-----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, QrzUrfTbd6eMYcmmVSudu+tfZsPuSt+uPLd2d33jFO43dOtCiZfGcm76NZcE1Aqk cA8IOWhteVC2ts+o++38wg== 0000950110-98-000788.txt : 19980630 0000950110-98-000788.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950110-98-000788 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRS TECHNOLOGIES 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: SEC FILE NUMBER: 001-08533 FILM NUMBER: 98655611 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 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 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K ================================================================================ 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, 1998 ---------- COMMISSION FILE NUMBER 1-8533 DRS TECHNOLOGIES, INC. DELAWARE 13-2632319 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054 (973) 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 due August 1, 1998 American Stock Exchange 9% Senior Subordinated Convertible Debentures due October 1, 2003 American Stock Exchange 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 AND EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ___ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [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 22, 1998, WAS APPROXIMATELY $78,000,000. THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 22, 1998 WAS 6,201,976 (EXCLUSIVE OF 402,461 SHARES OF COMMON STOCK HELD IN THE TREASURY.) DOCUMENTS INCORPORATED BY REFERENCE 1. 1998 Annual Report (for the fiscal year ended March 31, 1998), incorporated in Part II. 2. Definitive Proxy Statement, dated July 2, 1998, for the Annual Meeting of Stockholders, incorporated in Part III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL The registrant, DRS Technologies, Inc. (hereinafter the "Company" or "DRS") was incorporated in 1968 and is a diversified, high-technology company serving government and commercial niche markets worldwide. DRS develops and manufactures a variety of leading edge systems and components used for the processing, display and storage of data. These include combat display workstations, electronic sensor systems, mission recording systems, digital imaging systems, electro-optical systems, ship communications and flight safety systems. The Company also provides a wide range of technical support and depot level services. DRS's defense electronics products serve all branches of the U.S. Armed Services and certain international military forces. The Company's commercial and industrial products are used by the airline, banking, computer disk drive, security, transportation, retail sales and broadcast industries. 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 implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the Cold War and military budget constraints. 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. In addition to winning contracts for new programs and supporting existing military 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 provide a strategic complement to the Company's existing products, services and technological capabilities in both the defense and commercial marketplaces. To effect these strategies, the Company has (i) made several acquisitions in recent years, adding complementary military and commercial products and technologies; (ii) entered into strategic relationships with other defense suppliers, such as Lockheed Martin Tactical Defense Systems and Northrop-Grumman, 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 increased revenues and profits over the last five fiscal years. Acquisitions and Related Activities: In July 1995, the Company acquired substantially all of the assets of Opto-Mechanik, Inc., now known as DRS Optronics, Inc. ("DRS Optronics"), located in Palm Bay, Florida. This acquisition enabled the Company to expand its electro-optical targeting products, add backlog in complementary product areas and consolidate certain manufacturing activities in a lower-cost facility. 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. Due to the fact that DRS Medical Systems did not complement the Company's on-going strategies, on September 12, 1997, the Company sold substantially all the net assets of DRS Medical Systems to United States Surgical Corporation. As part of the Company's strategy to diversify into non-defense markets, the Company made four acquisitions that expanded its presence and existing capabilities in the magnetic head marketplace. In February 1996, the Company acquired substantially all of the assets of Mag-Head Engineering Company, Inc., a manufacturer of audio and flight recorder heads. In addition, in June 1996, the Company acquired substantially all of the assets of Vikron, Inc. ("Vikron"). Located in St. Croix Falls, Wisconsin, Vikron manufactures data and recording heads. In October 1996, the Company acquired certain assets of Nortronics Company, Inc. ("Nortronics"), which also manufactures magnetic data recording head products. Nortronics is located in Dassel, Minnesota. Effective February 26, 1997, 2 these operations were merged with and into DRS Ahead Technology, Inc. to form a single legal entity. In May 1997, the Company acquired 80% of the outstanding equity of Magnetic Heads Company Ltd. ("MHC"). Located in Razlog, Bulgaria, MHC, now known as DRS Ahead Technology--Bulgaria, is a manufacturer and supplier of magnetic recording heads used primarily for commercial applications. The Company currently is integrating these operations to further streamline its manufacturing operations. In October 1996, Pacific Technologies, Inc. merged with and into a subsidiary of the Company. Based in San Diego, California, and renamed DRS Technical Services, Inc., it provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. In October 1997, the Company acquired the assets of the Applied Systems Division of Spar Aerospace Limited, a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited, incorporated under the laws of England and Wales. Headquartered in Carleton Place, Ontario, Canada, and operating under the name DRS Flight Safety and Communications, the Applied Systems Division has been an international provider of aviation and defense systems for over 30 years. It designs, manufactures and markets sophisticated flight safety systems, naval communications systems and other advanced electronics for government and commercial customers around the world. It also provides custom manufacturing services for complex electronic assemblies and systems. In March 1998, the Company acquired Hadland Photonics Ltd., headquartered in Tring, Hertfordshire, the United Kingdom, currently known as DRS Hadland Ltd. ("DRS Hadland"). The company has been a leader in ultra high-speed image capture and analysis for over 40 years. It designs, manufactures and markets ultra high-speed digital imaging cameras and avionics systems, including airborne video recording and ground replay systems, for government and commercial customers worldwide. Cost-Reduction and Other Initiatives. During fiscal 1998 the Company integrated the administrative and support functions of its magnetic head manufacturing facilities into an operation in Plymouth, Minnesota. In addition, the Company restructured certain operations by moving various display workstation product lines from the Company's facility in Oakland, New Jersey to its operation in Gaithersburg, Maryland and by relocating its multi-platform boresighting equipment product lines, formerly located in Hauppauge, New York, to Oakland, New Jersey. In connection with this restructuring, the Company sold the land and building owned in Hauppauge, New York. The Company continues to focus on opportunities to streamline its operations. COTS Designs. The COTS concept was developed and mandated 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 ensure readiness for use in harsh military environments) of available commercial components. Using COTS designs, the Company develops and delivers its products with significantly less development time and expense compared with traditional military product cycles, generally resulting in shorter lead times, lower costs and the employment of the latest information and computing technologies. The Company strives to apply COTS designs to most of its new products. Management believes that the adaptation of available commercial components to existing and newly developed military systems offers three primary advantages over traditional military systems development and procurement cycles: (i) it has the potential to save significant amounts of time and cost with respect to product research and development; (ii) the adaption of commercial technology to battlefield systems has the potential to shorten military product cycles, as commercial product development and production cycles are shorter than their military equivalents; and (iii) use of COTS designs should ensure that the latest information and computing technologies are employed in the design and manufacture of defense electronics systems. Adaptable Product Designs. The Company has focused on the design and development of new products and the redesign of existing products for use by all branches of the military. This has enabled the Company to increase revenues using its existing product and technology base, reduce overall product development costs and decrease reliance on U.S. Navy procurement programs. For instance, 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 designed to be adaptable to other air, sea or land-based weapons platforms. The boresight system has been applied successfully to the U.S. Marine Corps' Cobra helicopter and to the U.S. Air Force's AC-130 Spectre Gunship platforms. 3 COMPANY ORGANIZATION DRS is organized into four principal operating segments on the basis of products and services offered: the Electronic Systems Group ("ESG"), the Data Systems Group ("DSG"), the Electro-Optical Systems Group ("EOSG"), and Flight Safety and Communications ("FS&C"). See Note 12 of Notes to Consolidated Financial Statements for selected financial information by segment. Electronic Systems Group ESG consists of DRS Electronic Systems, Inc. ("DRS ESI"), located in Gaithersburg, Maryland, DRS Laurel Technologies ("DRS Laurel"), located in Johnstown, Pennsylvania, DRS Technical Services, Inc., based in San Diego, California and a division of DRS ESI known as DRS Technical Services, located in Chesapeake, Virginia. ESI designs, manufactures and integrates complex systems using advanced commercial technology to meet the performance and environmental requirements of military customers. Current products include tactical processing and display systems for military ships and aircraft, surveillance systems for coastal and harbor regions, radar and acoustic sensor systems, and low-cost emulators of legacy military systems for test and training support. ESG also provides manufacturing services and technical support services for both DRS products and those of other suppliers. Major products 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 operator/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 for the enhancement of drug interdiction efforts. This system currently is being procured for utilization in 22 field installations. The Company is under contract to provide various upgrades to these field installations. DRS ESI also produces tactical (e.g., combat/attack) information systems and training systems. Major products and contracts include: o AN/UYQ-70: The AN/UYQ-70 is an advanced, open-architecture display system designed for widespread application through software and hardware modification, and for deployment on Aegis and other surface ships, submarines and airborne platforms. This system was developed for the U.S. Navy under subcontract with Lockheed Martin Tactical Defense Systems. The AN/UYQ-70 is a self-contained, microprocessor-based unit complete with mainframe interface software and offers 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. 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 currently is delivering these Military Display Emulators for use at land-based training sites for the Aegis and other U.S. Navy programs. o AN/SPS-67: The AN/SPS-67 Radar Systems are deployed on the U.S. Navy's new DDG-51 Aegis class ships and provide ocean surveillance and navigation data, including detection and tracking of low flying aircraft and other targets. An integral part of the ships' command and control combat system, the AN/SPS-67 is a below-deck system which the Company believes has a potential market application on other surface ships in the Navy's fleet, as well as on aircraft carriers and amphibious operation assault ship platforms. 4 DRS ESI also produces a line of Lightweight Portable Display Workstations for the collection, display, storage and communication of data in the field, Replacement Data Storage Systems for program loading and data archiving on P-3C aircraft, and Flat Panel Display products, display subsystems and other computer peripherals for integration primarily with military tactical display workstations. DRS Laurel, which is 80% owned by DRS through a partnership formed in December 1993 with Sunburst Management, Inc., serves as a cost-efficient manufacturing operation for the Company. DRS Laurel primarily manufactures and integrates electronic systems, providing turn-key production, and performs related electronic and electromechanical assembly and associated test services. In addition, DRS Laurel specializes in cable and wire harness interconnect products, primarily for large industrial customers that are involved in the military and commercial aerospace industries. DRS Laurel currently produces both the AN/UYQ-65 and AN/UYQ-70 workstations. DRS Technical Services, Inc. and DRS Technical Services perform field service and depot level repairs for ESG products, as well as other manufacturers' systems, and also provide systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. Both facilities are located in close proximity to U.S. Naval bases 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. DRS Technical Services also has performed work for foreign navies, including those of Australia, Egypt, Greece, the Republic of China and Turkey. Data Systems Group DSG consists of DRS Precision Echo, Inc. ("DRS Precision Echo"), located in Santa Clara, California, and DRS Ahead Technology, Inc. ("DRS Ahead Technology"), with locations in San Jose, California, Plymouth, Minnesota, St. Croix Falls, Wisconsin, Dassel, Minnesota, and Razlog, Bulgaria. DSG utilizes advanced commercial technology to design and manufacture multisensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. Through its commercial operations, DSG also provides a variety of magnetic head products and services used in the commercial aviation, airline, television and audio broadcast, computer disk drive, security, transportation and retail sales industries that test or write and read information on magnetic data storage media. DRS Precision Echo manufactures a variety of digital and analog recording systems utilized for military applications, including reconnaissance, antisubmarine warfare (ASW) and other information warfare data storage requirements and is a predominant U.S. manufacturer of Hi-8 millimeter military recorders supplied to the U.S. armed forces. DRS Precision Echo's products include: o AN/USH-42: DRS Precision Echo is currently under contract to manufacture these recording systems for use on the Navy's S-3B ASW aircraft. The AN/USH-42 are used to record radar, infrared, bus, navigation and voice data. o WRR-818: This ruggedized video recorder uses certain components from commercial video recording equipment and has been selected for use on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10 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. DRS Precision Echo also provides a line of high-capacity digital tape drives and automated library systems for the archiving and back-up of very large amounts of digital data, ranging from 378 GigaBytes to 2.6 PetaBytes of uncompressed data. DRS Ahead Technology 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. In addition, DRS Ahead Technology specializes in the manufacture and refurbishment of broadcast video and audio heads, heads used in commercial flight data recorders and in a variety of industries for reading, writing and verifying data on magnetic cards, tapes and inks. 5 Electro-Optical Systems Group EOSG consists of DRS Photronics, Inc. ("DRS Photronics"), located in Oakland, New Jersey, DRS Optronics, located in Palm Bay, Florida, and DRS Hadland, based in Tring, Hertfordshire, the United Kingdom. EOSG integrates advanced commercial technology with military requirements to design and manufacture advanced electro-optical sighting, targeting, weapons and aircraft optical alignment systems, assemblies and components used primarily in the aerospace and defense industries. The Group is a leader in aircraft boresighting equipment and high-speed digital imaging systems. EOSG also produces night vision and directional devices, as well as eye-safe, laser-based products for military applications. DRS Photronics produces boresighting equipment used to align and harmonize the navigation, targeting and weapons systems on rotary- and fixed-wing aircraft. Multiple Platform Boresighting Equipment (MPBE) is DRS Photronics' main product line. MPBE currently is used on the Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship radar. This technology is proprietary to the Company. In fiscal 1996, the Company was selected as the prime contractor on a tri-service (Army, Navy and Air Force) program to develop the Advanced Digital Imaging System ("ADIS") for the test and evaluation of weapons separation events on board various fixed- and rotary-wing military aircraft. The system includes an electronically-shuttered, fast-frame, high-resolution, digital imaging camera and a high-density, digital data storage device. Upon completion of development, the ADIS will incorporate a color readiness capability and will include a miniaturized high-speed electronic camera to assure compatibility with multiple air platforms, such as the Air Force's F-16. DRS Optronics designs and manufactures electro-optical targeting and sighting systems and various missile components. Major programs of DRS Optronics include: o Night Vision Binoculars: DRS Optronics is currently under contract to develop and manufacture these units for the Israeli military. The Night Vision Binocular is a hand-held viewing binocular that incorporates an image intensifier tube, laser range finder 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 eyepiece, 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 back-up sighting system on M-1 Abrams battle tanks and contains a very sophisticated electro-optical train and a laser protective filter. DRS Optronics 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. Options for additional units under this program may be exercised through fiscal 2000. o TOW Optical Sight: DRS Optronics is currently the only U.S. qualified producer of two of the three critical assemblies in 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. DRS Optronics currently is the only qualified manufacturer of this tightly toleranced assembly, and currently is working on modification and retrofit programs. DRS Optronics also has been contracted to modify a version for use by an overseas customer. o Eye-Safe Laser Range Finder: DRS Optronics competed against the U.S. Army's historical primary laser supplier for this contract and was awarded an initial contract for preproduction units. DRS Optronics also is currently manufacturing a laser range finder/target designator for airborne use in the MILES AGES program. This effort includes redesigning the target designator unit to accommodate DRS Optronics' laser components. o Missile Components: EOSG originally provided only the 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. 