-owned subsidiary of the Company. All property, plant and equipment acquired or constructed from the proceeds of the original bonds collateralizes the obligation, and payment of the principal and interest and premium (if any) on the Bonds is further secured by the unconditional guaranty of the Company. The Bonds are supported by an irrevocable, direct-pay letter of credit in an amount equal to the principal balance plus interest thereon for 45 days. At March 31, 1996, the contingent liability of the Company as guarantor under the letter of credit was approximately $1,726,000. The Company has collateralized the letter of credit with accounts receivable and also has agreed to certain financial covenants, including the maintenance of: (i) a certain minimum ratio of consolidated tangible net worth to total debt (Debt Ratio), (ii) a certain minimum quarterly ratio of earnings before interest and taxes to interest (Interest Ratio), and 30 (iii) a certain minimum balance of billed and unbilled accounts receivable (Eligible Receivables), all as defined in the related agreements. The financial covenants also require that the Company realize a certain level of profits during each quarter of fiscal 1997 in order to be in compliance. A default under the Bonds constitutes a default on the 8-1/2% Debentures and the 9% Debentures. As a result of the issuance of the $25,000,000 aggregate principal amount of 9% Debentures, the Debt Ratio at March 31, 1996 was below the required minimum ratio. The Company has obtained a waiver, renewable quarterly, from the bank of the required debt ratio and is in compliance with all covenants under the letter of credit. Commencing February 1, 1992 and on the first business day of each month thereafter, interest on the Bonds is payable at that daily rate determined to be necessary under prevailing market conditions to enable the Bonds to be sold at a price equal to 100% of the principal amount thereof plus accrued interest. Such rate was 3.1% at March 31, 1996. At the option of the Company, the interest rate payable on the Bonds may be changed to a weekly or fixed rate. Commencing February 1, 1992 and until such time as the Bonds may be converted to fixed-rate obligations, the Bonds are subject to redemption, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued interest. On or after the second anniversary of a conversion, Bonds bearing interest at a fixed rate are subject to the redemption, in whole on any date or in part on any interest payment date, at the option of the Company at an annual redemption rate of 102% at the second anniversary of such conversion and diminishing by one percent each year to 100% on or after the fourth anniversary of such conversion. Commencing January 1, 1993 and on each January 1 thereafter, to and including January 1, 1998, the Bonds are subject to a schedule of mandatory sinking fund redemptions at a price equal to 100% of the principal amount of the Bonds redeemed plus accrued interest. The principal amount of the Bonds redeemed at January 1, 1996 was $200,000. Cash payments for interest during fiscal 1996, 1995 and 1994 were $1,169,000, $1,237,000 and $1,448,000, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2001 are as follows: 1997, $726,000; 1998, $2,054,000; 1999, $5,394,000; 2000, $160,000; and 2001, $0. NOTE 7. OTHER INCOME, NET Other income, net includes: Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------- Interest Income $679,000 $439,000 $370,000 Royalty Income 51,000 63,000 157,000 Gains on Repurchases of 8-1/2% Debentures 5,000 13,000 257,000 Other 126,000 19,000 50,000 -------- -------- -------- TOTAL $861,000 $534,000 $834,000 - ------------------------------------------------------------------------------- NOTE 8. INCOME TAXES Income tax expense consists of: Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------- CURRENT: Federal $2,421,000 $1,498,000 $ 884,000 State 362,000 128,000 224,000 ---------- ---------- ---------- 2,783,000 1,626,000 1,108,000 ---------- ---------- ---------- DEFERRED: Federal 602,000 172,000 33,000 State (761,000) (146,000) (48,000) ---------- ---------- ---------- (159,000) 26,000 (15,000) ---------- ---------- ---------- TOTAL $2,624,000 $1,652,000 $1,093,000 - ------------------------------------------------------------------------------- Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1996 and 1995 are as follows: 31 March 31, 1996 1995 - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS: State Net Operating Loss Carryforwards $ 2,786,000 $ 3,977,000 Inventory Capitalization 2,316,000 1,687,000 Costs Accrued on Uncompleted Contracts 1,470,000 2,627,000 Other 1,063,000 2,287,000 ----------- ------------ Total Gross Deferred Tax Assets 7,635,000 10,578,000 Less Valuation Allowance (1,419,000) (2,279,000) ----------- ------------ NET DEFERRED TAX ASSETS 6,216,000 8,299,000 ----------- ------------ DEFERRED TAX LIABILITIES: Depreciation and Amortization (3,834,000) (5,048,000) General and Administrative