-----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, RobwJLHCIk5eaK2DKVAAOCWRFdDiPDhu9uRx25ANFsz8/uxkKEV68+AVP5vXaxlG pooN1pZu/gBEzbm+LfYLKg== /in/edgar/work/20000630/0000950110-00-000698/0000950110-00-000698.txt : 20000920 0000950110-00-000698.hdr.sgml : 20000920 ACCESSION NUMBER: 0000950110-00-000698 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: [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: 665400 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9738981500 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 0001.txt 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, 2000 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 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 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. [ ] 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 19, 2000, was approximately $101,300,000. The number of shares of common stock outstanding as of June 19, 2000 was 9,277,031 (exclusive of 440,939 shares of common stock held in the treasury.) DOCUMENTS INCORPORATED BY REFERENCE 1. 2000 Annual Report (for the fiscal year ended March 31, 2000), incorporated in Part II. 2. Definitive Proxy Statement, dated June 28, 2000, for the Annual Meeting of Stockholders, incorporated in Part III. ================================================================================ PART I 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 risks and uncertainties are inherent to forward-looking statements. Accordingly, the Company's actual results could differ materially from those suggested by such forward-looking statements. Risks 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. ITEM 1. BUSINESS GENERAL DRS Technologies, Inc. ("DRS", the "Company", "we", "us", "our") is a leading supplier of defense electronic systems. We provide advanced technology products and services to government and commercial customers worldwide. Our company develops and manufactures a broad range of mission critical products--from rugged computers and peripherals to systems and components in the areas of communications, combat systems, data storage, digital imaging, electro-optics, flight safety and space. Our defense electronics systems and subsystems are sold to all branches of the U.S. military, selected U.S. Government intelligence agencies, major aerospace/defense prime contractors, international military forces and a wide range of commercial customers. We also offer a full complement of technical support and advanced manufacturing services. Incorporated in 1968, DRS has served the defense industry for over thirty years. We have increased our annual revenues at a compound annual growth rate of approximately 42% over the last five years, and are currently a leading provider of infrared night vision devices, combat display workstations, electronic sensor systems, mission recorders and deployable flight incident recorders. Our operating results directly reflect our strategies of maintaining our reputation for technical excellence, focusing on the development of long-term contracts and acquiring businesses that complement or extend our product lines. COMPANY ORGANIZATION We design and manufacture electronic systems for several of the U.S. military's well-funded programs and high-profile platforms. We operate in three principal business segments on the basis of products and services offered. Each operating unit is comprised of separate and distinct businesses: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG) and the Flight Safety and Communications Group (FSCG). All other operations are grouped in "Other." Financial information on our reportable business segments is presented in Note 13 to our Consolidated Financial Statements, which are incorporated by reference in this Form 10-K (see Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K). Additional financial data and commentary on the results of operations for the reportable segments are included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which is also incorporated by reference in this Form 10-K (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations). These data and comments should be referred to in conjunction with the summary description of our business segments which follows: ELECTRONIC SYSTEMS GROUP ESG is a leading provider of naval computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustic signal processing and display equipment, and combat control systems for U.S. and international military organizations. ESG performs field service and depot level repairs for its products, as well as other manufacturers' systems, and also provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in the U.S. Army's ongoing battlefield digitization programs. ESG markets directly to various U.S. Government agencies, primarily in the intelligence community, and has teamed with leading corporations, such as General Dynamics and Booz-Allen. ESG's major products and services include: o AN/UYQ-70: AN/UYQ-70 Advanced Display Systems are advanced, open-architecture display systems designed for widespread application through software and hardware modification for deployment on Aegis and other surface ships, submarines and airborne platforms. These systems are self-contained, microprocessor-based units complete with interface software and offer advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a shipboard computer at approximately 25% of the cost of the legacy systems. These systems were developed for the U.S. Navy under a subcontract with Lockheed Martin Tactical Defense Systems. Based upon the size of the Naval surface, subsurface and air fleets and the average number of workstations to be deployed on each, we believe 2 that the potential market for these workstations may exceed 5,000 units over the next decade. Revenues from the AN/UYQ-70 program accounted for approximately 21% of total consolidated revenues for the year ended March 31, 2000. 