6 DRS Hadland designs, manufactures and markets products for high-speed image capture and analysis. Products include a comprehensive range of equipment for the visual analysis of events lasting from hundreds of femtoseconds to milliseconds. Many of these systems are used for multiple applications by international military forces, ballistic test ranges, university and other research institutes, laboratories and large corporations. DRS Hadland also provides qualified airborne monitors, CCD cameras and airborne video tape recording devices. Major products include: o Framing Cameras: Framing cameras have the ability to take a sequence of pictures at the same location at very high speeds. These cameras are designed to produce images at equivalent speeds of several million pictures per second, although in practice 4-8 frames are taken. Framing cameras are used primarily for research in the areas of electrical breakdown/discharge, ballistics, detonics and combustion. o Electronic Ballistic Range Cameras: These cameras use digital imaging to capture a single picture of a projectile in flight. Slower than framing cameras but with better resolution, these cameras are used in the development and proof testing of ballistics. o Streak Cameras: These cameras are designed to capture quick events analyzed over a very short, continuous period. Faster than framing or range cameras, streak cameras are used to produce continuous cross section images in one dimension, rather than full images, and are used for such applications as laser development and testing. Flight Safety and Communications FS&C is headquartered in Carleton Place, Ontario, Canada, with locations in Nepean, Ontario, Canada and Hayes, Middlesex, the United Kingdom. FS&C designs and manufactures advanced flight safety systems, naval communications systems and other advanced electronics primarily for defense and commercial aerospace applications. Major products and services include: o Aircraft Flight Incident Recorders: Designed to withstand the intense destructive forces associated with an aircraft crash, deployable flight incident recorders are flush-mounted to or located beneath the airframe skin. Deployment commands provided by switch activation trigger release of the unit and activation of the recorder. These systems have been installed successfully on fighter aircraft such as the German Tornado and the U.S. Navy F/A-18 Hornet and are used to record both flight and voice data. o Aircraft Crash Locator Beacons: Consisting of a composite airfoil which encloses a radio transmitter and power source, crash locator beacons are designed to deploy and activate either before or upon impact. Used primarily on fixed-wing military aircraft, these crash position locators enable rapid location of downed aircraft and the timely rescue of survivors. FS&C also produces complete emergency avionics systems, combining the functionality of a crash locator beacon with a flight incident recorder for search, recovery and crash analysis. o Integrated Shipboard Communications Systems: Using the latest available technology and COTS-based designs, FS&C produces integrated digital shipboard communications systems which provide single-button access to tactical interior, exterior and secured channels for joint operations. These Shipboard Integrated Communications ("SHINCOM") systems improve communication efficiency by eliminating the need for multiple single-purpose communications systems, thus providing a comprehensive system solution. FS&C's SHINCOM systems are capable of handling shipboard interior communications; communications with other aircraft, surface and undersea vessels; and satellite, UHF/VF, HF and broadband communications with shore stations and cooperating units. o Electronic Manufacturing and Systems Integration Services: FS&C is an experienced provider of manufacturing, test and product support services and currently performs contract manufacturing services for various aerospace and military applications. FS&C's manufacturing expertise and capabilities include: surface mount and through-hole multi-layer CCA assembly; harness fabrication; power supply assembly and testing; motherboard assembly and testing; and systems integration services. 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 74%, 71% and 78% of total consolidated revenues for fiscal 1998, 1997 and 1996, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies, principally the U.S. Navy. See "Foreign Operations and Export Sales" below for information concerning sales to foreign governments. 7 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, 1998 MARCH 31, 1997 MARCH 31, 1996 -------------- -------------- -------------- Government Products: U.S. Government ............ $141,500,000 $ 85,900,000 $120,000,000 Foreign Government ......... 24,900,000 23,000,000 21,200,000 ------------ ------------ ------------ 166,400,000 108,900,000 141,200,000 Commercial Products ......... 11,000,000 9,500,000 4,400,000 ------------ ------------ ------------ $177,400,000 $118,400,000 $145,600,000 ============ ============ ============ "Backlog" refers to the aggregate revenues remaining to be earned at a 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. Backlog also includes all firm orders for commercial products. Fluctuations in backlog generally relate to the timing and amount of defense contract awards. At March 31, 1998, the Company's backlog of orders was approximately $177.4 million compared with $118.4 million at March 31, 1997. The increase in backlog was due primarily to a significant increase in bookings, most notably for display workstations, offset, in part, by the effect of increased revenues. The change in backlog also reflects approximately $23.4 million of acquired backlog from the FS&C and DRS Hadland acquisitions. New contract awards of approximately $228.6 million were booked during the fiscal year ended March 31, 1998. Approximately 80% of backlog as of March 31, 1998 is expected to result in revenues during fiscal 1999. RESEARCH AND DEVELOPMENT The defense electronics sector 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 is an important factor affecting its growth. A portion of its research and development activities has taken place in connection with customer-sponsored research and development contracts. Revenues recorded by the Company for customer-sponsored research and development were approximately $12,000,000, $13,000,000 and $12,100,000 for fiscal 1998, 1997 and 1996, respectively. All such customer-sponsored activities are the result of contracts directly or indirectly with the U.S. Government. The Company also invests in internal research and development ("IR&D"). Such expenditures were approximately $4,000,000, $3,900,000 and $600,000 for fiscal 1998, 1997 and 1996, respectively. The increase in IR&D expenditures in fiscal 1998 and 1997 reflects the Company's investment in new technology and the diversification of its products. 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 8 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 1998, 1997 and 1996 attributable to the Company's contracts by contract type were as follows: FISCAL YEARS ENDED MARCH 31, ------------------------------------------ 1998 1997 1996 ------ ------ ----- Firm-fixed-price ................... 85% 85% 87% Cost-plus-incentive-fee ............ 4% 5% -- Cost-plus-fixed-fee ................ 11% 10% 13% The consistent percentage and continued predominance of firm-fixed-price contracts are 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 75-90% 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 $7.6 million, $3.8 million and $8.7 million as of March 31, 1998, 1997 and 1996, 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 internal 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 internal research and development costs) of $10.1 million and $9.4 million at March 31, 1998 and 1997, respectively. 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. Multiyear 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. COMPETITION The defense electronics sector 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 competitors also are customers of and 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 9 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 large and mid-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 defense contractors are narrowing their supplier base and awarding increasing portions of projects to strategic mid- and lower-tier suppliers, and, in the process, are becoming oriented more toward system integration and assembly. Management believes that the Company has benefited from this trend, as evidenced by the formation of strategic alliances with several large suppliers. PATENTS The Company has patents on certain of its commercial and data recording products. The Company does not believe patent protection to be significant to its current operations; however, future products and 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. Further, the Company does not believe that the loss, impairment or expiration of any existing patents would have a material effect on the Company's financial position or future results of 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, silicon wafers and other conductive materials, 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 quality and other related 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. FOREIGN OPERATIONS AND EXPORT SALES The Company currently sells several of its products and services in the international marketplace to countries such as Canada, Israel, the Republic of China and Spain. 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 generally are payable in United States dollars. Export sales were 10% or less of total revenues in each of the fiscal years in the three-year period ended March 31, 1998. Through the FS&C, the Company operates outside the United States, primarily in Canada. Information on revenues, operating income and identifiable assets is presented in Note 12 of Notes to Consolidated Financial Statements. Foreign operations other than those of FS&C are not material to the financial position or results of operations of the Company. The addition of international businesses involve additional risks for the Company, such as exposure to currency fluctuations, future investment obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely different legal systems, customs and practices in foreign countries (see Management's Discussion & Analysis of Financial Condition and Results of Operations--Business Considerations). 10 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 48 Officer and Director Nina L. Dunn .......... Executive Vice President, General Counsel 51 and Secretary Nancy R. Pitek ........ Vice President, Finance and Treasurer 41 Paul G. Casner, Jr. ... Vice President; President of DRS Electronic 60 Systems Group Stuart F. Platt ....... Vice President and Director; President of DRS Data 64 Systems Group Richard Ross .......... Vice President; President of DRS Electro-Optical 43 Systems 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. Nina L. Dunn joined the Company as Executive Vice President, General Counsel and Secretary in July 1997. Prior to joining DRS, Ms. Dunn was a director in the corporate law department of Hannoch Weisman, a Professional Corporation, since 1993, where she served as the Company's outside legal counsel. Ms. Dunn is admitted to practice law in New York and New Jersey and is a member of the American, New York State and New Jersey State Bar Associations. 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 May 1996 was named Vice President, Finance. Paul G. Casner, Jr. joined the Company in 1993 as President of Technology Applications and Service Company ("TAS"), now DRS Electronic Systems, Inc. In 1994, he also became President of the 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. Stuart F. Platt has been a director of the Company since 1991 and became the President of DRS Precision Echo, Inc. in July 1992. He was named Vice President of the Company in May 1994 and also serves as President of the DRS Data Systems Group. Rear Admiral Platt held various high level positions as a military officer in the Department of the Navy, retiring as Competition Advocate General of the Navy in 1987. Richard Ross joined the Company as Assistant Vice President and Director of Sales in 1986 and Assistant Vice President, Corporate Development in 1987. In 1988, he became a Vice President of the Company, and in 1990, he became President of DRS Photronics, Inc. Mr. Ross also serves as President of the DRS Electro-Optical Systems Group. EMPLOYEES As of March 31, 1998, the Company had approximately 1,470 employees, 1,045 of which were located in the United States. 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. 11 ITEM 2. PROPERTIES The Company leases the following properties:
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE EXPIRATION -------- -------- ---------- ------- ---------- Corporate DRS Technologies, Inc. Parsippany, New Jersey Corporate Headquarters 10,800 Fiscal 2003 ESG DRS Electronic Systems, Inc. Gaithersburg, Maryland Administrative, 40,000 Fiscal 2000 Engineering and Manufacturing DRS Technologies, Inc. Arlington, Virginia Administrative and 2,000 Fiscal 2000 Marketing DRS Laurel Technologies Johnstown, Pennsylvania Administrative and 38,000 Fiscal 1999 Manufacturing DRS Laurel Technologies Davidsville, Pennsylvania Manufacturing 65,800 Fiscal 1999 DRS Technical Services, Inc. San Diego, California Engineering Support 5,000 Fiscal 2000 Services DRS Technical Services Chesapeake, Virginia Field Service and 20,600 Fiscal 2005 Engineering Support EOSG DRS Photronics, Inc. Oakland, New Jersey Administrative and 25,400 Fiscal 2003 Engineering DRS Photronics, Inc. Oakland, New Jersey Administrative and 36,000 Fiscal 2003 Manufacturing DRS Optronics, Inc. Palm Bay, Florida Administrative, 53,900 Fiscal 2006 Engineering and Manufacturing DRS Hadland, Inc. Cupertino, California Sales and Field Service 500 Fiscal 1999 DRS Hadland GmbH Munich, Germany Sales and Field Service 500 (1) DSG DRS Precision Echo, Inc. Santa Clara, California Administrative, 55,000 Fiscal 2001 Engineering and Manufacturing DRS Ahead Technology, Inc. San Jose, California Administrative, 32,000 Fiscal 2001 Product Development and Manufacturing DRS Ahead Technology, Inc. Plymouth, Minnesota Administrative and 13,700 Fiscal 2003 Manufacturing DRS Ahead Technology, Inc. St. Croix Falls, Wisconsin Administrative and 24,000 Fiscal 2000 Manufacturing DRS Ahead Technology, Inc. Dassel, Minnesota Administrative and 23,100 Fiscal 2002 Manufacturing DRS Ahead Technology, Inc. Bloomington, Illinois Manufacturing 5,400 Fiscal 2000 FS&C DRS Flight Safety and Kanata, Ontario, Canada Administrative, 70,000 Fiscal 1999 Communications Manufacturing and Engineering DRS Technologies (UK) Ltd. Middlesex, United Kingdom Administrative and 6,800 Fiscal 2001 Manufacturing - ---------- Note: (1) Lease has no set expiration date. Three months notice is required to terminate lease.