Costs (4,035,000) (4,325,000) Federal Impact of the State Benefits (731,000) (1,136,000) Other (495,000) (828,000) ----------- ------------ Total Gross Deferred Tax Liabilities (9,095,000) (11,337,000) ----------- ------------ NET DEFERRED TAX LIABILITIES $ 2,879,000 $ 3,038,000 - ------------------------------------------------------------------------------- A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company has established a valuation allowance for a portion of the deferred tax asset attributable to state net operating loss carryforwards, due to the uncertainty of future Company earnings attributable to various states and the status of applicable statutory regulation that could limit or preclude utilization of these benefits in future periods. A deferred tax liability of $272,000 is included in Accounts Payable and Accrued Expenses in the Consolidated Balance Sheet. A deferred tax asset of $1,567,000 is included in Other Current Assets in the Consolidated Balance Sheet at March 31, 1995. Approximately $36,121,000 of state net operating loss carryforwards were available in various tax jurisdictions at March 31, 1996, which will expire between fiscal years 1997 and 2011. A reconciliation of the statutory Federal income tax rate to the effective tax rate follows: Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------- Statutory Tax Rate 34% 34% 34% State Income Tax, Net of Federal Income Tax Benefit 4 3 4 Amortization of Intangible Assets 1 1 2 Other -- 1 -- --- --- --- TOTAL 39% 39% 40% - ------------------------------------------------------------------------------- The provision for income taxes includes all estimated income taxes payable to federal and state governments, as applicable. Cash payments for income taxes during fiscal 1996, 1995 and 1994 amounted to $2,809,000, $1,723,000 and $311,000, respectively. NOTE 9. COMMON STOCK, STOCK OPTION PLANS AND EMPLOYEE BENEFIT PLANS Until March 31, 1996, the Company had three authorized classes of stock: a class consisting of 10,000,000 shares of Class A Common Stock, a class consisting of 20,000,000 shares of Class B Common Stock, and a class consisting of 2,000,000 shares of Preferred Stock (none of which has been issued). The holders of Class A and Class B Common Stock were entitled to one vote per share and one-tenth vote per share, respectively. On February 7, 1996, the Board of Directors (Board) of the Company approved and recommended for submission to the stockholders of the Company by a majority vote the consideration and approval of an Amended and Restated Certificate of Incorporation (the Restated Certificate), which amended and restated the Company's certificate to (i) effect a reclassification (the Reclassification) of each share of Class A and Class B Common Stock into one share of Common Stock of the Company, (ii) provide that action by the stockholders may be taken only at a duly called annual or special meeting and not by written consent, and (iii) provide that the stockholders of the Company would have the right to make, adopt, alter, amend, change or repeal the by-laws of the Company only upon the affirmative vote of not less than 66 2/3% of the outstanding capital stock of the Company entitled to vote thereon. On March 26, 1996, the stockholders approved the Restated Certificate. The Restated Certificate was filed with the Secretary of State of the State of Delaware and became effective April 1, 1996. Accordingly, future Consolidated Balance Sheets of the Company will not present Class A and Class B Common Stock, but rather the new, single class of Common Stock. 32 As a result of the Reclassification, the 8-1/2% Debentures and 9% Debentures are now convertible into an equivalent number of shares of Common Stock. Also, options granted under the Company's 1991 Stock Option Plan (Stock Option Plan) are now exercisable for an equivalent number of shares of Common Stock. On February 7, 1991, the Board of Directors (Board) adopted the 1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000 shares of Class B Common Stock. The Stock Option Plan was approved by the Company's stockholders on August 8, 1991. The Stock Option Plan is the successor to the Company's 1981 Non-Qualified Stock Option Plan (Non-Qualified Plan) that expired on May 12, 1991 and to the 1981 Incentive Stock Option Plan (Incentive Plan) that expired on October 31, 1991. Under the terms of the Stock Option Plan, options to purchase shares of Class B Common Stock may be granted to key employees, directors and consultants of the Company. Options granted under the Stock Option Plan are at the discretion of the Board (Stock Option Committee) and may be incentive stock options or non-qualified stock options, except that incentive stock options may be granted only to employees. The option price is determined by the Stock Option Committee and must be a price per share which is not less than the par value per share of the Class B Common Stock, and in the case of an incentive stock option, may