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 commercial off-the-shelf (COTS) components suitable for land-based 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. o AN/SPS-67: AN/SPS-67 Radar Systems are being deployed on the U.S. Navy's new DDG-51 Aegis class ships, Spanish Navy's F-100 class ships and other international naval forces. They 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 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. o AN/SQR-17A(V)3: The AN/SQR-17A(V)3 Mobile In-shore Undersea Warfare (MIUW) system is a multi-sensor processing system that is deployed in land-based vans, utilizing sonobuoys and sensor string array passive detectors for harbor defense, coastal defense and amphibious operations surveillance, as well as for the enhancement of drug interdiction efforts. These systems currently are being procured for use in 22 field installations. We are under contract to provide the system's underwater sensor string arrays and other upgrades to these field installations. o The Explorer (often referred to as the CCU, Compact Computer Unit): The Explorer provides the full capabilities for the Common Hardware/Software (CHS)-2 program in a portable, self-contained unit with its own power source and an integrated flat panel display. The unit uses exchangeable media (hard disks and tape units) and provides compatibility of information and system security. The unit shares its design with the Explorer 2 and is being complemented with an upgraded version with a larger display and greater capabilities. o The Genesis 300 rugged multi-platform computer: The Genesis 300, a variant of the Genesis SR (short rack), features an integrated 12-inch screen and keyboard. Since its launch in 1997, the Genesis SR, which supports applications such as mission planning, tactical communications, combat support and logistics support, has been sold into military programs in Europe and Southeast Asia. o Custom-packaged integrated computer systems for deployment in land vehicles, ships, shelters and other demanding environments, including unique physical packaging requirements such as compact size, low weight, specialized air flow and rack mounting. 3 o The design and integration of special-purpose systems configured specifically for a variety of target applications, including: communications processing; data acquisition, storage and forwarding; digital signal processing; and client/server systems and embedded processing. In addition, ESG provides specially packaged monitors, keyboards, printers and peripheral subsystems that are used in conjunction with its computer systems. o Electronic Manufacturing and Systems Integration Services: ESG is an experienced provider of manufacturing, test and product support services and performs contract manufacturing services for various aerospace and military applications. ELECTRO-OPTICAL SYSTEMS GROUP EOSG produces systems and subsystems for infrared night vision and targeting products used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the HMMWV scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures regardless of the ambient light level. This Group is also a designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its technology base by expanding into related non-defense markets and manufactures electro-optical modules for a commercial device used in corrective laser eye surgery. EOSG's major products and contracts include: o Horizontal Technology Integration Second Generation Forward Looking Infrared (FLIR), thermal imaging systems (HTI SGF Thermal Imaging Systems) installed on the U.S. Army's Abrams, Bradleys and HMMWV Scouts. Revenues from the HTI SGF Thermal Imaging Systems program accounted for approximately 14% of total consolidated revenues for the year ended March 31, 2000. o Improved Bradley Acquisition System (IBAS), which provides the thermal imaging and fire control system installed on Bradleys. o Long Range Advanced Scout Surveillance System (LRAS3), the thermal imaging sighting systems on the HMMWV scouts. o Day/Night Vision Binoculars: EOSG is currently under contract to develop and manufacture these units for the Israeli military. The Nightstar(TM) 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. Nightstar(TM) 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 secondary sighting system on Abrams M1 Main Battle Tanks and contains a very sophisticated electro-optical device and a laser protective filter. EOSG has produced more than 2,000 of these instruments and continues to operate as a repair and retrofit facility for the M1A2 upgrade program. Options for additional units under this program may be exercised through fiscal 2001. o Tube-launched Optically-tracked Wire-guided (TOW) Optical Sight: EOSG is currently the only U.S. qualified producer of two of the three critical assemblies in the TOW missile launcher. This complex electro-optical system is the main component of this premier ground antitank weapons system. o Infrared