12 During July 1998, in connection with the expiration of the lease for the Kanata, Ontario, Canada facility, FS&C will relocate a substantial portion of the Kanata operations to its facility in Carleton Place, Ontario, Canada and the remainder to a leased facility in Nepean, Ontario, Canada. The Company leases the building in Oakland, New Jersey from LDR Realty Co., a partnership wholly-owned by Leonard Newman and David E. Gross, co-founders of the Company. 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. The Company owns the following properties:
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE -------- -------- ---------- ------- DSG DRS Ahead Technology, Inc. Razlog, Bulgaria Manufacturing 64,100 EOSG DRS Hadland Ltd. Tring, Hertfordshire, Administrative, 7,500 United Kingdom Engineering and Manufacturing FS&C DRS Flight Safety and Carleton Place, Ontario, Canada Administrative and 128,500 Communications Manufacturing
In fiscal 1998, the Company sold its 45,000 square foot building in Hauppauge, New York, which previously housed DRS Photronics' administrative, engineering and manufacturing operations (see Note 10 of Notes to Consolidated Financial Statements). Management believes that all of the Company's facilities are in good condition, adequate for their intended use and sufficient for the Company's immediate needs. 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. Further, the Company believes that it can obtain additional space, if necessary, based on prior experience and current real estate market conditions. Substantially all assets of the Company, including those properties identified above, are pledged as collateral on borrowings of the Company (see Note 6 of Notes to Consolidated Financial Statements). ENVIRONMENTAL PROTECTION The Company believes that its manufacturing operations and properties are, in all material respects, in 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. In April and May of 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to certain equipment manufactured by DRS Photronics. The subpoenas were issued in connection with United States v. Tress, a case involving a DRS Photronics employee and related to the accuracy of test data for the equipment. To date, no claim has been made or threatened against the Company in connection with this matter. At this time, the Company is unable to determine if any such claim will be made. DRS Photronics currently is unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. At this time, the Company is unable to quantify the effect of the delayed shipments on its results of operations or financial position, or to predict when such shipments ultimately will be made, although the delays are expected to impact fiscal 1999's first quarter results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1998. 13 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 on its Common Stock in the foreseeable future. The indentures relating to the Company's 8-1/2% Convertible Subordinated Debentures and 9% Senior Subordinated Convertible Debentures and the Company's bank lines of credit restrict 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. The information required by this item with respect to the market prices for the Company's common equity securities is incorporated herein by reference to page 41 of the DRS 1998 Annual Report (for the fiscal year ended March 31, 1998). ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference herein to page 14 of the DRS 1998 Annual Report (for the fiscal year ended March 31, 1998). ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference herein to pages 15 through 23 of the DRS 1998 Annual Report (for the fiscal year ended March 31, 1998). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference herein to pages 24 through 41 of the DRS 1998 Annual Report (for the fiscal year ended March 31, 1998). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III The information required by Items 10. through 13. of this Part is incorporated herein by reference to the Definitive Proxy Statement of the Company, dated July 2, 1998, for the 1998 Annual Meeting of Stockholders. Reference also is 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 DRS Technologies, Inc. and subsidiaries have been incorporated by reference to the DRS 1998 Annual Report (for the fiscal year ended March 31, 1998), pursuant to Item 8 of this report: 1998 ANNUAL REPORT PAGE(S) -------------- Independent Auditors' Report 42 Consolidated Balance Sheets--March 31, 1998 and 1997 24 Consolidated Statements of Earnings--Years Ended March 31, 1998, 1997 and 1996 25 Consolidated Statements of Stockholders' Equity--Years Ended March 31, 1998, 1997 and 1996 25 Consolidated Statements of Cash Flows--Years Ended March 31, 1998, 1997 and 1996 26 Notes to Consolidated Financial Statements 27-41 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 Filed as of January 12, 1998: Amendment No. 1 to Current Report on Form 8-K dated as of October 29, 1997, with respect to the acquisition of the net assets of the Applied Systems Division of Spar Aerospace Limited, a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Ltd. 15 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. DRS TECHNOLOGIES, INC. Dated: June 26, 1998 /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 26, 1998 - ----------------------- Chief Executive Officer and Director Mark S. Newman /s/ NANCY R. PITEK Vice President, Finance and Treasurer June 26, 1998 - ----------------------- Nancy R. Pitek /s/ IRA ALBOM Director June 26, 1998 - ----------------------- Ira Albom /s/ THEODORE COHN Director June 26, 1998 - ----------------------- Theodore Cohn /s/ DONALD C. FRASER Director June 26, 1998 - ----------------------- Donald C. Fraser /s/ WILLIAM F. HEITMANN Director June 26, 1998 - ----------------------- William F. Heitmann /s/ MARK N. KAPLAN Director June 26, 1998 - ----------------------- Mark N. Kaplan /s/ STUART F. PLATT Vice President, President of DRS Data June 26, 1998 - ----------------------- Systems Group and Director Stuart F. Platt /s/ JACK RACHLEFF Director June 26, 1998 - ----------------------- Jack Rachleff 16 APPENDIX A DRS TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX Independent Auditors' Report Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts All other financial statement schedules have been omitted because they are either not required, not applicable or the required information is shown in the consolidated financial statements or the notes thereto. A-1 INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders DRS Technologies, Inc.: Under date of May 11, 1998, we reported on the consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, 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, 1998, as contained in the 1998 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 1998. 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, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Short Hills, New Jersey May 11, 1998 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1998, 1997 AND 1996
COL. A COL. B COL. C COL. D COL. E ADDITIONS (a) DEDUCTIONS (b) --------------------------- --------------------------- (1) (2) (1) (2) CHARGED TO CREDITED TO BALANCE AT CHARGED TO OTHER CREDITED TO OTHER BALANCE AT BEGINNING OF COSTS AND ACCOUNTS-- COSTS AND ACCOUNTS-- END OF DESCRIPTION PERIOD EXPENSES DESCRIBE EXPENSES DESCRIBE PERIOD ------------- ------------- ------------- ------------- ------------- ------------- ------------- INVENTORY RESERVE Year ended March 31, 1998 .......... $ 741,000 $ 666,000 $ 988,000(c) $ 532,000 $ 166,000(d) $1,695,000 Year ended March 31, 1997 .......... $1,069,000 $ 46,000 $2,166,000(c) $ 400,000 $2,138,000(d) $ 741,000 Year ended March 31, 1996 .......... $1,400,000 $ 670,000 $2,139,000(c) $ 8,000 $3,132,000(d) $1,069,000 LOSSES & FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS Year ended March 31, 1998 .......... $2,204,000 $4,834,000 $ 166,000(c) $2,346,000 $ 738,000(e) $4,120,000 Year ended March 31, 1997 .......... $3,850,000 $1,564,000 $ 16,000(c) $1,060,000 $2,166,000(e) $2,204,000 Year ended March 31, 1996 .......... $4,555,000 $2,026,000 $ 353,000(c) $ 945,000 $2,139,000(e) $3,850,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended March 31, 1998 .......... $ 136,000 $ 313,000 $ 71,000(c) $ 34,000 $ -- $ 486,000 Year ended March 31, 1997 .......... $ 136,000 $ -- $ -- $ -- $ -- $ 136,000 Year ended March 31, 1996 .......... $ 129,000 $ 7,000 $ -- $ -- $ -- $ 136,000 OTHER Year ended March 31, 1998 .......... $ 0 $ -- $ -- $ -- $ -- $ 0 Year ended March 31, 1997 .......... $ 0 $ -- $ -- $ -- $ -- $ 0 Year ended March 31, 1996 .......... $ 290,000 $ -- $ -- $ 290,000 $ -- $ 0 - -------------------
(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 from related reserve accounts. (d) Represents amounts utilized and credited to related asset accounts. (e) Represents amounts reclassified to related reserve accounts. 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. PAGE NO. EXHIBIT 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 Company, as filed July 7, 1983 [Registration Statement on Form 8-A of the Company, dated July 13, 1983, Exhibit 2.2] 3.3 -- Composite copy of the Restated Certificate of Incorporation of the Company, as amended [Registration Statement No. 2-85238, Exhibit 3.3] 3.4 -- Amended and Restated Certificate of Incorporation 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 November 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 Certificate 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 Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] 3.8 -- Amended and Restated By-Laws of the Company, 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 Convertible 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 10.1 -- Stock Purchase Agreement, dated as of August 6, 1993, among TAS Acquisition Corp., Technology 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)(1)] 10.2 -- Waiver Letter, dated as of September 30, 1993, among TAS Acquisition Corp., Technology 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 November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 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 Management 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 Management 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 Precision 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 February 22, 1994, between Technology Applications 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 10.13 -- Amendment to Lease Modification, dated June 1, 1994, between Technology Applications 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 Service 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 August 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. 1-8533, Exhibit 10.18] 10.20 -- Lease, dated April 3, 1996, by and between the Company and Los Alamos Economic Development Corporation [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.20] 10.21 -- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.22 -- Contract No. N00024-92-C-6102, dated September 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 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 November 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, between the Company and Westinghouse Electric 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, fiscal 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 January 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 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] 10.48 -- Modification No. P00006, dated March 20, 1996, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.48] 10.49 -- Contract No. N00019-93-C-0202, dated August 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 November 18, 1992, between Technology Applications 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 10.60 -- Contract No. N00174-94-D-0006, dated February 17, 1994, between Technology Applications & 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 International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.73] 10.64 -- Amendment No. 1, dated January 30, 1996, to Purchase Order No. 2285 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.64] 10.65 -- Purchase Order No. 2286, dated June 6, 1994, between Photronics Corp. and International 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 December 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 Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.67] 10.68 -- Amendment, dated April 4, 1995, to Purchase 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 Purchase 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 Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.70] 10.71 -- Amendment, dated November 7, 1995, to Purchase 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 December 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 Termination Agreement, dated 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 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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 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 Technology 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 September 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] 10.81 -- Modification No. PZ0001, dated January 24, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.81] 10.82 -- Modification No. P00002, dated February 24, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.82] 10.83 -- Modification No. P00003, dated March 28, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.83] 10.84 -- Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.81] 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 August 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 Properties [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 Properties [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 Properties [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] PAGE NO. EXHIBIT NO. DESCRIPTION OF PAPER FILING ----------- ----------- --------------- 10.91 -- Master Lease, dated August 31, 1995, between 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 February 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 February 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 February 9, 1996, by and among Mag-Head Engineering, Company, Inc. and Ahead Technology 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 Termination Agreement, dated March 28, 1996, between the Company and Leonard Newman [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.94] 10.98 -- Contract No. N00024-95-G-5609, dated January 25, 1996, between Technology Applications and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.98] 10.99 -- Asset Purchase Agreement, dated June 17, 1996, by and among Vikron, Inc., Northland Aluminum, Inc., Ahead Wisconsin Acquisition Corporation, a third-tier subsidiary of the Company, and Ahead Technology, Inc., a second-tier subsidiary of the Company [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.99] 10.100 -- Agreement and Plan of Merger, dated September 30, 1996, by and among PTI Acquisition Corp., a subsidiary of the Company, Pacific Technologies, Inc., David A. Leedom, Karen A. Mason, Robert T. Miller, Carl S. Ito and Barry S. Kindig[Form 10-K, fiscal year ended March 31, 1997, File No. 1-8533, Exhibit 10.101] 10.101 -- Asset Purchase Agreement, dated October 22, 1996, by and among Ahead Technology, Inc., a second-tier subsidiary of the Company, Nortronics Acquisition Corporation, a third-tier subsidiary of the Company, Nortronics Company, Inc., Alan Kronfeld, Thomas Philipich and Robert Liston [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.102] 10.102 -- Purchase Agreement, dated as of September 19, 1997, between DRS Technologies, Inc. and Spar Aerospace Limited. [Form 8-K, October 27, 1997, File No. 1-8533, Exhibit 1] 10.103 -- Revolving Credit Loan and Term Loan Agreement, dated as of October 29, 1997, by and among DRS Technologies, Inc., DRS Technologies Canada Company/Compagnie DRS Technologies Canada, DRS Technologies Canada, Inc. and Mellon Bank, N.A. [Form 8-K, October 27, 1997, File No. 1-8533, Exhibit 2] *11 -- Computation of earnings per share *13 -- Portions of the 1998 Annual Report to Stockholders of the Company *21 -- List of subsidiaries of the Company as of March 31, 1998 *23.1 -- Consent of KPMG Peat Marwick LLP *27 -- Financial Data Schedule EX-11 2 COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE YEAR ENDED MARCH 31, YEAR ENDED MARCH 31, YEAR ENDED MARCH 31, 1998 1997 1996 ----------------------- ----------------------- ---------------------- BASIC DILUTED BASIC DILUTED BASIC DILUTED ---------- ---------- --------- ---------- ---------- --------- Shares: Weighted average number of shares of common stock outstanding 5,625,788 5,625,788 5,524,803 5,524,803 5,470,028 5,470,028 Effect of dilutive common stock options -- 282,929 -- 227,804 -- 177,475 Effect of 8-1/2% convertible subordinated debenbentures (1) -- 332,800 -- 332,800 -- -- Effect of 9% senior subordinated convertible debentures -- 2,803,189 -- 2,824,859 -- 1,373,839 ---------- ---------- --------- ---------- ---------- ---------- Adjusted shares 5,625,788 9,044,706 5,524,803 8,910,266 5,470,028 7,021,342 ========== ========== ========== ========== ========== ========== Net Earnings: Net earnings for the year $6,372,000 $6,372,000 $5,663,000 $5,663,000 $4,103,000 $4,103,000 Effect of assumed conversion of 8 1/2% convertible subordinated debentures (1) -- 278,000 -- 259,000 -- -- Effect of assumed conversion of 9% senior subordinated convertible debentures -- 1,793,000 -- 1,536,000 -- 748,000 ---------- ---------- ---------- ----------- ---------- --------- Adjusted net earnings $6,372,000 $8,443,000 $5,663,000 $7,458,000 $4,103,000 $4,851,000 ========== ========== ========== ========== ========== ========== Earnings per share (adjusted net earnings divided by adjusted shares) $ 1.13 $ 0.93 $ 1.03 $ 0.84 $ 0.75 $ 0.69 ========== ========== ========== ========== ========== ========== - -------------- (1) The 8-1/2% convertible subordinated debentures are excluded from the calculation of fully diluted earnings per share for fiscal years 1996, as they would have an antidilutive effect on earnings per share.
EX-13 3 ANNUAL REPORT TO FORM 10-K DRS Technologies, Inc. and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
Years ended March 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Revenues ................................. $190,854,000 $143,578,000 $101,454,000 $69,930,000 $57,820,000 Cost and expenses ........................ 176,595,000 130,996,000 92,907,000 64,836,000 54,372,000 - ---------------------------------------------------------------------------------------------------------------------------------- Operating income ......................... 14,259,000 12,582,000 8,547,000 5,094,000 3,448,000 Interest and related expenses ............ (5,098,000) (3,592,000) (2,681,000) (1,372,000) (1,574,000) Interest and other income, net ........... 1,377,000 698,000 971,000 655,000 802,000 Minority interest ........................ (874,000) (404,000) (110,000) (121,000) 32,000 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes ............. 9,664,000 9,284,000 6,727,000 4,256,000 2,708,000 Income taxes ............................. 3,292,000 3,621,000 2,624,000 1,652,000 1,093,000 - ---------------------------------------------------------------------------------------------------------------------------------- NET EARNINGS ............................. $ 6,372,000 $ 5,663,000 $ 4,103,000 $ 2,604,000 $ 1,615,000 PER-SHARE DATA(1) Basic earnings per share ................. $ 1.13 $ 1.03 $ 0.75 $ 0.51 $ 0.30 Diluted earnings per share ............... $ 0.93 $ 0.84 $ 0.69 $ 0.50 $ 0.30 Book value per share ..................... $ 7.16 $ 5.90 $ 4.86 $ 4.16 $ 3.70 SUMMARY OF FINANCIAL POSITION Working capital .......................... $ 42,126,000 $ 32,838,000 $ 33,990,000 $20,317,000 $19,803,000 Net property, plant and equipment ........ $ 22,972,000 $ 19,987,000 $ 16,191,000 $ 9,849,000 $ 8,893,000 Total assets ............................. $163,473,000 $ 97,673,000 $ 97,251,000 $64,590,000 $58,836,000 Long-term debt, excluding current installments ................... $ 56,532,000 $ 30,801,000 $ 32,608,000 $11,732,000 $14,515,000 Net stockholders' equity ................. $ 44,335,000 $ 32,987,000 $ 26,566,000 $22,509,000 $19,759,000 FINANCIAL RATIOS Pretax return on revenues ................ 5.1% 6.5% 6.6% 6.1% 4.7% After tax return on revenues ............. 3.3% 3.9% 4.0% 3.7% 2.8% Return on average stockholders' equity ... 16.5% 19.0% 16.7% 12.3% 8.5% Current ratio ............................ 1.8 2.2 2.0 1.9 2.1 Long-term debt, excluding current installments, to capitalization ........ 56.0% 48.3% 55.1% 34.3% 42.3% SUPPLEMENTAL INFORMATION Capital expenditures ..................... $ 6,570,000 $ 5,228,000 $ 6,331,000 $ 2,543,000 $ 988,000 Depreciation and amortization ............ $ 7,059,000 $ 5,027,000 $ 3,170,000 $ 2,480,000 $ 2,558,000 Internal research and development ........ $ 4,049,000 $ 3,852,000 $ 649,000 $ 795,000 $ 537,000 Employees(2) ............................. 1,470 1,107 809 565 548 Revenues per employee(3) ................. $ 124,000 $ 129,000 $ 137,000 $ 130,000 $ 137,000 - ---------------- (1) Earnings per share for all prior-year periods have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" (See Note 1 of Notes to Consolidated Financial Statements). No cash dividends have been distributed in any of the years in the five-year period ended March 31, 1998. (2) Indicates the number of employees at March 31 for each of the fiscal years presented. Included in fiscal 1998, 1997, 1996 and 1995 are approximately 428, 188, 155 and 46 employees, respectively, from new operations. (See Note 11 of Notes to Consolidated Financial Statements.) (3) Based on average number of employees. - ----------------------------------------------------------------------------------------------------------------------------------