not be less than the fair-market value of the Common Stock on the date of the grant. Options may be exercised during the exercise period, as determined by the Stock Option Committee, except that no option may be exercised within six months of its grant date, and in the case of an incentive stock option, generally, the exercise period may not exceed ten years from the date of the grant. At March 31, 1996, 129,850 shares of Class B Common Stock were reserved for future grants under the Stock Option Plan. The Non-Qualified Plan, as amended, provided for the grant of options to purchase a total of 100,000 shares of Class A Common Stock and 50,000 shares of Class B Common Stock through May 12, 1991. Under the Non-Qualified Plan, the Stock Option Committee had discretion to grant options to employees, consultants and directors of the Company. The exercise price of an option granted under the Non-Qualified Plan was the price, as determined by the Stock Option Committee, but was not less than the aggregate par value of the shares subject to the option. Options granted under the Non-Qualified Plan were exercisable in accordance with the terms of the grant during a specified period, which did not exceed five years. Upon the expiration of the Non-Qualified Plan, a total of 87,600 shares of Class A Common Stock and a total of 10,300 shares of Class B Common Stock remained ungranted. As of March 31, 1996, there were no options outstanding under the Non-Qualified Plan. The Incentive Plan, as amended, provided for the grant of options to purchase a total of 150,000 shares of Class A Common Stock and 475,000 shares of Class B Common Stock through October 31, 1991. Under the Incentive Plan, options were granted at the discretion of the Stock Option Committee only to employees of the Company. Options are exercisable in accordance with the terms of the grant within a specified period, which may not exceed ten years. Each option granted provided for the purchase of a specified number of shares of Class A Common Stock or Class B Common Stock, or both, at an exercise price not less than the fair-market value of the shares subject to the option on the date of grant. Upon the expiration of the Incentive Plan, options representing a total of 23,665 shares of Class A Common Stock and a total of 269,832 shares of Class B Common Stock remained ungranted. As of March 31, 1996, there were no options outstanding under the Incentive Plan. Under the Stock Option Plan, pursuant to the terms of exercise under the grant, the excess of the fair-market value of shares under option at the date of grant over the option price may be charged to unamortized restricted stock compensation or to earnings as compensation expense and credited to additional paid-in capital. The unamortized restricted stock compensation, if any, is charged to expense as the options become exercisable, in accordance with the terms of the grant. The amount of compensation charged to earnings in fiscal 1996, 1995 and 1994 was $81,000, $106,000 and $27,000, respectively. When stock is issued on exercise of options, the par value of each share ($.01) is credited to common stock and the remainder of the option price is credited to paid-in capital. No charge is made to operations. A summary of all transactions under the Stock Option, Incentive and Non-Qualified Plans follows: 33
Number of Number of Shares of Class A Option Price Shares of Class B Option Price Common Stock per Share Common Stock per Share - ----------------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT MARCH 31, 1993 (of Which 32,500 Shares and 111,925 Shares of Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 174,850 $ .01-4.75 Granted -- -- 142,750 $ .01-3.63 Exercised -- -- (11,000) $ .01-2.25 Expired -- -- (32,250) $ 2.13-2.25 ------- ----- ------- ----------- OUTSTANDING AT MARCH 31, 1994 (of Which 48,750 Shares and 111,163 Shares of Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 274,350 $ .01-4.75 Granted -- -- 150,000 $ .01-4.95 Exercised (25,000) $2.61 (57,725) $ .01-3.63 Expired -- -- (17,000) $ .01-3.63 ------- ----- ------- ----------- OUTSTANDING AT MARCH 31, 1995 (of Which 40,000 Shares and 145,425 Shares of Class A and Class B, Respectively, Were Exercisable) 40,000 $2.61 349,625 $ .01-4.95 Granted -- -- 159,000 $ 4.75-7.75 Exercised (40,000) $2.61 (60,350) $ 2.06-4.75 Expired -- -- (11,475) $ 2.13-7.75 ------- ----- ------- ----------- OUTSTANDING AT MARCH 31, 1996 (of Which 137,100 Shares Were Exercisable) -- -- 436,800 $ .01-7.75 - -----------------------------------------------------------------------------------------------------------------------------------