scanning Focal Plane Arrays (FPAs), staring FPAs and linear coolers: FPAs, staring FPAs and linear coolers are designed to maintain optimal operating temperatures for infrared scanning for military electro-optical systems applications. An FPA is a two-dimensional assembly of electro-optical detecting pixels used to generate night vision capability. FPAs are also used in heat-seeking missile guidance systems and missile warning systems, applications for which no pictorial image is required. o JASSM: EOSG provides the infrared detector module for the Joint Air to Surface Missile being developed by Lockheed Martin for the U.S. Air Force and Navy. The infrared detector module guides the JASSM Cruise Missile into the pre-flight designated target during the final moments of the flight. The JASSM program is in the engineering manufacturing development phase, with production beginning in 2001. o Standard Advanced Dewar Assembly II Detector (SADA): SADA is the specified detector dewar cooler module procured by the U.S. Army for its horizontal Technology Integration (HTI) program for use in the Second Generation night vision equipment upgrades on the MIA2 Abrams Tank and the Bradley Fighting Vehicle. The HTI upgrade greatly increases the range performance of these systems for our soldiers. o Multiple Platform Boresighting Equipment (MPBE): MPBE currently is used on the U.S. Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship radar as well as aircraft of international military forces. Boresighting equipment is used to align and harmonize the navigation, targeting and weapons systems on rotary- and fixed-wing aircraft. This technology is proprietary to the Company. 4 FLIGHT SAFETY AND COMMUNICATIONS GROUP FSCG is a leading manufacturer of deployable flight emergency or "black box" recording equipment. These complete emergency avionics systems combine the functionality of a crash locator beacon with a flight incident recorder for search, recovery and crash analysis. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for harsh aerospace and defense environments. FSCG also manufactures shipboard communications and infrared laser warning and range finder displays for Canadian and other foreign navies. FSCG is also a leading manufacturer of ultra high-speed digital imaging systems. FSCG's major products and services include: o Emergency Avionics System 3000 (EAS3000): The EAS3000 is an integrated in-flight data recorder, cockpit voice recorder and emergency locator beacon system constructed in a modular, deployable and crash-survivable package, designed to withstand intensive destructive forces. Mounted on the outside of a helicopter, the EAS3000 provides the immediate location of an accident site, allowing early rescue of survivors and recovery of vital flight and cockpit voice data. FSCG provides the EAS3000 for use on UK EH-101 helicopters and its variants, as well as on the Italian MMI, Canadian Cormorant, Tokyo Metropolitan Police and other military and search and rescue helicopters. FSCG also developed a version of the EAS3000, known as EAS3000F, for use on fixed-wing aircraft. o Deployable Flight Incident Recorders: Designed to withstand the intense destructive forces associated with an aircraft crash, deployable flight incident recorders are mounted beneath the airframe skin. Deployment commands provided by the switch activation trigger release the unit and activate the recorder. These systems also contain crash locator beacons. They 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 the rapid location of downed aircraft and timely rescue of survivors. o Integrated Shipboard Communications Systems: Using the latest available technology and COTS-based designs, FSCG 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. FSCG's SHINCOM systems are capable of handling shipboard interior communications; communications with other aircraft, surface and undersea vessels; and UHF/VHF and broadband communications via satellite with shore stations and cooperating units. These systems are used aboard the Canadian Iroquois class ships and the U.S.S. George Washington aircraft carrier. FSCG also provides data link components and systems, modems, digital telephone and radar surveillance systems. o Electronic Manufacturing and Systems Integration Services: FSCG is an experienced provider of manufacturing, test and product support services and performs contract manufacturing services for various aerospace, military and space applications. FSCG's manufacturing expertise and capabilities include: o surface mount and through-hole multi-layer computer circuit assemblies (CCAs); o harness fabrication; o power supply assembly and testing; o motherboard assembly and testing; and o systems integration services. o WRR-818: This ruggedized airborne video recorder captures various sensor and video data on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10A aircraft. The U.S. Army also has selected it for use in its Kiowa Warrior attack helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's Light Armored Reconnaissance Vehicles. 5 o DCMR-24 and 100: These are digital cassette mission recorders that use high-capacity digital tape formats (DTF)under license by Sony Corporation. Incorporating DTF technology, FSCG produces the Acoustic Data Recorder for U.S. Navy P-3C patrol aircraft. 