14 DRS Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the consolidated financial condition and results of operations of DRS Technologies, Inc. and subsidiaries (hereinafter, the Company or DRS) as of March 31, 1998 and 1997, and for each of the fiscal years in the three-year period ended March 31, 1998. This discussion should be read in conjunction with the audited consolidated financial statements and related notes. The following discussion and analysis contains certain forward looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Forward looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that such forward looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from the results suggested by these forward looking statements. Factors that could cause actual results to differ materially from the forward looking statements include, without limitation, the effect of the Company's acquisition strategy on future operating results; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to the Company's products and services; the effects of government regulation or shifts in government policy, as they may relate to the Company's products and services; competition; and other matters referred to in this report. BUSINESS OVERVIEW DRS is a diversified, high-technology company serving government and commercial niche markets worldwide. The Company develops and manufactures a variety of leading edge systems and components used for the processing, display and storage of data. These include combat display workstations, electronic sensor systems, mission recording systems, digital imaging systems, electro-optical systems, ship communications and flight safety systems. The Company also provides a wide range of technical support and depot-level repair services. DRS's defense electronics products serve all branches of the U.S. Armed Services and certain international military forces. The Company's commercial and industrial products are used by the airline, banking, computer disk drive, security, transportation, retail sales and broadcast industries. The fiscal year ended March 31, 1998 marked the sixth consecutive year of growth for the Company. Over the past five fiscal years, revenues and net earnings have grown at compounded average annual rates of approximately 35% and 41%, respectively. DRS's revenue growth in fiscal 1998, fueled both internally and through acquisitions, was approximately 33%. The increase in the Company's core business (represented by existing businesses at March 31, 1997) was approximately 23%. This growth has been achieved while operating in an industry characterized by consolidation, reduced spending and technological transition. To address the challenges of its business environment, DRS has employed a four-part strategy of: expanding its core technological capabilities in electronic processing and display, data storage and electro-optical systems; designing new products and adapting existing products for use by all branches of the military; transferring technologies from the defense sector to commercial and industrial markets; and acquiring new businesses which provide a strategic complement to the Company's existing products and technological capabilities. COMPANY ORGANIZATION AND PRODUCTS DRS is organized into four principal operating segments: the Electronic Systems Group (ESG), the Data Systems Group (DSG), the Electro-Optical Systems Group (EOSG), and Flight Safety and Communications (FS&C). ESG designs, manufactures and integrates complex systems using advanced commercial technology to meet the performance and environmental requirements of military customers. Current products include tactical display and processing systems for military ships and aircraft, littoral surveillance systems for coastal and harbor regions, radar and acoustic sensor systems, and low-cost emulators of legacy military systems for test and training support. ESG also provides manufacturing services and technical support services for both DRS products and those of other suppliers. DSG utilizes advanced commercial technology to design and manufacture multisensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. Through its commercial operations, DSG also provides a variety of magnetic head products and services used in the commercial aviation, airline, television and audio broadcast, computer disk drive, security, transportation and retail sales industries that test or write and read information on magnetic data storage media. EOSG integrates advanced commercial technology with military requirements to design and manufacture advanced electro-optical sighting, targeting, weapons and aircraft optical alignment systems, assemblies and components used primarily in the aerospace and defense industries. The Group is a leader in aircraft boresighting equipment and ultra high-speed digital imaging systems. EOSG also produces night vision and directional devices, as well as eye-safe, laser-based products for military applications. FS&C designs and manufactures advanced flight safety systems, naval communications systems and other advanced electronics primarily for defense and commercial aerospace applications. FS&C is a prominent global supplier of deployable aircraft locator beacons and flight data recorders used in emergencies to locate aircraft. Its shipboard communications systems integrate commercial technology and are used in conjunction with surveillance satellites. FS&C also provides custom manufacturing services for complex electronic systems. 15 ACQUISITIONS AND RELATED ACTIVITIES On July 5, 1995, DRS Optronics, Inc. (DRS Optronics), a second-tier subsidiary of the Company, acquired substantially all of the assets of Opto-Mechanik, Inc., pursuant to an asset acquisition agreement, for a total of $5.5 million, consisting of $3.7 million in cash and $1.8 million in notes payable. DRS Optronics, 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. On February 6, 1996, a wholly-owned subsidiary of the Company entered into a partnership with Universal Sonics Corporation and its shareholders (DRS Medical Systems or the Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to DRSMedical Systems consisted of $.4 million in cash, certain managerial expertise and manufacturing capabilities, representing a 90% interest in the Partnership. On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $.1 million and the reversal of accrued obligations of $.3 million. The results of operations of this Partnership were not material to the consolidated operating results of the Company during the periods presented. On February 9, 1996, DRS Ahead Technology, Inc. (DRS Ahead Technology) acquired, through a wholly-owned subsidiary, 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, for approximately $.4 million in cash. Mag-Head produces audio and flight recorder heads. On June 18, 1996, DRS Ahead Technology acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, DRS Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. Located in Dassel, Minnesota, Nortronics manufactures data and recording heads. On October 30, 1996, Pacific Technologies, Inc., a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $.5 million. Based in San Diego, California and renamed DRS Technical Services, Inc., it provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. On May 13, 1997, a subsidiary of the Company acquired approximately 80% of the outstanding equity of Magnetic Heads Company Ltd. (MHC)for approximately $.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead Technology -- Bulgaria, is a manufacturer and supplier of magnetic recording heads used primarily for commercial applications. In connection with this acquisition, the Company has agreed to make additional investments in DRS Ahead Technology -- Bulgaria totaling approximately $2.3 million over a five-year period. For purposes of this agreement, investments include transfer of technology and related intangible assets, transfer of inventory and other productive assets, employee training and other similar transfers and expenditures. On October 29, 1997 (the Closing Date), DRS acquired, through certain of its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace Limited (Spar), a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited, incorporated under the laws of England and Wales (the Acquisition), pursuant to a purchase agreement (the Agreement) dated as of September 19, 1997 between DRS and Spar. The Company paid approximately $35.4 million in cash for the Acquisition (which included $6.9 million for cash acquired in connection with the transaction), subject to a certain working capital adjustment as provided for in the Agreement. The amount of such working capital adjustment, if any, remains the subject of dispute between DRS and Spar. Although the Company cannot, at this time, predict the outcome of such dispute, management does not expect that its resolution will have a material impact on the Company's consolidated results of operations or financial position. The excess of cost over the estimated fair value of net assets acquired was approximately $20.0 million and is being amortized on a straight-line basis over 30 years. DRS incurred professional fees and other costs related to the Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. Headquartered in Carleton Place, Ontario, Canada, and operating under the name DRS Flight Safety and Communications, the company has been an international provider of aviation and defense systems for over 30 years. It designs, manufactures and markets sophisticated flight safety systems, naval communications systems and other advanced electronics for government and commercial customers around the world. It also provides custom manufacturing services for complex electronic assemblies and systems. On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics Ltd. for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating under the name DRS Hadland, the company has been a leader in ultra high-speed image capture and analysis for over 40 years. It designs, manufactures and markets ultra high-speed digital imaging cameras and avionics systems, including airborne video recording and ground replay systems, for government and commercial customers worldwide. The excess of cost over the estimated fair value of net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over 30 years. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used for purposes of these Consolidated Financial Statements. The aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in the Company's reported operating results from their respective effective dates of acquisition. Except for the Spar Acquisition, the financial position and results of operations of these businesses were not significant to those of the Company as of their respective effective dates of acquisition (see Note 11 of Notes to Consolidated Financial Statements). 16 The Company continues to seek acquisition opportunities consistent with its business strategy 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 further acquisitions will be consummated. 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 --------------------------------- ---------------------------- Years Ended March 31, 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 - ---------------------------------------------------------------------------------------------------------- Revenues .......................... 100.0% 100.0% 100.0% 32.9% 41.5% Costs and expenses ................ 92.5% 91.2% 91.6% 34.8% 41.0% - ---------------------------------------------------------------------------------------------------------- Operating income .................. 7.5% 8.8% 8.4% 13.3% 47.2% Interest and related expenses ..... (2.7%) (2.5%) (2.6%) 41.9% 34.0% Interest and other income, net .... 0.8% 0.5% 1.0% 97.3% (28.1%) Minority interest ................. (0.5%) (0.4%) (0.2%) 116.3% 267.3% - ---------------------------------------------------------------------------------------------------------- Earnings before income taxes ...... 5.1% 6.4% 6.6% 4.1% 38.0% Income taxes ...................... 1.7% 2.5% 2.6% (9.1%) 38.0% - ---------------------------------------------------------------------------------------------------------- Net earnings ...................... 3.3% 3.9% 4.0% 12.5% 38.0% The following tables set forth, by operating segment, revenues, operating income, operating margin and the percentage increase or decrease of those items as compared with the prior period: (dollars in thousands) Years Ended March 31, Percent Changes --------------------------------- ----------------------------- ESG 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 - ----------------------------------------------------------------------------------------------------------- Revenues .......................... $95,054 $81,157 $47,844 17.1% 69.6% Operating income .................. $ 9,454 $ 6,348 $ 3,181 48.9% 99.6% Operating margin .................. 9.9% 7.8% 6.6% 27.2% 17.6% Years Ended March 31, Percent Changes --------------------------------- ----------------------------- DSG 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 - ----------------------------------------------------------------------------------------------------------- Revenues .......................... $49,310 $33,852 $31,427 45.7% 7.7% Operating income .................. $ 2,306 $ 5,231 $ 6,023 (55.9%) (13.1%) Operating margin .................. 4.7% 15.5% 19.2% (69.7%) (19.4%) Years Ended March 31, Percent Changes --------------------------------- ------------------------------ EOSG 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 - ------------------------------------------------------------------------------------------------------------ Revenues .......................... $31,396 $25,134 $22,122 24.9% 13.6% Operating income .................. $ 1,134 $ 1,295 $ 781 (12.4%) 65.8% Operating margin .................. 3.6% 5.2% 3.5% (29.9%) 45.9% Years Ended March 31, Percent Changes --------------------------------- ----------------------------- FS&C 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 - ----------------------------------------------------------------------------------------------------------- Revenues .......................... $13,384 $ -- $ -- -- -- Operating income .................. $ 1,222 $ -- $ -- -- -- Operating margin .................. 9.1% -- -- -- --
COMPARISON OF FISCAL 1998 WITH FISCAL 1997 Revenues from ESG for the fiscal year ended March 31, 1998 increased 17.1% to $95.1 million from $81.2 million in fiscal 1997. The revenue growth was attributable primarily to increased shipments of the Group's military display workstations and coastal surveillance systems. ESG's operating income for fiscal 1998 increased 48.9% to $9.5 million, compared with $6.3 million reported in the prior year. Operating margins were 9.9% and 7.8% for the fiscal years ended March 31, 1998 and 1997, respectively. The increase in ESG's operating income and operating margin in fiscal 1998 resulted from the overall increase in revenues, coupled with operating efficiencies and the net cost savings derived from the consolidation and transfer of certain of the Group's military display product lines to its Gaithersburg, Maryland operation. 17 Revenues from DSG for the fiscal year ended March 31, 1998 increased 45.7% to $49.3 million from $33.9 million in fiscal 1997. The increase in revenues was attributable primarily to increased shipments of the Group's military data storage and recording products. DSG's operating income for fiscal 1998 decreased 55.9% to $2.3 million, compared with $5.2 million reported a year ago. Operating margins were 4.7% and 15.5% for the fiscal years ended March 31, 1998 and 1997, respectively. The decrease in DSG's operating income and operating margin in fiscal 1998 was the result of revenue mix and increased general and administrative costs associated with the Group's military product lines, principally attributable to higher company-sponsored research and development expenditures during the year for new 8mm recording products. In addition, the Group experienced margin pressure on its commercial magnetic head products. The decline in margin reflected the effects of the decrease in orders in the second half of fiscal 1998, related to the general downturn and consolidation in the computer disk drive industry, the delayed start up of the Group's Bulgarian operation and higher selling, general and administrative costs. The market factors affecting the disk drive industry are expected to continue to impact margins for the Group's commercial product lines during the first half of fiscal 1999. Revenues from EOSG for the fiscal year ended March 31, 1998 increased 24.9% to $31.4 million from $25.1 million in fiscal 1997. The increase in revenues was attributable primarily to increased shipments of the Group's electro-optical systems product lines and to revenues from the acquisition of DRSHadland in March 1998. EOSG's operating income for fiscal 1998 decreased 12.4% to $1.1 million, compared with $1.3 million in the prior year. Operating margins were 3.6% and 5.2% for the fiscal years ended March 31, 1998 and 1997, respectively. The decrease in EOSG's operating income and operating margin in fiscal 1998 reflected the effect of restructuring and other costs related to the closure of the Group's Hauppauge, New York facility and relocation of its operations to Oakland, New Jersey. Results for fiscal 1998 include those of FS&C from the date of its acquisition in October 1997. Revenues from FS&C were $13.4 million in the fiscal year ended March 31, 1998 and were attributable to shipments of the Group's flight safety and communications products and from contract manufacturing services. FS&C's operating income for fiscal 1998 was $1.2 million and operating margin was 9.1%. Consolidated revenues in fiscal 1998 and 1997 included approximately $1.7 million and $3.4 million, respectively, from DRS Medical Systems. Substantially all of the net assets of DRS Medical Systems were sold on September 12, 1997. Operating income of the Partnership was not significant to the consolidated results of operations of the Company in fiscal 1998 and 1997 (see Acquisitions and Related Activities). Interest and related expenses increased 41.9% to $5.1 million for the fiscal year ended March 31, 1998, as compared with $3.6 million in the prior fiscal year. The increase was attributable primarily to the increase in debt associated with the acquisition of FS&C and higher average working capital borrowings. Interest and other income, net increased by approximately $.7 million, or 97.3%, in fiscal 1998 to $1.4 million. This increase principally was due to the interest earned on higher average cash balances primarily resulting from cash acquired with FS&C. Minority interest increased from $.4 million in fiscal 1997 to $.9 million in fiscal 1998. The increase was due to the continued growth of the DRS Laurel Technologies partnership (DRS Laurel), in which the Company has an 80% interest. DRS Laurel manufactures many of the Company's military display workstations. The Company's effective tax rates for the fiscal years ended March 31, 1998 and 1997 were 34% and 39%, respectively. The lower effective income tax rate in fiscal 1998 reflects the benefit of the utilization of U.S. Federal capital loss carryforwards against the capital gain resulting from the sale of the Company's Hauppauge, New York facility, combined with the effect of lower overall effective tax rates of newly acquired foreign operations. The provision for income taxes includes all estimated income taxes payable to federal, state and foreign governments, as applicable. As a result of the above, net earnings for fiscal 1998 were approximately $6.4 million, up 12.5% from $5.7 million generated in fiscal 1997. Diluted earnings per share of $.93 were 10.7% higher than $.84 per share earned a year ago. COMPARISON OF FISCAL 1997 WITH FISCAL 1996 Revenues from ESG for the fiscal year ended March 31, 1997 increased 69.6% to $81.2 million from $47.8 million in fiscal 1996, primarily due to increased shipments of the Group's AN/UYQ-65 military display workstations. ESG's operating income for fiscal 1997 increased 99.6% to $6.3 million, compared with $3.2 million reported in the prior year. Operating margins were 7.8% and 6.6% in the fiscal years ended March 31, 1997 and 1996, respectively. The increase in ESG's operating income resulted from the overall increase in revenues. Revenues from DSG for the fiscal year ended March 31, 1997 increased 7.7% to $33.9 million from $31.4 million in fiscal 1996. The increase in revenues resulted from a substantial increase in commercial magnetic head shipments due, in part, to acquisitions completed during fiscal 1997. Higher overall commercial product sales offset lower revenues from shipments of the Group's military data storage and recording products. The decrease in revenues from military products was due primarily to the delayed receipt of orders for certain 8mm products, coupled with the completion, in fiscal 1996, of a contract for mission recorder systems. DSG's operating income for fiscal 1997 decreased 13.1% to $5.2 million, compared with $6.0 million reported in fiscal 1996. Operating margins were 15.5% and 19.2% for the fiscal years ended March 31, 1997 and 1996, respectively. The decrease in DSG's operating income and operating margin in fiscal 1997 was the result of revenue mix and increased general and administrative costs associated with acquisitions. Operating income also included the effect of additional product design and development costs on certain of the Group's 8mm data recording products. 