The Company also maintains defined contribution plans covering substantially all full-time eligible employees. The Company's contributions to these plans for fiscal 1996, 1995 and 1994 amounted to $414,000, $365,000 and $203,000, respectively. On February 1, 1996, the Company established a Supplemental Executive Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant to the SERP, the Company will provide retirement benefits to each key executive, based on years of service and final average annual compensation as defined therein. In addition, the Company will advance premiums for life insurance policies providing a death benefit equal to five times the participants' salary at time of death. In the event of a change in control, as defined therein, benefits become fully vested. The SERP is non-contributory and unfunded. Benefits under the SERP are currently being funded from working capital. As of March 31, 1996, the Company's liability for benefits accrued under the SERP was approximately $876,000, and is included in Other Liabilities in the Consolidated Balance Sheet. Charges of $45,000 relating to the SERP were included in the results of operations for fiscal 1996. NOTE 10. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS At March 31, 1996, the Company was party to various noncancelable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: - ------------------------------------------------------------------------------ 1997 $ 2,717,000 1998 2,600,000 1999 2,340,000 2000 2,215,000 2001 1,213,000 Thereafter 1,675,000 ----------- TOTAL $12,760,000 - ------------------------------------------------------------------------------ 34 It is not certain as to whether the Company will negotiate new leases as existing leases expire. Determinations to that effect will be made as existing leases approach expiration and will be based on an assessment of the Company's capacity requirements at that time. Total rent expense aggregated $3,115,000, $2,490,000 and $1,703,000 in fiscal 1996, 1995 and 1994, respectively. In April 1984, the Board of Directors approved a lease agreement with LDR Realty Co. (wholly owned by the former Chairman of the Board of Directors and former President) for additional office and manufacturing space for the Company. The LDR lease, which expired on May 31, 1988, was renegotiated for a ten-year term commencing June 1, 1988 at a net annual rental of $233,000. The Company is required to pay all real-estate taxes, maintenance and repairs to the facility. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the Gross Agreement) and a Stock Purchase Agreement (the Stock Purchase Agreement) with David E. Gross, who retired as President and Chief Technical Officer of the Company on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross will receive a total of $600,000 as compensation for his services under a five-year consulting agreement with the Company and a total of $750,000 as consideration for a five-year non-compete arrangement. The payments will be charged to expense over the term of the Gross Agreement as services are performed and obligations are fulfilled by Mr. Gross. He also will receive, at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period as deferred compensation. The approximate net present value of the payments to be made to Mr. Gross, pursuant to the deferred compensation portion of the Gross Agreement, is included in Other Liabilities in the Consolidated Balance Sheets. On July 28, 1994, pursuant to the Stock Purchase Agreement, the Company purchased 659,220 shares of Class A Common Stock and 45,179 shares of Class B Common Stock owned by Mr. Gross for $4.125 and $4.00 per share, respectively, totaling approximately $2.9 million in cash (the Buy-back). The Stock Purchase Agreement also includes certain provisions regarding the sale and voting of Mr. Gross' remaining shares of stock in the Company, as well as the adjustment which would have been made in the purchase price paid to Mr. Gross pursuant to the Buy-back should a change in control of the Company occur within three years from the date of the Stock Purchase Agreement. Subsequent to the Buy-back, the Company offered to sell 650,000 shares of its Class A Common Stock at a purchase price of between $3.92 per share and $4.33 per share and 45,000 shares of its Class B Common Stock at a purchase price of between $3.80 per share and $4.20 per share, pursuant to a related registration statement filed with the SEC. As of March 31, 1995, all shares of Class A and Class B Common Stock offered for sale under the registration statement had been sold at a price of $4.125 per share and $4.00 per share, respectively, totaling approximately $2.9 million. On March 28, 1996, the Company entered into an Employment, Non-Competition and Termination Agreement with Leonard Newman, a co-founder, former Chairman and Chief Executive Officer of the Company (the Newman Agreement). Pursuant to the Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0 million, of which approximately $1.5 million was charged to operations in fiscal 1995. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five-year period and also has agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with Mr. Newman. In March 1996, Mr. Leonard Newman and certain members of his immediate family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an investment adviser to several accounts. In connection with this sale, the Company entered into a registration rights agreement with the buyer and filed a registration statement relating to these shares. The Company is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Since a substantial amount of the Company's revenues are derived from contracts or subcontracts with the U.S. Government, future revenues and profits will be dependent upon continued contract awards, Company performance and volume of Government business. The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency. 35 NOTE 11. BUSINESS COMBINATIONS On October 1, 1993, the Company acquired (through TAS Acquisition Corp., a wholly-owned subsidiary) a 95.7% equity interest in Technology Applications and Service Company (TAS), a Maryland corporation, pursuant to a Stock Purchase Agreement (the Agreement) dated as of August 6, 1993. Under the terms of the Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and outstanding shares of common stock, par value $.01 per share, of TAS. TAS, headquartered in Gaithersburg, Maryland, was a privately-held company incorporated in 1991. It applies state-of-the-art technology to produce emulators that can replace display consoles and computer peripherals used by the military. TAS also produces simulators, stimulators and training products used primarily for testing and training at military land-based sites, as well as provides technical services to both Department of Defense and commercial customers. On September 30, 1993, the Company, in anticipation of the acquisition, advanced $1,800,000 to TAS pursuant to a demand promissory note. Such advance was converted to an intercompany liability on the date of the acquisition and is eliminated in consolidation. On November 1, 1993, Articles of Merger were filed in order to merge TAS into TAS Acquisition Corp. The name TAS Acquisition Corp. was changed to Technology Applications & Service Company (TAS). The acquisition has been accounted for using the purchase method of accounting; the Consolidated Statements of Earnings include the operations of TAS from October 1, 1993. On December 13, 1993, pursuant to a Joint Venture Agreement dated November 3, 1993 and a Partnership Agreement dated December 13, 1993, by and between DRS Systems Management Corporation, a wholly-owned subsidiary of the Company, and Laurel Technologies, Inc. (Laurel) of Johnstown, Pennsylvania, the Company entered into a partnership with Laurel (the Partnership) for the purposes of electronic cable and harness manufacturing, military-quality circuit card assembly and other related activities. The Company's contribution to the Partnership consisted of cash, notes and equipment valued at approximately $600,000, representing an 80% controlling interest in the Partnership. As a result, the financial position of the Partnership has been consolidated with that of the Company's, and the Consolidated Statements of Earnings include the operations of Laurel from December 13, 1993. The related minority interest in the Partnership has been included in Other Liabilities and Other Income, Net, respectively, in the Company's consolidated financial statements. The Company also made one other asset acquisition in December 1993 which was not significant to the Company's consolidated financial statements. On November 17, 1994, Precision Echo, Inc., a wholly-owned subsidiary of the Company, acquired, through its wholly-owned subsidiary (Precision Echo), the net assets of Ahead Technology Corporation (Ahead), pursuant to an Asset Purchase Agreement dated October 28, 1994. Under the terms of the Asset Purchase Agreement, Precision Echo paid, on the date of acquisition, approximately $1,100,000 for the net assets of Ahead. In addition, Precision Echo entered into a Covenant and Agreement Not to Compete (Covenant), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant, the total cash consideration to be paid by Precision Echo consisted of approximately $400,000 payable at the acquisition date, and an additional $540,000 payable in equal monthly installments over a period of five years from the acquisition date. Ahead, now located in San Jose, California, designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. Its products include burnish heads, glide heads and specialty test heads. The acquisition has been accounted for using the purchase method of accounting, and, therefore, Ahead's financial statements are included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $940,000 and will be amortized on a straight-line basis over five years, or approximately $188,000 annually. The financial position and results of operations of Ahead were not significant to those of the Company's at the date of acquisition. On July 5, 1995 (the OMI Closing Date), Photronics, a wholly-owned subsidiary of the Company, acquired, through OMI Acquisition Corp. (OMI), a wholly-owned subsidiary of Photronics, substantially all of the assets of Opto-Mechanik, Inc. (Opto), pursuant to an Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5, 1995, between Photronics and Opto (the OMI Agreement), and approved by the United States Bankruptcy Court for the Middle District of Florida on June 23, 1995. OMI, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. 