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. OTHER Other includes the activities of the parent company, DRS Corporate Headquarters, DRS Ahead Technology, Inc. (DRS Ahead) and certain non-operating subsidiaries of the Company. DRS Ahead produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead also services and manufactures video heads used in broadcast television equipment. STRATEGY Our goal is to secure our emerging position as a mid-tier defense technology supplier by maintaining our reputation for technical excellence, focusing on the development of profitable long-term contracts and acquiring businesses that complement or extend our product lines. o Leverage Existing Contracts to Win New Business. Our experience has shown that high levels of performance on existing contracts provide contractors with valuable exposure to decision makers within the government procurement staff and greatly enhance the prospects of obtaining new or follow-on contracts. We intend to continue to leverage our high level of performance on our extensive range of existing contracts across entire program life cycles to help us obtain new and follow-on contracts. o Obtain New Development Contracts. Customer-funded development contracts offer us the opportunity to work with our military customers to design and manufacture new systems and components that provide highly customized solutions to our customers' procurement needs, while minimizing our financial risk. An important element of our success will continue to be our ability to win new development contracts to maintain our backlog of funded programs. o Pursue Selective Acquisitions. Historically, we have pursued acquisitions of complementary businesses with leading positions in product or market areas that are synergistic with our existing business. We believe that such acquisitions offer the opportunity to acquire new technologies and customers, thereby leveraging our core strengths. The acquisition of existing contracts provides us with both current income and the opportunity for future contract awards based upon our performance. o Build Strategic Alliances in the U.S. and Abroad. We pursue alliances with companies whose core competencies are synergistic with ours, from a product, as well as technological, point of view. In this way we can expand our produt offerings and market penetration in the U.S. and abroad. Our profitability in the defense electronics industry is due in part to our focus on managing our financial risk with respect to the development and fabrication of new products. Many of our research and development projects are performed with funding obtained from the military customer under development contracts. In fact, in fiscal year 2000, we received approximately $23.5 million in research and development funding from our customers. In addition, when a system enters into full production, the terms of many of our production contracts provide for progress payments or milestone payments. This allows us to fund a portion of our working capital requirements from external sources and reduce our financial risk. 6 DISCONTINUED OPERATIONS The Company entered into an agreement dated as of May 10, 2000 to sell our magnetic tape head business units located in St. Croix Falls, Wisconsin, and Razlog, Bulgaria. The St. Croix Falls and Bulgarian operations produce primarily magnetic tape recording heads for transaction products that read data from magnetic cards, tapes and ink. We anticipate that the sale will be completed in the second quarter of fiscal 2001. The pending sale of the magnetic tape business represents a strategic decision by us to focus our resources on our core businesses. We have restated our financial statements to present the operating results of these business units as a discontinued operation. RECENT ACQUISITIONS On July 21, 1999, we acquired Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., located in Chippenham, Wiltshire, the United Kingdom, for approximately $7.8 million in cash and potential future consideration. This acquisition enabled us to expand our presence in the rugged computer and peripheral product market and add backlog in complementary product areas. On June 14, 2000, we acquired the assets of General Atronics Corporation for approximately $11.0 million in cash and stock. Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC, the company designs, develops and manufactures military data link components and systems, high-frequency communication modems, tactical and secure digital telephone components, and radar surveillance systems for U.S. and international militaries. CUSTOMERS We sell a significant portion of our products to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or their subcontractors. Approximately 80%, 81% and 78% of total consolidated revenues for fiscal 2000, 1999 and 1998, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies. See "Foreign Operations and Export Sales" below for information concerning sales to foreign governments. BACKLOG The following table sets forth our backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated. "Backlog" refers to the aggregate revenues remaining to be earned at a specified date under contracts held by us, 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. 7