18 Revenues from EOSG for the fiscal year ended March 31, 1997 increased 13.6% to $25.1 million from $22.1 million in fiscal 1996. The increase in revenues reflected the full-year impact from revenues attributable primarily to the acquisition of DRS Optronics in July 1995. EOSG's operating income for fiscal 1997 increased 65.8% to $1.3 million, compared with $.8 million in the prior year. Operating margins were 5.2% and 3.5% for the fiscal years ended March 31, 1997 and 1996, respectively. The increase in EOSG's operating income and operating margin in fiscal 1997 reflected the effect of the increase in revenues and improved margins on sales of the Group's multi-platform boresight equipment. Consolidated revenues in fiscal 1997 included approximately $3.4 million from DRS Medical Systems; revenues were insignificant in fiscal 1996. Operating income from this operation was immaterial to the consolidated results of operations of the Company in both fiscal years. Interest and related expenses increased 34% to $3.6 million for the fiscal year ended March 31, 1997, as compared with $2.7 million in the prior fiscal year. The increase was due to the issuance of the Company's $25.0 million aggregate principal amount of 9% Senior Subordinated Convertible Debentures due 2003 (the 9% Debentures), which were outstanding throughout fiscal 1997 and for a portion of fiscal 1996. A portion of the proceeds from the issuance of the 9% Debentures was used to repurchase approximately $5.0 million of the 8-1/2% Convertible Subordinated Debentures due 1998 (the 8-1/2% Debentures) in the fourth quarter of fiscal 1996, partially offsetting the increase in interest relating to the 9% Debentures. Interest and other income, net decreased by approximately $.3 million or 28% in fiscal 1997 to $.7 million. This decrease principally was due to the change in interest earned on lower average cash balances, which resulted from a net use of cash in fiscal 1997, mostly for acquisitions and capital expenditures. Minority interest increased from $.1 million in fiscal 1996 to $.4 million in fiscal 1997. The increase was due to the growth of DRS Laurel Technologies. The Company's effective tax rate for the fiscal years ended March 31, 1997 and 1996 was 39%. The provision for income taxes included all estimated income taxes payable to federal and state governments, as applicable. As a result of the above, net earnings for fiscal 1997 were approximately $5.7 million, up 38% from $4.1 million generated in fiscal 1996. Diluted earnings per share of $.84 were 22% higher than $.69 per share earned the previous year, and reflected the dilutive effect of the assumed conversion of the 9% Debentures issued in fiscal 1996. FINANCIAL CONDITION AND LIQUIDITY On October 29, 1997, the Company entered into a $60 million secured credit facility (the Secured Credit Facility) with Mellon Bank, N.A. (Mellon Bank) consisting of a $20 million term loan (the Term Loan) and a $40 million revolving line of credit (the Secured Line of Credit). The Secured Credit Facility was used to finance the acquisition of DRS Flight Safety and Communications (see Note 11 of Notes to Consolidated Financial Statements) and replaced a previous revolving line of credit and equipment line of credit facility. The Secured Line of Credit is available for working capital, general corporate purposes and acquisitions and expires on March 31, 2003. As of March 31, 1998, approximately $48.3 million was outstanding against the Secured Credit Facility, of which $4.9 million was contingently payable under letters of credit, as compared with amounts outstanding under the previous revolving line of credit at March 31, 1997 of $5.3 million and $2.3 million, respectively. Working capital as of March 31, 1998 was approximately $42.1 million, as compared with $32.8 million at March 31, 1997. The increase was primarily due to the net effect of higher accounts receivable and inventory levels, offset, in part, by higher accounts payable balances and short-term debt. In addition, the change in working capital reflects the effect of an increase in current installments of long-term debt attributable to the amortization of a portion of the Term Loan and the maturity in fiscal 1999 of the Company's outstanding 8-1/2% Debentures (approximately $1.5 million and $5.0 million, respectively). The Company believes that its current working capital position and available bank financing are sufficient to support operational needs in fiscal 1999; however, the Company is assessing certain financing alternatives to support its near-term business objectives. Accounts Receivable: Accounts receivable increased approximately $22.9 million in the fiscal year ended March 31, 1998, primarily due to the addition of $10.8 million in accounts receivable from entities acquired during the fiscal year and the increased level of March shipments. The Company receives progress payments on certain contracts from the U.S. Government of between 75-90% of allowable costs incurred. The remainder, including profits and incentive fees, is billed to customers based upon delivery and final acceptance of products and services. The Company also may bill its customers based upon units delivered. Included in accounts receivable at March 31, 1998 is $.8 million arising from retainage provisions in certain contracts with the Canadian government, a portion of which may not be collected within one year. Inventories: Inventories increased by approximately $9.0 million in fiscal 1998, net of $4.5million attributable to business acquisitions. The increase in inventories was due primarily to higher overall business volume. In addition, increased material procurement at fiscal year-end, in anticipation of production requirements on several military programs, contributed to the higher inventory balance. Debt: Total debt outstanding increased by approximately $34.1 million during the fiscal year ended March 31, 1998 to $69.1 million, primarily due to the borrowings associated with the acquisition of FS&C, offset, in part, by the conversion, in March 1998, of $5.0 million aggregate principal amount of the 9% Debentures. 19 Stockholders' Equity: Net stockholders' equity increased by approximately $11.3 million during the fiscal year ended March 31, 1998 to approximately $44.3 million, primarily as a result of net earnings for the fiscal year and the conversion of $5.0 million aggregate principal amount of the 9% Debentures. Backlog: Backlog at March 31, 1998 was approximately $177.4 million, as compared with $118.4 million a year ago. The increase was primarily attributable to the significant level of bookings achieved for the year, most notably on display workstations, offset, in part, by the effect of increased revenues. The change in backlog also reflects approximately $23.4 million of acquired backlog from the FS&C and DRS Hadland acquisitions. Due to the general nature of defense procurement and contracting, the operating cycle for the Company's military business typically has been long term. Military backlog currently consists of various production and development contracts with varying delivery schedules and project time tables. However, there has been a recent trend in the Company's backlog to include a higher percentage of commercial product orders and Commercial Off-The-Shelf (COTS)-based systems for the military, both of which favor shorter lead times. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues, may not be indicative of future results. New contract awards of approximately $228.6 million were booked in fiscal 1998. ESG secured $135.7 million in new contracts, including significant awards of approximately $86.3 million in additional production and engineering contracts for AN/UYQ-70 Advanced Display Systems; $14.7 million for littoral surveillance systems; $8.7 million for AN/SPS-67 Radar Systems; and $6.3 million on the JSTARS program. DSG booked $38.5 million in new business in fiscal 1998, including $24.7 million for its specialty magnetic head products and $4.7 million for 8mm recorders for use on F/A-18 aircraft. Total awards of $28.7 million for EOSG included $7.5 million for high-speed digital imaging systems; $5.0 million to produce upper optics modules for optical laser surgery equipment; and $2.1 million for Multi-Platform Boresight Equipment. FS&C received a total of $22.7 million in awards following the acquisition in October 1997, including approximately $9.6 million for flight incident recorders and locator beacons and $8.2 million for advanced manufacturing services. Contract awards also included approximately $3.0 million for medical ultrasound equipment booked by DRS Medical Systems (see Acquisitions and Related Activities). Internal Research and Development: In addition to customer-sponsored research and development, the Company also engages in internal research and development (IR&D). IR&D expenditures reflect the Company's continued investment in new technology and diversification of its products. Expenditures for IR&D in fiscal 1998, 1997 and 1996 were $4.0 million, $3.9 million and $.6 million, respectively. Business Considerations: The Company primarily is engaged in the design and manufacture of high-technology systems and products used for the processing, display and storage of electronic data. Although DRS has diversified into commercial products and markets, a significant portion of the Company's revenues continue to be derived directly or indirectly from defense industry contracts with the U.S. Government. In recent years, the Federal defense budget has been reduced dramatically in inflation-adjusted terms. However, the overall level of spending for defense electronics has increased, given the nature of modern warfare and its increasing reliance on sophisticated weaponry and support systems. In addition, the U.S. Government has determined that it is often more cost effective to retrofit and upgrade existing weapons platforms than to replace them. These factors have affected the nature and extent of defense procurement and have precipitated a consolidation of the defense industry and a focus principally on cost competitiveness and efficiency of operations. DRS has participated successfully in this industry consolidation through strategic business acquisitions and by streamlining its existing operations. The Company also has focused on supporting and improving existing products and programs, as well as identifying opportunities to develop and manufacture new products. The defense electronics sector is characterized by rapid technological change. The nature of modern warfare also has changed, with increasing reliance on timely and accurate battlefield information, both to ensure that increasingly costly assets are deployed efficiently and to minimize the destruction of non-military targets. In response to these factors, as well as to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on COTS product designs, whereby commercial electronic components are integrated, adapted, upgraded and "ruggedized" for applications in harsh military environments. Using COTS designs, the Company is able to develop and deliver its products with significantly less development time and expense compared with traditional military product cycles. The COTS approach generally results in shorter lead times, lower product costs and the employment of the latest available 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 in which the equipment will be installed and an in-depth understanding of military operating environments and requirements. The Company believes that it has the personnel and technical expertise required to address the technological challenges confronting the defense electronics sector. The Company is subject to other inherent risks associated with defense contracting, including changes in government policies and dependence on congressional support, primarily for appropriations and allocation of funds to products and programs supported by the Company. In recent years, the Company's products and programs have been well supported. However, uncertainty exists with respect to the size and scope of future defense budgets and their possible impact on existing or future products and programs. Further, the Company's existing defense contracts are subject to termination, either at the convenience of the customer or as a result of cancellation of funding. The Company's contracts and operations also are subject to governmental oversight, particularly with respect to business practices, contract performance and cost accounting practices. Governmental investigations may lead to claims against the Company, the outcome of which cannot be predicted. As described in Note 9 of Notes to the Consolidated Financial Statements, in fiscal 1999, the Government commenced a case against an employee of DRS Photronics, Inc., a subsidiary of the Company, relating to the accuracy of test data. To date, no claim has been made or threatened against the Company or the subsidiary. The subsidiary is currently unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. At this time, the Company is unable to quantify the effect of the delayed shipments on its results of operations or financial position, or to predict when such shipments ultimately will be made, although the delays are expected to impact fiscal 1999 first quarter results. 20 The additions of international businesses involve additional risks for the Company, such as exposure to currency fluctuations, future investment obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely differing legal systems, customs and practices in foreign countries. The Company expects that international sales as a percentage of the overall sales of the Company will continue to increase in future years as a result of, among other factors, the Company's growth strategy and continuing changes in the United States defense industry. DRS has continued to grow despite these circumstances and conditions. However, future growth will be dependent on the Company's ability to adapt to these and other changing market and industry conditions. 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 In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards for the reporting of financial and descriptive information about operating segments of publicly-held companies in their respective interim and annual financial statements. SFAS 131 also requires additional disclosures with respect to products and services, geographic areas of operations and other related data. The Statement is effective for fiscal years beginning after December 31, 1997; however, DRS has elected to adopt this standard in fiscal 1998. See Note 12 of Notes to Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June of 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The Company will adopt this Statement in fiscal 1999. Its adoption is not expected to have a material impact on the Company's financial position or results of operations, as it requires changes or additions to current disclosures. OTHER MATTERS The Company has signed a non-binding letter of intent to acquire NAI Technologies, Inc. (NAI). NAI, based in Huntington, New York, is a diversified, international electronics company. It is a leading provider of rugged computers, peripheral equipment and integrated systems for military, government and commercial applications. NAI reported revenues of approximately $52 million for the year ended December 31, 1997. The transaction is subject to the negotiation of a definitive merger agreement, completion of due diligence investigations, and receipt of stockholder and regulatory approvals. YEAR 2000 The Company is in the process of completing its assessment of computer systems affected by the Year 2000 issue, and it plans to resolve any issues identified. These plans provide for the Company's main business application systems to be Year 2000 compliant by the end of fiscal 1999. Based on the information currently available from the work performed, management does not expect that the amounts to be expended for Year 2000 activities in fiscal 1999 will have a material impact on the Company's consolidated results of operations or financial position. 21
DRS Technologies, Inc. and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - --------------------------------------------------------------------------------------------------------------------------------- March 31, 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents ........................................................... $ 9,673,000 $ 9,455,000 Accounts receivable, net (Note 2) ................................................... 47,273,000 24,343,000 Inventories, net of progress payments (Note 3) ...................................... 38,637,000 25,169,000 Prepaid expenses and other current assets ........................................... 1,849,000 1,389,000 Total current assets ................................................................ 97,432,000 60,356,000 - --------------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost (Note 4) ..................................... 55,429,000 48,286,000 Less accumulated depreciation and amortization ...................................... 32,457,000 28,299,000 Net property, plant and equipment ................................................... 22,972,000 19,987,000 - --------------------------------------------------------------------------------------------------------------------------------- Intangible assets, less accumulated amortization of $6,061,000 and $4,827,000 at March 31, 1998 and 1997, respectively ........................ 33,070,000 10,915,000 Other assets ........................................................................ 9,999,000 6,415,000 Total assets ........................................................................ $163,473,000 $97,673,000 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Current installments of long-term debt (Notes 6 and 11) ............................. $ 7,514,000 $ 2,255,000 Short-term bank debt (Note 6) ....................................................... 5,100,000 1,994,000 Accounts payable and other current liabilities (Note 5) ............................. 42,692,000 23,269,000 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities ........................................................... 55,306,000 27,518,000 Long-term debt, excluding current installments (Notes 6 and 11) ..................... 56,532,000 30,801,000 Deferred income taxes (Note 7) ...................................................... 3,897,000 3,367,000 Other liabilities (Notes 8 and 9) ................................................... 3,403,000 3,000,000 Total liabilities ................................................................... $119,138,000 $64,686,000 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity (Notes 6 and 8) Preferred Stock, no par value. Authorized 2,000,000 shares; no shares issued at March 31, 1998 and 1997 .................................... $ -- $ -- Common Stock, $.01 par value per share. Authorized 20,000,000 shares; issued 6,596,237 and 6,007,786 shares at March 31, 1998 and 1997, respectively ................................................................... 66,000 60,000 Additional paid-in capital .......................................................... 19,399,000 14,208,000 Retained earnings ................................................................... 27,057,000 20,685,000 Cumulative translation adjustment ................................................... (135,000) -- Treasury Stock, at cost: 402,461 and 420,893 shares of Common Stock at March 31, 1998 and 1997, respectively ....................................... (1,561,000) (1,622,000) Unamortized restricted stock compensation ........................................... (491,000) (344,000) Net stockholders' equity ............................................................ 44,335,000 32,987,000 Commitments and contingencies (Note 9) -- -- Total liabilities and stockholders' equity .......................................... $163,473,000 $97,673,000 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 22