36 Pursuant to the OMI Agreement, the Company paid a total of $5,450,000 consisting of (i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. (PNC), (ii) a note to PNC in the principal amount of $1,450,000 payable in forty-eight equal monthly installments of principal and interest commencing with the first day of the month subsequent to the OMI Closing Date (the PNC Note), (iii) $2,550,000 in cash to MetLife Capital Corporation and (iv) a note in the principal amount of $300,000 to Opto payable in six equal monthly installments of principal and interest commencing on August 5, 1995 (the Opto Note). The PNC Note bears interest at a floating rate equal to the lesser of (i) PNC's stated prime interest rate plus 0.5% or (ii) the prime rate as reported by the Wall Street Journal plus 0.5%. The Opto Note bears interest at a rate of 9.5% per annum. Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. Total cash consideration paid in connection with the acquisition was obtained from the Company's working capital. The acquisition of the assets of Opto has been accounted for under the purchase method. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. The operating results of OMI, the acquiring corporation, have been included in the Company's reported operating results since the date of acquisition. On February 6, 1996, pursuant to a Joint Venture Agreement, dated February 6, 1996, by and among DRS/MS, Inc. (DRS/MS), a wholly-owned subsidiary of the Company, Universal Sonics Corporation (Universal Sonics), and the shareholders of Universal Sonics, and a Partnership Agreement, dated February 6, 1996, by and between DRS/MS and Universal Sonics, the Company entered into a partnership with Universal Sonics (the DRS/MS Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the DRS/MS Partnership consisted of $400,000 in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in the DRS/MS Partnership. On February 9, 1996, Precision Echo acquired, through Ahead Technology Acquisition Corporation (Ahead Acquisition), a wholly-owned subsidiary of Precision Echo, certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. (Mag-Head), pursuant to an Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head and Ahead Acquisition for approximately $400,000 in cash. Mag-Head produces audio and flight recorder heads. NOTE 12: SUBSEQUENT EVENTS (UNAUDITED) On May 31, 1996, the Company entered into an agreement with Mellon Bank, N.A. (Mellon Bank) for a three-year $15 million unsecured revolving line of credit. The line of credit will be used for working capital, letters of credit, and to refinance certain existing debt obligations of the Company at more favorable interest rates. Interest on borrowings under the line of credit will be charged at the prime rate or at the London Interbank Offered Rate plus 175 basis points. The Company has agreed to maintain certain financial covenants, including the maintenance of: (i) a certain minimum quarterly ratio of liquid assets to current liabilities, (ii) a certain minimum interest coverage ratio, calculation on a rolling four-quarter basis, and (iii) a certain maximum quarterly ratio of total liabilities to tangible net worth, as defined in the agreement. In June 1996, a second-tier subsidiary of Precision Echo acquired substantially all of the assets of Vikron, Inc. (Vikron) for approximately $3.7 million. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. 37 NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for fiscal 1996 and 1995: First Quarter 1996 1995 - ------------------------------------------------------------------------------- Revenues $17,279,000 $16,012,000 Operating Income $ 1,314,000 $ 1,076,000 Income Taxes $ 420,000 $ 382,000 Net Earnings $ 656,000 $ 508,000 Net Earnings per Share of Common Stock Primary $ .12 $ .10 Fully Diluted $ .12 $ .10 - ------------------------------------------------------------------------------- Second Quarter 1996 1995 - ------------------------------------------------------------------------------- Revenues $22,786,000 $15,650,000 Operating Income $ 1,844,000 $ 1,180,000 Income Taxes $ 584,000 $ 335,000 Net Earnings $ 915,000 $ 570,000 Net Earnings per Share of Common Stock Primary $ .16 $ .12 Fully Diluted $ .16 $ .12 - ------------------------------------------------------------------------------- Third Quarter 1996 1995 - ------------------------------------------------------------------------------- Revenues $25,563,000 $15,742,000 Operating Income $ 2,181,000 $ 1,005,000 Income Taxes $ 590,000 $ 425,000 Net Earnings $ 924,000 $ 634,000 Net Earnings per Share of Common Stock Primary $ .16 $ .13 Fully Diluted $ .16 $ .13 - ------------------------------------------------------------------------------- Fourth Quarter 1996 1995 - ------------------------------------------------------------------------------- Revenues $35,826,000 $22,526,000 Operating Income $ 3,208,000 $ 1,833,000 Income Taxes $ 1,030,000 $ 510,000 Net Earnings $ 1,608,000 $ 892,000 Net Earnings per Share of Common Stock Primary $ .28 $ .16 Fully Diluted $ .23 $ .16 - ------------------------------------------------------------------------------- COMMON STOCK DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES FISCAL 1996 FISCAL 1995 - ------------------------------------------------------------------------------- CLASS A CLASS A As Traded on the American ------------- ------------- Stock Exchange HIGH LOW HIGH LOW - ------------------------------------------------------------------------------- First Quarter 6-5/8 4-3/4 5-1/4 3-5/8 Second Quarter 7-13/16 6-3/16 4-3/4 3-3/4 Third Quarter 8 7 4-5/16 3-15/16 Fourth Quarter 8-11/16 7-7/16 5-1/4 4 - ------------------------------------------------------------------------------- CLASS B CLASS B As Traded on the American ------------- ------------- Stock Exchange HIGH LOW HIGH LOW - ------------------------------------------------------------------------------- First Quarter 6-13/16 4-7/8 5-1/8 3-3/4 Second Quarter 7-7/8 5-3/4 4-5/8 3-3/4 Third Quarter 7-7/8 6-3/4 4-3/8 3-7/8 Fourth Quarter 8-3/4 7-3/8 5-1/2 3-7/8 - ------------------------------------------------------------------------------- Effective April 1, 1996, the stockholders of the Company approved a reclassification of each share of the Company's Class A and Class B Common Stock into one share of Common Stock (the Reclassification). (See Note 9 of Notes to the Consolidated Financial Statements.) The purpose of the Reclassification was to simplify the Company's capital structure, streamline the Company's voting procedures and enhance the marketability and liquidity of and maximize investor interest in the Company's capital stock. In addition, the Company believes that, as a result of the Reclassification, the Company is in a more flexible position to raise capital and effect mergers and acquisitions using its common stock. However, there can be no assurance that the Reclassification will have such effects. As of May 23, 1996, the Common Stock of the Company was held by 346 stockholders of record. 38 INDEPENDENT AUDITORS' REPORT DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES KPMG Peat Marwick LLP To the Board of Directors and Stockholders, Diagnostic/Retrieval Systems, Inc.: We have audited the accompanying consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996 in conformity with generally accepted accounting principles. /s/KPMG PEAT MARWICK LLP Short Hills, New Jersey May 17, 1996 39 EX-21 5 SUBSIDIARIES OF DIAGNOSTIC/RETRIEVAL SYSTEMS Exhibit 21 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE COMPANY MARCH 31, 1996 Subsidiary State of Incorporation - ---------- ---------------------- Precision Echo, Inc. Delaware Photronics Corp. New York Technology Applications & Service Company Delaware DRS Systems Management Corporation Delaware Ahead Technology, Inc. Delaware OMI Acquisition Corp. Delaware Ahead Technology Acquisition Corp. Delaware DRS/MS, Inc. Delaware EX-23.1 6 INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Diagnostic/Retrieval Systems, Inc.: We consent to the incorporation by reference in the registration statements (No. 2-87303, No. 2-99986, No. 33-33125, No. 2-97784 and No. 33-42886) on Form S-8 and Form S-3 Diagnostic Retrieval Systems, Inc. of our reports dated May 17, 1996, relating to the consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three year period ended March 31, 1996, which reports appear or are incorporated by reference in the March 31, 1996 Annual Report on Form 10-K of Diagnostic/Retrieval Systems, Inc. KPMG Peat Marwick LLP Short Hills, New Jersey June 28, 1996 EX-23.2 7 AUDITORS' REPORT EXHIBIT 23.2 INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Diagnostic/Retrieval Systems, Inc.: Under date of May 17, 1996, we reported on the consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 1996, as contained in the 1996 Annual Report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the fiscal year 1996. In connection with our audits of the aforementioned consolidated financial statements we also have audited the related consolidated financial statement schedule as listed in the accompanying index. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Short Hills, New Jersey May 17, 1996 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. FORM 10-K FOR THE ANNUAL PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 22,785,000 0 22,942,000 0 19,449,000 66,640,000 41,935,000 25,744,000 97,251,000 32,650,000 32,608,000 0 0 59,000 26,507,000 97,251,000 101,454,000 101,454,000 92,907,000 92,907,000 0 0 2,681,000 6,727,000 2,624,000 0 0 0 0 4,103,000 0.73 0.69
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