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 --------------- --------------- --------------- Government Products: U.S. Government.......................... $ 303,600,000 $ 293,400,000 $ 141,500,000 Foreign Government....................... 56,200,000 48,400,000 24,900,000 --------------- --------------- --------------- 359,800,000 341,800,000 166,400,000 Commercial Products....................... 28,300,000 20,900,000 8,500,000 --------------- --------------- --------------- $ 388,100,000 $ 362,700,000 $ 174,900,000 ============== ============== ==============
At March 31, 2000, our backlog of orders was approximately $388.1 million compared with $362.7 million at March 31, 1999. The increase in backlog was due primarily to increased bookings, most notably for display workstations and infrared sighting and targeting systems, offset, in part, by the effect of increased revenues. New contract awards of approximately $406.0 million were booked during the fiscal year ended March 31, 2000. Approximately 71% of backlog as of March 31, 2000 is expected to result in revenues during fiscal 2001. RESEARCH AND DEVELOPMENT The defense electronics sector is subject to rapid technological changes, and our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, our technological expertise is an important factor affecting our growth. A portion of our research and development activities take place in connection with customer-sponsored research and development contracts. We recorded revenues for customer-sponsored research and development of approximately $23.5 million, $15.4 million, and $11.8 million for fiscal 2000, 1999 and 1998, respectively. Such customer-sponsored activities are primarily the result of contracts directly or indirectly with the U.S. Government. We also invest in internal research and development (IR&D). Such expenditures were approximately $9.9 million, $5.2 million, and $4.0 million for fiscal 2000, 1999 and 1998, respectively. CONTRACTS Our 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, historically, development contracts 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, we agree to perform for an agreed-upon price. Accordingly, we derive benefits from cost savings, but bear the 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 us. If actual costs under such a contract exceed estimated costs, however, excess costs are apportioned between the customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if any. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which we are committed to deliver without regard to performance cost, cost-type contracts normally obligate us to use our best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of our 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 we are 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 formulae are agreed upon when the contract is negotiated. In the case of performance-based incentives, we are 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, we are reimbursed for costs and receive a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. 8 The percentages of revenues during fiscal 2000, 1999 and 1998 attributable to our contracts by contract type were as follows: FISCAL YEARS ENDED MARCH 31, ---------------------------- 2000 1999 1998 ---- ---- ---- Firm fixed-price.................... 88% 84% 87% Cost-plus-incentive fee............. 1% 1% 3% Cost-plus-fixed fee................. 11% 15% 10% The consistent percentage and continued predominance of firm fixed-price contracts are reflective of the fact that production contracts comprise a significant portion of our U.S. Government contract portfolio. We negotiate for and generally receive progress payments from our customers of between 75-90% of allowable costs incurred on the previously described contracts. Included in our reported revenues are certain amounts which we have not billed to customers. These amounts, approximately $13.9 million, $14.8 million and $7.6 million as of March 31, 2000, 1999 and 1998, 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, are 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 $12.7 million and $13.6 million at March 31, 2000 and 1999, respectively. Our defense contracts and subcontracts 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 Our products are sold in markets containing competitors which are substantially larger than we are, devote substantially greater resources to research and development and generally have greater financial resources. Certain competitors are also our customers and suppliers. 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. We believe that we compete on the basis of the performance of our products, our reputation for prompt and responsive contract performance, and our accumulated technical knowledge and expertise. Our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, we compete with 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, the number of consolidations and mergers of defense suppliers has increased. We expect this consolidation trend 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. We believe that we have benefited from this trend, as evidenced by the formation of strategic alliances with several large suppliers. PATENTS AND LICENSES We have patents on certain of our commercial and data recording products, semi-conductor devices, rugged computer related items, and electro-optical and focal plane array products. DRS and its subsidiaries have certain 9 registered trademarks, none of which are considered significant to current operations. We believe our patent position and intellectual property portfolio, in the aggregate, is valuable to our operations. We do not believe that the conduct of our business as a