DRS Technologies, Inc. and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Earnings Years Ended March 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Revenues .................................................... $190,854,000 $143,578,000 $101,454,000 Costs and expenses (Note 3) ................................. 176,595,000 130,996,000 92,907,000 - ----------------------------------------------------------------------------------------------------------------------------- Operating income ............................................ 14,259,000 12,582,000 8,547,000 Interest and related expenses ............................... (5,098,000) (3,592,000) (2,681,000) Interest and other income, net .............................. 1,377,000 698,000 971,000 Minority interest ........................................... (874,000) (404,000) (110,000) - ----------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes ................................ 9,664,000 9,284,000 6,727,000 Income taxes (Note 7) ....................................... 3,292,000 3,621,000 2,624,000 Net earnings ................................................ $ 6,372,000 $ 5,663,000 $ 4,103,000 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share of Common Stock (Note 1) BASIC .................................................. $ 1.13 $ 1.03 $ 0.75 DILUTED ................................................ $ 0.93 $ 0.84 $ 0.69 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 23 DRS Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1998, 1997 and 1996
Common Stock Additional Cumulative (Note 8) Paid-In Retained Translation Shares Amount Capital Earnings Adjustment - --------------------------------------------------------------------------------------------------------------------------------- BALANCES AT MARCH 31, 1995 ....................... 5,863,216 $59,000 $13,435,000 $10,919,000 $ -- Net earnings ...................... -- -- -- 4,103,000 -- Stock options exercised ........... 100,350 -- 250,000 -- -- Compensation relating to stock options, net ........... -- -- 30,000 -- -- Other ............................. -- -- (76,000) -- -- - --------------------------------------------------------------------------------------------------------------------------------- BALANCES AT MARCH 31, 1996 ....................... 5,963,566 59,000 13,639,000 15,022,000 -- Net earnings ...................... -- -- -- 5,663,000 -- Stock options exercised ........... 44,220 1,000 101,000 -- -- Compensation relating to stock options, net ........... -- -- (29,000) -- -- Restricted stock bonus awards ......................... -- -- 167,000 -- -- Shares reissued from treasury for acquisitions ....... -- -- 330,000 -- -- - --------------------------------------------------------------------------------------------------------------------------------- BALANCES AT MARCH 31, 1997 ....................... 6,007,786 60,000 14,208,000 20,685,000 -- Net earnings ...................... -- -- -- 6,372,000 -- Stock options exercised ........... 23,480 -- 145,000 -- -- Compensation relating to stock options, net ........... -- -- 199,000 -- -- Restricted stock bonus awards ......................... -- -- 139,000 -- -- Conversion of 9% Debentures (Note 6) ............. 564,971 6,000 4,708,000 -- -- Foreign currency translation adjustment ......... -- -- -- -- (135,000) - --------------------------------------------------------------------------------------------------------------------------------- Balances at March 31, 1998 ....................... 6,596,237 $66,000 $19,399,000 $27,057,000 $(135,000) - --------------------------------------------------------------------------------------------------------------------------------- Unamortized Treasury Stock Restricted Net (Note 8) Stock Stockholders' Shares Amount Compensation Equity - ------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1995 ....................... 454,258 $(1,617,000) $(287,000) $22,509,000 Net earnings ...................... -- -- -- 4,103,000 Stock options exercised ........... -- -- -- 250,000 Compensation relating to stock options, net ........... -- -- 51,000 81,000 Other ............................. 44,176 (301,000) -- (377,000) - ------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1996 ....................... 498,434 (1,918,000) (236,000) 26,566,000 Net earnings ...................... -- -- -- 5,663,000 Stock options exercised ........... 300 (3,000) -- 99,000 Compensation relating to stock options, net ........... -- -- 109,000 80,000 Restricted stock bonus awards ......................... (34,575) 133,000 (217,000) 83,000 Shares reissued from treasury for acquisitions ....... (43,266) 166,000 -- 496,000 - ------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1997 ....................... 420,893 (1,622,000) (344,000) 32,987,000 Net earnings ...................... -- -- -- 6,372,000 Stock options exercised ........... 224 (2,000) -- 143,000 Compensation relating to stock options, net ........... -- -- (101,000) 98,000 Restricted stock bonus awards ......................... (18,656) 63,000 (46,000) 156,000 Conversion of 9% Debentures (Note 6) ............. -- -- -- 4,714,000 Foreign currency translation adjustment ......... -- -- -- (135,000) - ------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1998 ....................... 402,461 $(1,561,000) $(491,000) $44,335,000 - ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 24 DRS Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings .................................................................. $6,372,000 $5,663,000 $ 4,103,000 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation and amortization ....................................... 7,059,000 5,027,000 3,170,000 Deferred income taxes ............................................... (121,000) 701,000 (159,000) Other, net .......................................................... 572,000 (215,000) (1,003,000) Changes in assets and liabilities, net of effects from business combinations: (Increase) in accounts receivable ................................... (17,051,000) (200,000) (4,640,000) (Increase) in inventories ........................................... (10,985,000) (5,485,000) (4,926,000) (Increase) decrease in prepaid expenses and other current assets ........................................... (393,000) 779,000 (265,000) Increase (decrease) in accounts payable and other current liabilities ...................................... 14,018,000 (6,894,000) 8,630,000 Other, net .......................................................... (703,000) (1,090,000) (59,000) Net cash provided by (used in) operating activities ........................... (1,232,000) (1,714,000) 4,851,000 - ---------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures .......................................................... (6,570,000) (3,634,000) (5,942,000) Sales of capital assets ....................................................... 2,277,000 151,000 2,638,000 Payments pursuant to business combinations, net of cash acquired ..................................................... (34,183,000) (6,285,000) (4,669,000) Proceeds from sale of partnership net assets .................................. 1,890,000 -- -- Other, net .................................................................... 227,000 -- -- Net cash used in investing activities ......................................... (36,359,000) (9,768,000) (7,973,000) - ---------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Payments on long-term debt .................................................... (2,294,000) (840,000) (1,112,000) Repurchases of convertible subordinated debentures -- -- (7,212,000) Net proceeds from issuance of long-term debt .................................. 35,578,000 -- 23,127,000 Other borrowings (repayments), net ............................................ 4,706,000 (1,107,000) (163,000) Other, net .................................................................... (168,000) 99,000 70,000 Net cash provided by (used in) financing activities ........................... 37,822,000 (1,848,000) 14,710,000 Effect of exchange rates on cash and cash equivalents ......................... (13,000) -- -- Net increase (decrease) in cash and cash equivalents .......................... 218,000 (13,330,000) 11,588,000 Cash and cash equivalents, beginning of year .................................. 9,455,000 22,785,000 11,197,000 Cash and cash equivalents, end of year ........................................ $9,673,000 $9,455,000 $22,785,000 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 25 Note 1: Summary of Significant Accounting Policies A. ORGANIZATION DRS Technologies, Inc. (hereinafter DRS or the Company) is a diversified, high-technology company serving government and commercial niche markets worldwide. DRS develops and manufactures a variety of leading edge systems and components 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. DRS's defense electronics products serve all branches of the U.S. Armed Services and certain international military forces. The Company's commercial and industrial products are used by the airline, banking, computer disk drive, security, transportation, retail sales and broadcast industries. B. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of DRS Technologies, Inc., its subsidiaries (all of which are wholly or majority owned) and a joint venture consisting of an 80% controlling partnership interest. All significant intercompany transactions and balances have been eliminated in consolidation. Certain items in the fiscal 1997 consolidated financial statements have been reclassified to conform to the fiscal 1998 presentation. 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. C. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY TRANSACTIONS Transactions in foreign currencies are translated into U.S. dollars at the approximate prevailing rate at the time of the transaction. The operations of the Company's Canadian and U.K. subsidiaries are translated from the local (functional) currencies into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". The rates of exchange at each balance sheet date are used for translating balance sheet accounts, and an average rate of exchange is used for translating the statement of earnings. Gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a separate component of stockholders' equity. The functional currency of the Company's Bulgarian subsidiary is the U.S. dollar. 26 D. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. E. 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 from commercial product sales also are recognized upon shipment. 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 1998, 1997 and 1996 approximated 9%, 7% and 10% of total revenues, respectively, with remaining revenues recognized as deliveries of finished units are made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1998, 1997 and 1996 were $11,774,000, $12,995,000 and $12,051,000, 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 74%, 71% and 78% of the Company's revenues in fiscal 1998, 1997 and 1996, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government (principally the U.S. Navy). In addition, approximately 9% in fiscal 1998 and 1997, and 10% in fiscal 1996 of the Company's revenues were derived directly or indirectly from sales to foreign governments. F. INVENTORIES Commercial and other non-contract inventories are stated at the lower of cost (which includes material, labor and manufacturing overhead) or net realizable value. 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. G. DEPRECIATION AND AMORTIZATION OF 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 results of operations. H. INTANGIBLE ASSETS Substantially all intangible assets consist of intangibles resulting from acquisitions and represent the excess of cost of the investments over the fair values of the underlying net assets at the dates of investment. All intangibles are being amortized on the straight-line method over three to thirty years. I. CONVERTIBLE DEBENTURES The Company's outstanding 9% Senior Subordinated Convertible Debentures due 2003 (9% Debentures) and 8-1/2% Convertible Subordinated Debentures due 1998 (8-1/2% Debentures) are convertible at any time into shares of the Company's Common Stock at the election of the bondholders. Upon conversion, the Company's policy is to credit stockholders' equity for the aggregate principal amount of Debentures converted, net of a pro-rata portion of unamortized issuance costs at the conversion date. In the event the conversion occurs before an interest payment record date, the related liability for accrued and unpaid interest also would be credited to stockholders' equity. J. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting for Stock-based Compensation"(SFAS 123). This Statement stipulates, among other requirements, that companies make pro forma disclosures of net earnings and earnings per share as if the fair value-based method of accounting for stock options, as defined in the Statement, had been applied. As permitted under SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost has been recognized for its stock options in the financial statements only as it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company's Common Stock as of the date of grant. 27 K. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company recognizes deferred tax assets and liabilities 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. 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. L. EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement simplified standards for computing earnings per share (EPS), as specified in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under SFAS 128, the presentation of primary EPS was replaced by the presentation of basic EPS. For companies with complex capital structures, the presentation of fully diluted EPS was replaced by diluted EPS. Diluted EPS is computed similarly to fully diluted EPS, pursuant to APB 15. The Company adopted this standard in fiscal 1998 beginning with the fiscal quarter ended December 31, 1997, and its adoption did not have a material impact on reported earnings per share for current or restated prior periods. Basic earnings per share is computed by dividing net earnings by the sum of the weighted averages of all classes of Common Stock outstanding during each period. The computation of diluted earnings per share includes the effect of shares from the assumed exercise of dilutive stock options and the effect of the assumed conversion of the Company's outstanding 9% Debentures and 8-1/2% Debentures. The following table provides the components of the per-share computations:
(in thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Basic EPScomputation Net earnings .................................................... $6,372 $5,663 $4,103 Weighted average common shares outstanding ...................... 5,626 5,525 5,470 Basic earnings per share ........................................ $ 1.13 $ 1.03 $ 0.75 - ------------------------------------------------------------------------------------------------------------------------- Diluted EPScomputation Net earnings .................................................... $6,372 $5,663 $4,103 Interest and expenses related to convertible debentures ......... 2,071 1,795 748 - ------------------------------------------------------------------------------------------------------------------------- Adjusted earnings ............................................... $8,443 $7,458 $4,851 Weighted average common shares outstanding ...................... 5,626 5,525 5,470 Stock options ................................................... 283 228 177 Convertible Debentures: 8-1/2% Debentures .......................................... 333 333 -- 9% Debentures .............................................. 2,803 2,824 1,374 - ------------------------------------------------------------------------------------------------------------------------- Diluted common shares outstanding ............................... 9,045 8,910 7,021 Diluted earnings per share ...................................... $ 0.93 $ 0.84 $ 0.69 - -------------------------------------------------------------------------------------------------------------------------
M. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS Whenever events or changes in circumstances indicate that the carrying amount of a long-lived or intangible asset may not be recoverable, the Company's policy is to evaluate the realizability of such assets based upon the expectations of non-discounted cash flows or operating income for each subsidiary or acquired business having a material acquisition-related intangible asset balance. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. N. FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1998 and 1997 of the Company's 8-1/2% Debentures and 9% Debentures, which are convertible into shares of the Company's Common Stock, are disclosed herein (see Note 6). O. SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards for the reporting of financial and descriptive information about operating segments of publicly-held companies in their respective interim and annual financial statements. SFAS 131 also requires additional disclosures with respect to products and services, geographic areas of operations and other related data. The Statement is effective for fiscal years beginning after December 31, 1997; however, DRS has elected to adopt this standard in fiscal 1998 (see Note 12). 28 Note 2: Accounts Receivable The component elements of accounts receivable, net of allowances for doubtful accounts of $486,000 and $136,000, respectively, are as follows:
March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Government: Amounts billed ............................................................................ $10,042,000 $ 4,062,000 Recoverable costs and accrued profit on progress completed, not billed ......................................................... 1,592,000 2,817,000 11,634,000 6,879,000 - ------------------------------------------------------------------------------------------------------------------------------------ Other Defense Contracts: Amounts billed ............................................................................ 24,058,000 10,777,000 Recoverable costs and accrued profit on progress completed, not billed ......................................................... 4,925,000 952,000 Other Trade Receivables ................................................................... 6,656,000 5,735,000 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ..................................................................................... $47,273,000 $24,343,000
Included in accounts receivable at March 31, 1998 is $784,000 arising from retainage provisions in certain contracts with the Canadian government, a portion of which may not be collected within one year. The Company receives progress payments on certain contracts from the U.S. Government of between 75-90% 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. Inventories are summarized as follows:
Note 3: Inventories March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Work in process ........................................................................... $63,000,000 $38,740,000 Raw materials and finished goods .......................................................... 5,813,000 3,874,000 - ------------------------------------------------------------------------------------------------------------------------------------ 66,813,000 42,614,000 Less progress payments .................................................................... (30,176,000) (17,445,000) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ..................................................................................... $38,637,000 $25,169,000
General and administrative costs included in work in process were $10,092,000 and $9,449,000 at March 31, 1998 and 1997, respectively. General and administrative costs included in costs and expenses amounted to $35,394,000, $31,599,000 and $21,956,000 in fiscal 1998, 1997 and 1996, respectively. Included in these amounts are expenditures for internal research and development, amounting to approximately $4,049,000, $3,852,000 and $649,000 in fiscal 1998, 1997 and 1996, respectively. Property, plant and equipment at March 31, 1998 and 1997 are summarized as follows:
Note 4: Property, Plant and Equipment March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Land ...................................................................................... $ 1,780,000 $ 1,350,000 Building and building improvements ........................................................ 736,000 2,427,000 Office furnishings, equipment and other ................................................... 5,034,000 4,292,000 Laboratory and production equipment ....................................................... 29,279,000 25,075,000 Computer equipment ........................................................................ 10,329,000 8,878,000 Leasehold improvements .................................................................... 8,271,000 6,264,000 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ..................................................................................... $55,429,000 $48,286,000
Depreciation and amortization of plant and equipment amounted to $4,983,000, $3,542,000 and $2,311,000 in fiscal 1998, 1997 and 1996, respectively. In fiscal 1997, the Company financed approximately $1,594,000 of capital expenditures with long-term notes and other available lines of credit (see Note 6). 29 The component elements of accounts payable and other current liabilities are as follows:
Note 5: Accounts Payable and Other Current Liabilities March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Payrolls, other compensation and related expenses ......................................... $ 5,693,000 $ 4,427,000 Income taxes payable ...................................................................... 1,342,000 1,959,000 Losses and future costs accrued on uncompleted contracts .................................. 4,120,000 2,204,000 Other ..................................................................................... 8,358,000 4,516,000 - ------------------------------------------------------------------------------------------------------------------------------------ 19,513,000 13,106,000 Accounts payable .......................................................................... 23,179,000 10,163,000 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ..................................................................................... $42,692,000 $23,269,000
A summary of debt is as follows:
Note 6: Debt March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ 9% Senior Subordinated Convertible Debentures due October 1, 2003 ......................... $20,000,000 $25,000,000 8-1/2% Convertible Subordinated Debentures due August 1, 1998 ............................. 4,992,000 4,992,000 Term note ................................................................................. 19,794,000 -- Revolving line of credit .................................................................. 23,556,000 3,010,000 Variable rate industrial revenue bonds due January 1, 1998 ................................ -- 1,595,000 Other obligations ......................................................................... 804,000 453,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt ................................................................................ 69,146,000 35,050,000 Current installments of long-term debt .................................................... (7,514,000) (2,255,000) Short-term bank debt ...................................................................... (5,100,000) (1,994,000) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM DEBT ...................................................................... $56,532,000 $30,801,000
The 9% Debentures were issued in fiscal 1996 for an aggregate principal amount of $25,000,000. These Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock (see Note 8), unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. In March 1998, $5,000,000 aggregate principal amount of these Debentures were converted into 564,971 shares of Common Stock, at the election of the bondholders. 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 a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. Under the indenture, the Company also is required to maintain a minimum level of consolidated net worth. As of March 31, 1998, the Company was in compliance with these covenants. 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 8), unless previously redeemed, at a conversion price of $15.00 per share, subject to adjustment under certain conditions. The 8-1/2% Debentures currently 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 March 31, 1998, the Company had repurchased $20,008,000 of the 8-1/2% Debentures and has satisfied all sinking fund requirements under the related indenture. 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. The indenture contains certain dividend payment and other restrictions. As of March 31, 1998, the Company was in compliance with these covenants. The 8-1/2% Debentures and the 9% Debentures are listed for trading on the American Stock Exchange. The aggregate market values, based on closing prices, of the principal amount of the outstanding 8-1/2% Debentures and 9% Debentures were approximately $5,042,000 and $25,400,000, respectively, as of March 31, 1998 and approximately $5,004,000 and $34,000,000, respectively, as of March 31, 1997. The variable rate demand industrial development revenue refunding bonds (Bonds) were issued to refinance a prior bond issue, which provided funds for the construction of manufacturing facilities for DRS Photronics, Inc., a wholly-owned subsidiary of the Company. The Bonds were redeemed at maturity in January 1998. On October 29, 1997, the Company entered into a $60 million secured credit facility (the Secured Credit Facility) with Mellon Bank, N.A. (Mellon Bank) consisting of a $20 million term loan (the Term Loan) and a $40 million revolving line of credit (the Secured Line of Credit). The Secured Credit Facility expires on March 31, 2003. The Secured Credit Facility was used to finance the acquisition of Flight Safety and Communications (see Note 11) and replaced a previous revolving line of credit and equipment line of credit facility. 30 The Secured Credit Facility is secured by substantially all of the assets of the Company. Borrowings can be in United States dollars at rates based on LIBOR or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The Term Loan and approximately $4.3 million of revolving lines of credit borrowings were denominated in Canadian dollars at March 31, 1998. Quarterly principal installments are required on the Term Loan beginning on June 30, 1998. The Secured Line of Credit is available for working capital, general corporate purposes and acquisitions. The Secured Credit Facility contains certain covenants and restrictions, including maintenance of a minimum level of consolidated net worth, a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. The Company was in compliance with all covenants under its line of credit arrangements at March 31, 1998 and 1997. As of March 31, 1998, approximately $48,294,000 was outstanding against the Secured Credit Facility, of which $4,944,000 was contingently payable under letters of credit, as compared with amounts outstanding under the previous revolving line of credit at March 31, 1997 of $5,316,000 and $2,306,000, respectively. Weighted average borrowings under revolving lines of credit for the fiscal years endedMarch 31, 1998 and 1997 were approximately $11,325,000 and $3,148,000, respectively. The weighted average interest rates on outstanding revolving line of credit borrowings as of March 31, 1998 and 1997 were 7.8% and 7.3%, respectively. As of March 31, 1998, the interest rate on the Term Loan was 7.0%. Cash payments for interest during fiscal 1998, 1997 and 1996 were $3,874,000, $3,032,000 and $1,169,000, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2003 are as follows: 1999, $7,514,000; 2000, $4,136,000; 2001, $4,488,000; 2003, $4,488,000 and 2003, $23,180,000. Note 7: Income Taxes Income tax expense consists of:
Years Ended March 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CURRENT: Federal .................................................. $2,186,000 $2,673,000 $2,421,000 State .................................................... 698,000 247,000 362,000 Foreign .................................................. 529,000 -- -- 3,413,000 2,920,000 2,783,000 - ----------------------------------------------------------------------------------------------------------------------- DEFERRED: Federal .................................................. 117,000 596,000 602,000 State .................................................... 34,000 105,000 (761,000) Foreign .................................................. (272,000) -- -- (121,000) 701,000 (159,000) - ------------------------------------------------------------------------------------------------------------------------ TOTAL .................................................... $3,292,000 $3,621,000 $2,624,000
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, 1998 and 1997 are as follows:
March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ DEFERRED TAX ASSETS: State net operating loss carryforwards .......................................... $2,840,000 $2,774,000 Inventory capitalization ........................................................ 1,984,000 1,361,000 Costs accrued on uncompleted contracts .......................................... 1,112,000 1,063,000 Other ........................................................................... 1,503,000 1,443,000 - ------------------------------------------------------------------------------------------------------------------------ Total gross deferred tax assets ................................................. 7,439,000 6,641,000 Less valuation allowance ........................................................ (1,455,000) (1,411,000) NET DEFERRED TAX ASSETS ......................................................... 5,984,000 5,230,000 - ------------------------------------------------------------------------------------------------------------------------ DEFERRED TAX LIABILITIES: Depreciation and amortization ................................................... 4,255,000 4,012,000 General and administrative costs ................................................ 4,248,000 3,584,000 Federal impact of the state benefits ............................................ 749,000 727,000 Other ........................................................................... 1,326,000 487,000 Total gross deferred tax liabilities ............................................ 10,578,000 8,810,000 - ------------------------------------------------------------------------------------------------------------------------ NET DEFERRED TAX LIABILITIES .................................................... $4,594,000 $3,580,000
31 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 $697,000 and $213,000 is included in Accounts Payable and Other Current Liabilities in the Consolidated Balance Sheets as of March 31, 1998 and 1997, respectively. At March 31, 1998, approximately $23,585,000 of state net operating loss carryforwards, which will expire between fiscal years 1999 and 2012, were available in various tax jurisdictions. A reconciliation of the statutory U.S. Federal income tax rate to the effective tax rate follows:
Years Ended March 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- U.S. statutory tax rate ................................................... 34% 34% 34% Difference between U.S. and foreign tax rates ............................. (1) -- -- State income tax, net of Federal income tax benefit ....................... 4 3 4 Utilization of capital loss carryforward .................................. (2) -- -- Other ..................................................................... (1) 2 1 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ..................................................................... 34% 39% 39%
The provision for income taxes includes all estimated income taxes payable to Federal, state and foreign governments, as applicable. Cash payments for income taxes during fiscal 1998, 1997 and 1996 amounted to $4,449,000, $2,813,000 and $2,809,000, respectively. Note 8: Common Stock Stock Option Plans and Employee Benefit Plans On March 26, 1996, the stockholders of the Company approved an Amended and Restated Certificate of Incorporation, which amended and restated the Company's certificate primarily to 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. The Reclassification became effective April 1, 1996. The following table presents the capital structure of the Company prior to the Reclassification. The summarized totals have been used in the Consolidated Statements of Stockholders' Equity for presentation purposes to give effect to the Reclassification as if it had been completed on March 31, 1995:
Number of Shares Common Stock, $.01 par Value Authorized Issued Held in Treasury Outstanding - ------------------------------------------------------------------------------------------------------------------------------ As of March 31, 1995 Class A 10,000,000 3,699,963 432,639 3,267,324 Class B 20,000,000 2,163,253 21,619 2,141,634 - ------------------------------------------------------------------------------------------------------------------------------ 30,000,000 5,863,216 454,258 5,408,958 As of March 31, 1996 Class A 10,000,000 3,739,963 432,639 3,307,324 Class B 20,000,000 2,223,603 65,795 2,157,808 - ------------------------------------------------------------------------------------------------------------------------------ 30,000,000 5,963,566 498,434 5,465,132
As a result of the Reclassification, the 8-1/2% Debentures and 9% Debentures are convertible into an equivalent number of shares of Common Stock. Also, options granted under the Company's 1991 Stock Option Plan are exercisable for an equivalent number of shares of Common Stock. On February 7, 1991, the Board adopted the 1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000 shares of Common Stock. The Stock Option Plan was approved by the Company's stockholders on August 8, 1991. Under the terms of the Stock Option Plan, options to purchase shares of 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 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. As of March 31, 1998, 151,550 shares were reserved for future grants under the Stock Option Plan. On June 17, 1996, the Board adopted, and on August 7, 1996, the stockholders approved the 1996 Omnibus Plan (Omnibus Plan). An aggregate of 500,000 shares of Common Stock is reserved for issuance under this plan, subject to adjustment under certain circumstances. Awards under the Omnibus Plan are at the discretion of the Stock Option Committee and may be made in the form of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) phantom stock, (vi) stock bonuses and (vii) other awards. Awards may be granted to employees, officers, directors and consultants of the Company. The total number of shares of the Company's stock subject to awards granted to any participant of this plan during 32 any tax year of the Company may not exceed 200,000 shares. The Omnibus Plan also provides for automatic grants of non-qualified stock options to non-employee directors of the Company. Unless the Stock Option Committee expressly provides otherwise, options granted under the Omnibus Plan are not exercisable prior to one year after the date of grant and become exercisable as to 25% of the shares granted on each of the first four anniversaries of the date of grant. The Stock Option Committee will determine each option's expiration date, provided, however, that no incentive stock option may be exercised more than ten years after the date of grant. Additionally, the Stock Option Committee will establish the option price, provided, however, that in the case of an incentive stock option, the option price may not be set below the market value of a share of the Company's Common Stock on the date of grant. As of March 31, 1998, 143,300 shares were reserved for future grants under the Omnibus 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 1998, 1997 and 1996 was $98,000, $80,000 and $81,000, respectively, and related solely to options granted under the Stock Option Plan. When stock is issued on exercise of options, the par value of each share ($.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 and Omnibus Plans follows:
Number of Shares Weighted Average of Common Stock Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at (of which 185,425 shares were exercisable) 389,625 $2.68 March 31, 1995 Granted 159,000 $7.56 Exercised (100,350) $2.40 Expired (11,475) $2.66 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at (of which 137,100 shares were exercisable) 436,800 $4.52 March 31, 1996 Granted 165,900 $9.88 Exercised (44,220) $2.29 Expired (17,700) $5.03 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at (of which 218,280 shares were exercisable) 540,780 $6.33 March 31, 1997 Granted 204,800 $9.72 Exercised (23,480) $3.70 Expired (16,000) $9.41 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at (of which 303,100 shares were exercisable) 706,100 $7.33 March 31, 1998
Information regarding all options outstanding at March 31, 1998 follows:
Options Outstanding Options Exercisable Weighted Weighted Number Average Average Number Weighted of Exercise Remaining of Average Options Price Contractual Life Options Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Range of Exercise Price Less than $5.00 228,200 $ 2.61 1.7 years 182,200 $ 2.73 $5.00 - $9.99 288,650 $ 8.80 7.9 years 104,900 $ 8.00 Greater than $9.99 189,250 $10.77 9.2 years 16,000 $10.55 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL 706,100 $ 7.33 6.3 years 303,100 $ 4.96
Pro forma information regarding net earnings and earnings per share, as required by SFAS 123, has been determined as if the Company had accounted for its employee stock options under the fair-value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.0% in 1998, and 6.5% in 1997 and 1996; dividend yield of 0%; volatility factor related to the expected market price of the Company's Common Stock of .2824 in 1998, and .2764 in 1997 and 1996; and weighted-average expected option life of five years. The weighted-average fair values of options granted at market during fiscal 1998, 1997 and 1996 were $3.94, $3.68 and $3.31 per share, respectively. The per share weighted-average fair value and exercise price of options granted with an exercise price less than market during 1998 were $9.99 and $0.01, respectively. For purposes of pro forma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. Accordingly, the pro forma results for fiscal 1998, 1997 and 1996 presented below include 67%, 49% and 6%, respectively, of the total pro 33 forma expense for options awarded in each year. The pro forma amounts may not be representative of the effects on reported earnings for future years. The Company's pro forma information follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Pro forma net earnings ....................................... $5,869 $5,446 $4,077 Pro forma earnings per common share Basic ................................................ $ 1.04 $ 0.99 $ 0.75 Diluted .............................................. $ 0.88 $ 0.81 $ 0.69
The Company also maintains defined contribution plans covering substantially all domestic full-time eligible employees. The Company's contributions to these plans for fiscal 1998, 1997 and 1996 amounted to $743,000, $629,000 and $414,000, respectively. Certain employees of DRS Hadland and DRS Flight Safety and Communications participate in defined benefit pension plans sponsored by the Company. Plan assets are invested in publicly traded equity and fixed income securities. Retirement benefits are based on various factors, including remuneration and years of service. The plans will be funded by DRS in accordance with independent actuarial valuations. Current actuarial valuations are pending, in connection with the finalization of purchase price allocations related to the acquisitions of these businesses in fiscal 1998 (see Note 11). However, management believes that the net pension obligations and related expenses associated with these plans are not material to the consolidated financial position and results of operations of the Company. 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 currently are being funded from working capital. As of March 31, 1998 and 1997, the Company's liability for benefits accrued under the SERP was approximately $1,377,000 and $1,060,000, respectively, and is included in Other Liabilities in the Consolidated Balance Sheets. Charges of $436,000 and $270,000 relating to the SERP were included in the results of operations for fiscal 1998 and 1997, respectively. Note 9: Commitments, Contingencies and Related Party Transactions At March 31, 1998, the Company was party to various noncancellable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: ----------------------------------------------------- 1999 .................................. $4,201,000 2000 .................................. 3,844,000 2001 .................................. 2,570,000 2002 .................................. 1,978,000 2003 .................................. 1,295,000 Thereafter ............................ 