whole is materially dependent on any single patent, trademark or copyright. MANUFACTURING AND SUPPLIERS Our manufacturing processes for our products, excluding certain electro-optical products, includes the assembly of purchased components and testing of products 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 our products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components are fabricated to our designs and specifications. The manufacturing process for certain of our optics products includes the grinding, polishing and coating of various optical materials and the machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are our 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. We have not experienced significant production delays attributable to supply shortages, but occasionally experience quality and other related problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to our optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. FOREIGN OPERATIONS AND EXPORT SALES We currently sell several of our products and services in the international marketplace to Canada, Israel, the Republic of China, Spain, Australia, and other countries in Europe and Southeast Asia. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. Our foreign contracts generally are payable in United States dollars. Export sales accounted for 10% or less of total revenues in the fiscal years ended March 31, 2000 and 1999. We operate outside the United States through FSCG in Canada and the United Kingdom, and through ESG primarily in the United Kingdom. The information required by this item with respect to revenues and long-lived assets by geographic area is incorporated by reference herein to pages 49-50 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). The addition of international businesses involves additional risks for us, 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. 10 EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS The names of our executive officers, their positions and offices with us, and their ages are set forth below:
NAME AGE POSITION - ---- --- -------- Mark S. Newman...................... 50 Chairman of the Board, President and Chief Executive Officer Paul G. Casner, Jr.................. 62 Executive Vice President, Chief Operating Officer Nina Laserson Dunn.................. 53 Executive Vice President, General Counsel and Secretary Richard A. Schneider................ 47 Executive Vice President, Chief Financial Officer and Treasurer
MARK S. NEWMAN has been employed by us since 1973. He was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of DRS in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of DRS and in August 1995 became Chairman of the Board. PAUL G. CASNER, JR. joined DRS in 1993 as President of Technology Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he became President of the DRS Electronic Systems Group and a Vice President of DRS. In 1998, he became Executive Vice President, Operations, and in May 2000 he became our Executive Vice President, Chief Operating Officer. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. NINA LASERSON DUNN joined us 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, where she served as our 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. RICHARD A. SCHNEIDER joined us in 1999 as Executive Vice President, Chief Financial Officer and Treasurer of DRS. He held similar positions at NAI Technologies, Inc. (NAI) and was a member of its Board of Directors prior to its acquisition by DRS in February 1999. Mr. Schneider has over 20 years of experience in corporate financial management, including ten years with NAI. EMPLOYEES At March 31, 2000, we had approximately 2,000 employees (excluding employees at our discontinued operations), 1,529 of whom were located in the United States. None of our employees are represented by labor unions, and we have experienced no work stoppages. There is a continuing demand for qualified technical personnel, and we believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. 11 ITEM 2. PROPERTIES We lease the following properties (excluding two leased properties of our magnetic tape head businesses - see Discontinued Operations above):
APPROXIMATE SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE LEASE EXPIRATION ---------------------------- ----------------------------------------------- ---------------------------------- CORPORATE Parsippany, New Jersey Corporate 18,900 Fiscal 2003 Headquarters ESG Gaithersburg, Maryland Administrative, 42,500 Fiscal 2006 Engineering and Manufacturing ESG Johnstown, Pennsylvania Administrative 130,000 Fiscal 2011 and Manufacturing ESG San Diego, California Engineering 5,000 Fiscal 2001 Support Services ESG Chesapeake, Virginia Field Service 22,000 Fiscal 2005 and Engineering Support ESG Columbia, Maryland Administrative, 25,000 Fiscal 2002 Engineering and Manufacturing ESG Farnham, Surrey, Administrative, 26,000 Fiscal 2015 United Kingdom Engineering and Manufacturing ESG Chippenham, Wiltshire, Administrative, 35,500 Fiscal 2002 United Kingdom Engineering and Manufacturing EOSG Oakland, New Jersey Administrative, 36,000 Fiscal 2003 Engineering and Manufacturing EOSG Palm Bay, Florida Administrative, 85,200 Fiscal 2006 Engineering and Manufacturing EOSG Melbourne, Florida Administrative, 93,500 Fiscal 2011 Engineering and Manufacturing
12