1,441,000 ----------------------------------------------------- TOTAL ................................. $15,329,000 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 $3,788,000, $3,237,000 and $3,115,000 in fiscal 1998, 1997 and 1996, 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. In August 1997, the lease was amended, extending the term of the lease through June 2002. The Company pays an annual rent of $233,000 and 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) 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 $750,000 as consideration for a five-year non-compete arrangement. The payments are being charged to expense over the five-year term 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 deferred compensation payments to be made to Mr. Gross is included in Other Liabilities in the Consolidated Balance Sheets. The Company's Flight Safety and Communications segment receives assistance from the Canadian Government for research and development activities which is applied to reduce the cost of the related expenditures. Government assistance in the amount of approximately $2.9 million is repayable through royalties in the event the related research and development projects successfully are commercialized. The royalties are calculated on the basis of 2 to 34 3% of total related sales and continue in effect until the assistance received has been repaid or until the technology ceases to contribute to commercialization of related products. In April and May 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to certain equipment manufactured by DRS Photronics, Inc., a subsidiary of the Company. The subpoenas were issued in connection with United States v. Tress, a case involving a DRS Photronics' employee and related to the accuracy of test data for the equipment. To date, no claim has been made or threatened against the Company in connection with this matter. At this time, the Company is unable to determine if any such claim will be made. The Company itself 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 and foreign governments, 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 and similar foreign agencies. Note 10: Restructuring During fiscal 1998, the Company moved certain of its military display workstation product lines from the Company's facility in Oakland, New Jersey to its operation in Gaithersburg, Maryland and relocated its multi-platform boresighting equipment product lines, formerly located in Hauppauge, New York, to Oakland, New Jersey. In connection with this relocation, the Company sold the land and building owned in Hauppauge, New York. The Company recorded a restructuring charge of $634,000 in the year ended March 31, 1998 in connection with these relocations. This restructuring charge did not include costs associated with the relocation of employees, equipment and inventory, nor did it include retraining costs for new personnel and the cost of leasehold improvements for the Oakland, New Jersey production facility. These costs were charged to operations or capitalized, as appropriate, when incurred. The following table reconciles the restructuring charge to the related reserve account balance as of March 31, 1998: Fiscal 1998 restructuring charge .................. $634,000 Cash outflows for severance payments .............. (519,000) Cash outflows for idle plant costs ................ (115,000) - -------------------------------------------------------------- Balance at March 31, 1998 ......................... $ 0 Note 11: Business Combinations On July 5, 1995, DRS Optronics, Inc. (DRS Optronics), a second-tier subsidiary of the Company, acquired substantially all of the assets of Opto-Mechanik, Inc., pursuant to an asset acquisition agreement for a total of $5.5 million, consisting of $3.7 million in cash and $1.8 million in notes payable. DRS Optronics, 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. On February 6, 1996, a wholly-owned subsidiary of the Company entered into a partnership with Universal Sonics Corporation and its shareholders (DRS Medical Systems or the Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to DRS Medical Systems consisted of $.4 million in cash, certain managerial expertise and manufacturing capabilities, representing a 90% interest in the Partnership. On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $.1 million and the reversal of accrued obligations of $.3 million. The results of operations of this Partnership were not material to the consolidated operating results of the Company during the periods presented. On February 9, 1996, DRS Ahead Technology, Inc. (DRS Ahead Technology) acquired, through a wholly-owned subsidiary, 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, for approximately $.4 million in cash. Mag-Head produces audio and flight recorder heads. On June 18, 1996, DRS Ahead Technology acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, DRS Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. Located in Dassel, Minnesota, Nortronics manufactures data and recording heads. On October 30, 1996, Pacific Technologies, Inc., a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $.5 million. Based in San Diego, California, and renamed DRS Technical Services, Inc., it provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. On May 13, 1997, a subsidiary of the Company acquired approximately 80% of the outstanding equity of Magnetic Heads Company Ltd. (MHC) for approximately $.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead Technology -- Bulgaria, is a manufacturer and supplier of magnetic recording heads used primarily for commercial applications. In connection with this acquisition,the Company agreed to make additional investments in DRS Ahead Technology -- Bulgaria totaling approximately $2.3 million over a five-year period. For purposes of this agreement, investments include transfer of technology and related intangible assets, transfer of inventory and other productive assets, employee training and other similar transfers and expenditures. 35 On October 29, 1997 (the Closing Date), DRS acquired, through certain of its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace Limited (Spar), a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited, incorporated under the laws of England and Wales (the Acquisition), pursuant to a purchase agreement (the Agreement) dated as of September 19, 1997 between DRS and Spar. The Company paid approximately $35.4 million in cash for the Acquisition (which included $6.9 million for cash acquired in connection with the transaction), subject to a certain working capital adjustment as provided for in the Agreement. The amount of such working capital adjustment, if any, remains the subject of dispute between DRS and Spar. Although the Company cannot, at this time, predict the outcome of such dispute, management does not expect that its resolution will have a material impact on the Company's consolidated financial position or results of operations. The excess of cost over the estimated fair value of net assets acquired was approximately $20 million and is being amortized on a straight-line basis over thirty years. DRS incurred professional fees and other costs related to the Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. Headquartered in Carleton Place, Ontario, Canada, and operating under the name DRS Flight Safety and Communications, the company has been an international provider of aviation and defense systems for over 30 years. It designs, manufactures and markets sophisticated flight safety systems, naval communications systems and other advanced electronics for government and commercial customers around the world. It also provides custom manufacturing services for complex electronic assemblies and systems. The following unaudited pro forma financial information shows the results of operations for the years ended March 31, 1998 and 1997, as though the Acquisition had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma calculations include: the amortization of the excess of cost over the estimated fair value of net assets acquired; the reversal of revenue in connection with a certain contract which is not included in reported results of operations subsequent to the Closing Date; interest expense on the debt associated with the Acquisition; and the related tax effect of these adjustments for each pro forma period presented. For purposes of this pro forma financial information, adjustments to conform the revenue recognition method and the treatment of general and administrative expenses between DRS and the acquired companies prior to the Closing Date have not been made, as it was not practicable to conform the revenue recognition method. Management believes that the effect of any adjustment to conform the treatment of general and administrative expenses would be immaterial. Years Ended March 31, 1998 1997 - ---------------------------------------------------------------------------- Revenues .................................. $205,228,000 $172,690,000 Net earnings before extraordinary items ... $ 5,668,000 $ 5,153,000 Earnings per share: Basic ............................. $ 1.01 $ 0.93 Diluted ........................... $ 0.86 $ 0.78 The pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisition been made at the beginning of the period or of the future results of operations of the combined companies. On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics Ltd. for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating as DRS Hadland, the company has been a leader in ultra high-speed image capture and analysis for over 40 years. It designs, manufactures and markets ultra high-speed digital imaging cameras and avionics systems, including airborne video recording and ground replay systems, for government and commercial customers worldwide. The excess of cost over the estimated fair value of net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over thirty years. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used for purposes of these Consolidated Financial Statements. The aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in the Company's reported operating results from their respective effective dates of acquisition. Except for the Spar Acquisition, the financial position and results of operations of the aforementioned acquired businesses were not significant to those of the Company as of their respective effective dates of acquisition. Note 12: Operating Segments DRS is organized into four principal operating segments on the basis of products and services offered: the Electronic Systems Group (ESG), the Data Systems Group (DSG), the Electro-Optical Systems Group (EOSG) and Flight Safety and Communications (FS&C). Each operating segment is comprised of separate and distinct businesses. ESG consists of DRS Electronic Systems, Inc., located in Gaithersburg, Maryland, DRS Laurel Technologies, located in Johnstown, Pennsylvania, DRS Technical Services, Inc., based in San Diego, California, and the DRS Technical Services division, located in Chesapeake, Virginia. The Group designs, manufactures and integrates complex systems using advanced commercial technology to meet the performance and environmental requirements of military customers. Current products include tactical display and processing systems for military ships and aircraft, littoral surveillance systems for coastal and harbor regions, radar and acoustic sensor systems, and low-cost emulators of legacy military systems for test and training support. ESG also provides manufacturing services and technical support services for both DRS products and those of other suppliers. 36 DSG consists of DRS Precision Echo, Inc., located in Santa Clara, California, and DRS Ahead Technology, headquartered in San Jose, California. DRS Ahead Technology operates five manufacturing plants based in: Plymouth, Minnesota; St. Croix Falls, Wisconsin; Dassel, Minnesota; Bloomington, Illinois; and Razlog, Bulgaria. The Group utilizes advanced commercial technology to design and manufacture multisensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. Through its commercial operations, DSG also provides a variety of magnetic head products and services used in the commercial aviation, airline, television and audio broadcast, computer disk drive, security, transportation and retail sales industries that test or write and read information on magnetic data storage media. EOSG consists of DRS Photronics, Inc., now based in Oakland, New Jersey, DRS Optronics, located in Palm Bay, Florida and DRS Hadland, headquartered in Tring, Hertfordshire, United Kingdom. DRS Hadland also has service offices in Cupertino, California and Munich, Germany. The Group integrates advanced commercial technology with military requirements to design and manufacture advanced electro-optical sighting, targeting, weapons and aircraft optical alignment systems, assemblies and components used primarily in the aerospace and defense industries. The Group is a leading supplier of aircraft boresighting equipment and ultra high-speed digital imaging systems. EOSG also produces night vision and directional devices, as well as eye-safe, laser-based products for military applications. FS&C consists of DRS Flight Safety and Communications, located in Carleton Place, Ontario, Canada, and DRS Technologies (UK) Ltd., based in Hayes, Middlesex, United Kingdom. The Group designs and manufactures advanced flight safety systems, naval communications systems and other advanced electronics primarily for defense and commercial aerospace applications. FS&C is a leading global supplier of deployable aircraft beacons and flight data recorders used in emergencies to locate aircraft. Its shipboard communications systems integrate commercial technology and are used in conjunction with surveillance satellites. FS&C also provides custom manufacturing services for complex electronic systems. Corporate operations include the activities of the parent company, DRS Technologies, Inc., and several non-operating subsidiaries of the Company. Included in Corporate operations are the results of operations from DRS Medical Systems (see Note 11). The accounting policies of the segments are consistent with those described in the Summary of Significant Accounting Policies (see Note 1). The Company evaluates segment level performance based on revenues and operating income as presented in the Consolidated Statements of Earnings. Operating income, as shown, includes amounts allocated from Corporate operations. Revenues and identifiable assets of foreign operations other than those of FS&C (disclosed herein) are immaterial to the Company's consolidated financial statements. Information about the Company's operations in these segments for the three years ended March 31, 1998 is as follows:
(dollars in thousands) ESG DSG ESOG FS&C Corporate Total - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal 1998: Revenues ............................... $95,054 $49,310 $31,396 $13,384 $ 1,710 $190,854 Operating income ....................... $ 9,454 $ 2,306 $ 1,134 $ 1,222 $ 143 $ 14,259 Identifiable assets .................... $35,706 $35,119 $42,401 $39,236 $11,011 $163,473 Depreciation and amortization .......... $ 923 $ 2,543 $ 2,037 $ 571 $ 985 $ 7,059 Capital expenditures ................... $ 1,091 $ 1,803 $ 2,461 $ 149 $ 1,066 $ 6,570 Fiscal 1997: Revenues ............................... $81,157 $33,852 $25,134 $ -- $ 3,435 $143,578 Operating income ....................... $ 6,348 $ 5,231 $ 1,295 $ -- $ (292) $ 12,582 Identifiable assets .................... $27,354 $34,212 $21,755 $ -- $14,352 $ 97,673 Depreciation and amortization .......... $ 1,310 $ 1,669 $ 1,286 $ -- $ 762 $ 5,027 Capital expenditures ................... $ 1,766 $ 2,473 $ 449 $ -- $ 540 $ 5,228 Fiscal 1996: Revenues ............................... $47,844 $31,427 $22,122 $ -- $ 61 $101,454 Operating income ....................... $ 3,181 $ 6,023 $ 781 $ -- $(1,438) $ 8,547 Identifiable assets .................... $26,198 $19,899 $25,456 $ -- $25,698 $ 97,251 Depreciation and amortization .......... $ 935 $ 931 $ 1,036 $ -- $ 268 $ 3,170 Capital expenditures ................... $ 1,394 $ 1,841 $ 2,982 $ -- $ 114 $ 6,331 - -----------------------------------------------------------------------------------------------------------------------------------
37 DRS Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------ Note 13: Quarterly Financial Information (Unaudited) The following table sets forth unaudited quarterly financial information for fiscal 1998 and 1997: First Quarter 1998 1997 - ------------------------------------------------------------------------ Revenues ............................. $38,997,000 $27,423,000 Operating income ..................... $ 2,899,000 $ 2,468,000 Income taxes ......................... $ 788,000 $ 716,000 Net earnings ......................... $ 1,343,000 $ 1,120,000 Net earnings per share of common stock Basic ........................ $ 0.24 $ 0.20 Diluted ...................... $ 0.20 $ 0.18 Second Quarter 1998 1997 - ------------------------------------------------------------------------ Revenues ............................. $38,738,000 $33,440,000 Operating income ..................... $ 3,285,000 $ 3,032,000 Income taxes ......................... $ 863,000 $ 893,000 Net earnings ......................... $ 1,467,000 $ 1,396,000 Net earnings per share of common stock Basic ........................ $ 0.26 $ 0.25 Diluted ...................... $ 0.21 $ 0.21 Third Quarter 1998 1997 - ------------------------------------------------------------------------ Revenues ............................. $49,915,000 $38,379,000 Operating income ..................... $ 3,715,000 $ 3,254,000 Income taxes ......................... $ 916,000 $ 898,000 Net earnings ......................... $ 1,560,000 $ 1,406,000 Net earnings per share of common stock Basic ........................ $ 0.28 $ 0.25 Diluted ...................... $ 0.22 $ 0.21 Fourth Quarter 1998 1997 - ------------------------------------------------------------------------ Revenues ............................. $63,204,000 $44,336,000 Operating income ..................... $ 4,360,000 $ 3,828,000 Income taxes ......................... $ 725,000 $ 1,114,000 Net earnings ......................... $ 2,002,000 $ 1,741,000 Net earnings per share of common stock Basic ........................ $ 0.35 $ 0.31 Diluted ...................... $ 0.29 $ 0.24 38 DRS Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------ COMMON STOCK
Fiscal 1998 Fiscal 1997 Fiscal 1996 As traded on the American Stock Exchange High Low High Low High Low - --------------------------------------------------------------------------------------------------------------------------------- First Quarter ..................................... 11 3/8 9 5/8 11 5/8 7 1/4 6 13/16 4 3/4 Second Quarter .................................... 15 1/8 10 1/4 11 5/8 8 3/8 7 7/8 5 3/4 Third Quarter ..................................... 14 13/16 11 7/8 12 1/2 9 1/4 8 6 3/4 Fourth Quarter .................................... 14 7/8 11 1/4 13 10 1/8 8 3/4 7 3/8
As of June 1, 1998, the Common Stock of the Company was held by 335 stockholders of record. DRS Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP To the Board of Directors and Stockholders, DRS Technologies, Inc.: We have audited the accompanying consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, 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, 1998. 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 DRS Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey May 11, 1998 40 EX-21 4 SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1988
EXHIBIT 21 DRS TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1998 SUBSIDIARY PLACE OF INCORPORATION ---------- ---------------------- DRS Electronic Systems, Inc. United States of America (Delaware) DRS Technical Services, Inc. United States of America (Delaware) DRS Systems Management Corporation United States of America (Delaware) DRS Laurel Technologies United States of America (Delaware) DRS Precision Echo, Inc. United States of America (Delaware) DRS Ahead Technology, Inc. United States of America (Delaware) DRS Photronics, Inc. United States of America (New York) DRS Optronics, Inc. United States of America (Delaware) DRS Technologies Canada, Inc. United States of America (Delaware) DRS Nova Scotia Canada (Nova Scotia) DRS Technologies Canada Company Canada (Nova Scotia) DRS Technologies (Europe) Ltd. United Kingdom DRS Technologies (UK) Ltd. United Kingdom DRS Hadland Ltd. United Kingdom DRS Hadland GmbH Federal Republic of Germany DRS Hadland, Inc. United States of America (Delaware) DRS Air, Inc. United States of America (Delaware) DRS/MS, Inc. United States of America (Delaware) DRS International, Inc. United States of America (Delaware) Diagnostic/Retrieval Systems (DRS) Technologies Parsippany B.V. Netherlands Magnetic Heads Co. Ltd. Republic of Bulgaria
EX-23.1 5 ACCOUNTANTS' CONSENT EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors DRS Technologies, Inc.: We consent to the incorporation by reference in the registration statements (No. 2-87303, No. 2-99986, and No. 333-14487) on Form S-8 and (No. 2-97784, No. 33-33125, No. 33-42886, No. 33-64641, and No. 333-04929) on Form S-3 of DRS Technologies, Inc. of our reports dated May 11, 1998, relating to the consolidated balance sheets of DRS Technologies, Inc. as of March 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended March 31, 1998, which reports appear or are incorporated by reference in the March 31, 1998 Annual Report on Form 10-K of DRS Technologies, Inc. KPMG Peat Marwick LLP Short Hills, New Jersey June 26, 1998 EX-27 6 FDS WITH RESTATED INFO
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DRS TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL PERIOD ENDED MARCH 31, 1998, AND RESTATED INFORMATION FOR THE FISCAL PERIODS ENDED MARCH 31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS 12-MOS YEAR MAR-31-1998 MAR-31-1997 MAR-31-1996 MAR-31-1998 MAR-31-1997 MAR-31-1996 9,673,000 9,455,000 22,785,000 0 0 0 47,759,000 24,343,000 22,942,000 (486,000) 0 0 38,637,000 25,169,000 19,449,000 97,432,000 60,356,000 66,640,000 55,429,000 48,286,000 41,935,000 32,457,000 28,299,000 25,744,000 163,473,000 97,673,000 97,251,000 55,306,000 27,518,000 32,650,000 56,532,000 30,801,000 32,608,000 0 0 0 0 0 0 66,000 60,000 59,000 44,269,000 32,927,000 26,507,000 163,473,000 97,673,000 97,251,000 190,854,000 143,578,000 101,454,000 190,854,000 143,578,000 101,454,000 176,595,000 130,996,000 92,907,000 176,595,000 130,996,000 92,907,000 0 0 0 0 0 0 5,098,000 3,592,000 2,681,000 9,664,000 9,284,000 6,727,000 3,292,000 3,621,000 2,624,000 0 0 0 0 0 0 0 0 0 0 0 0 6,372,000 5,663,000 4,103,000 1.13 1.03 0.75 0.93 0.84 0.69
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