APPROXIMATE SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE LEASE EXPIRATION - ---------------------------- -------------------------- -------------------- ---------------- ----------------- EOSG Dallas, Texas Administrative, 109,600 Fiscal 2003 Engineering and Manufacturing EOSG Torrance, California Administrative, 35,000 Fiscal 2009 Engineering and Manufacturing Fiscal 2004 FSCG Nepean, Ontario, Administrative and 8,000 Canada Engineering FSCG Santa Clara, California Administrative, 32,700 Fiscal 2006 Engineering and Manufacturing OTHER San Jose, California Administrative, 32,000 Fiscal 2001 Product Development and Manufacturing
We own the following properties (excluding an owned facility in Razlog, Bulgaria, which will be sold as part of our pending sale of our magnetic tape head businesses - See Discontinued Operations in Item 1):
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE - ---------------------------- -------------------------- -------------------- ------------------- FSCG Carleton Place, Ontario, Administrative and 128,500 Canada Manufacturing FSCG Tring, Hertfordshire, Administrative, 7,500 United Kingdom Engineering and Manufacturing
We believe that all our facilities are in good condition, adequate for our intended use and sufficient for our immediate needs. It is not certain whether we will negotiate new leases as existing leases expire. Such determinations will be made as existing leases approach expiration and will be based on an assessment of our requirements at that time. Further, we believe that we can obtain additional space, if necessary, based on prior experience and current real estate market conditions. Substantially all of our assets, including those properties identified above, are pledged as collateral on our borrowings (see Note 9 of Notes to Consolidated Financial Statements). ENVIRONMENTAL PROTECTION We believe that our 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 our earnings or competitive position. 13 ITEM 3. LEGAL PROCEEDINGS We are a party to various legal actions and claims arising in the ordinary course of our business. In our opinion, we have adequate legal defenses for each of the actions and claims, and we believe that their ultimate disposition will not have a material adverse effect on our consolidated financial position or results of operations. 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 a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or Photronics. During the Government's investigation, until October 29, 1999, Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, Photronics received authorization to ship its first boresight system since the start of investigation. At this time, however, the Company is unable to quantify the effect of the delayed shipments on its future operations or financial position, or to predict when regular shipments ultimately will resume, although the delays are expected to continue to impact the Company's fiscal year 2001 results. We are presently involved in a dispute in arbitration with Spar Aerospace Limited (Spar) with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar (see Note 4 of Notes to Consolidated Financial Statements). We are also involved in a dispute with Raytheon Company with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Raytheon dated as of July 28, 1998, pursuant to which we acquired, through certain subsidiaries, certain assets of Raytheon (see Note 4 of Notes to Consolidated Financial Statements). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We have not paid any cash dividends since 1976. We intend to retain future earnings for use in our business and do not expect to declare cash dividends on our Common Stock in the foreseeable future. The indenture relating to the our 9% Senior Subordinated Convertible Debentures and our bank borrowings restrict our ability to pay dividends or make other distributions on our Common Stock. See Note 9 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 our Board of Directors. The timing, amount and form of any future dividends will depend, among other things, on our results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by our Board of Directors. The common stock of DRS is traded on the American Stock Exchange under the symbol "DRS." The information required by this item with respect to the market prices for and number of holders of our common equity securities is incorporated herein by reference to page 51 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference herein to page 20 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). 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 21 through 30 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference herein to page 30 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference herein to pages 31 through 51 of the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 15 PART III The information required by Items 10. through 13. of this Part is incorporated herein by reference to our Definitive Proxy Statement, dated June 28, 2000, for the 2000 Annual Meeting of Stockholders. Reference also is made to the information under "Executive Officers of the Registrant" in Part I of this report. 16 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 and its subsidiaries have been incorporated by reference to the DRS 2000 Annual Report (for the fiscal year ended March 31, 2000), pursuant to Item 8 of this report:
2000 ANNUAL REPORT PAGE(S) ------------------ ------- Independent Auditors' Report 51 Consolidated Balance Sheets--March 31, 2000 and 1999 31 Consolidated Statements of Earnings--Years Ended March 31, 2000, 1999 and 1998 32 Consolidated Statements of Stockholders' Equity and Comprehensive Earnings--Years Ended March 31, 2000, 1999 and 1998 33 Consolidated Statements of Cash Flows--Years Ended March 31, 2000, 1999 and 1998 34 Notes to Consolidated Financial Statements 35-50
2. Financial Statement Schedules - See Appendix A hereto. 3. Exhibits filed as part of this report are listed in the Exhibit Index at the end of this report. (b) Reports on Form 8-K None. 17 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 28, 2000 /s/ MARK S. NEWMAN -------------------------------------- Mark S. Newman, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARK S. NEWMAN Chairman of the Board, President, June 28, 2000 - -------------------------------------- Chief Executive Officer and Director Mark S. Newman /s/ RICHARD A. SCHNEIDER Executive Vice President, Chief June 28, 2000 - -------------------------------------- Financial Officer and Treasurer Richard A. Schneider /s/ IRA ALBOM Director June 28, 2000 - -------------------------------------- Ira Albom /s/ DONALD C. FRASER Director June 28, 2000 - -------------------------------------- Donald C. Fraser /s/ WILLIAM F. HEITMANN Director June 28, 2000 - -------------------------------------- William F. Heitmann /s/ STEVEN S. HONIGMAN Director June 28, 2000 - -------------------------------------- Steven S. Honigman /s/ C. SHELTON JAMES Director June 28, 2000 - -------------------------------------- C. Shelton James /s/ MARK N. KAPLAN Director June 28, 2000 - -------------------------------------- Mark N. Kaplan /s/ STUART F. PLATT Director June 28, 2000 - -------------------------------------- Stuart F. Platt /s/ ERIC J. ROSEN Director June 28, 2000 - -------------------------------------- Eric J. Rosen
18 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. INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders, DRS Technologies, Inc.: Under date of May 18, 2000, we reported on the consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended March 31, 2000, as contained in the 2000 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 2000. 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. /s/ KPMG LLP Short Hills, New Jersey May 18, 2000 19 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 2000, 1999 AND 1998
COL. A COL. B COL. C COL. D COL. E ADDITIONS DEDUCTIONS --------------------------- --------------------------- (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, 2000 $3,166,000 $4,885,000 $ 151,000(a) $2,752,000 $ 110,000(b) $ 5,340,000 Year ended March 31, 1999 $1,545,000 $3,424,000 $ 266,000(a) $1,461,000 $ 608,000(b) $ 3,166,000 Year ended March 31, 1998 $ 541,000 $ 514,000 $1,022,000(a) $ 532,000 $ -- $ 1,545,000 LOSSES & FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS Year ended March 31, 2000 $8,119,000 $3,491,000 $ 121,000(a) $4,269,000 $2,489,000(c) $4,973,000 Year ended March 31, 1999 $4,120,000 $2,717,000 $5,784,000(a) $1,197,000 $3,305,000(c) $8,119,000 Year ended March 31, 1998 $2,204,000 $4,834,000 $ 166,000(a) $2,346,000 $ 738,000(c) $4,120,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended March 31, 2000 $1,182,000 $ 389,000 $ 7,000(a) $ 149,000 $ 19,000(b) $1,410,000 Year ended March 31, 1999 $ 486,000 $ 492,000 $ 258,000(a) $ 48,000 $ 6,000(b) $1,182,000 Year ended March 31, 1998 $ 136,000 $ 313,000 $ 71,000(a) $ 34,000 $ -- $ 486,000
- ---------------------- (a) Represents amounts reclassified from related reserve accounts and foreign currency translation adjustments. (b) Represents amounts utilized and credited to related asset accounts. (c) Represents amounts reclassified to related reserve accounts. 20 EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*) are filed herewith. Certain of the following exhibits, designated with a "P", are being filed on paper, pursuant to a hardship exemption under Rule 202 of Regulation S-T. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits. EXHIBIT NO. DESCRIPTION - ----------- ----------- 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] 10.1 -- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.2 -- 1996 Omnibus Plan of the Company [Registration Statement No. 333-14487, Exhibit 99.1] 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)] 21 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.6 -- 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] 10.7 -- Stock Purchase Agreement, dated as of July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 2] 10.8 -- 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] 10.9 -- 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] 10.10 -- 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] 10.11 -- 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] 10.12 -- 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] 10.13 -- 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] 10.14 -- 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] 10.15 -- 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] 10.16 -- 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] 10.17 -- 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] 10.18 -- Asset Purchase Agreement, dated July 28, 1998, by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 1] 10.19 -- Letter Amendment by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., dated October 20, 1998, amending the Asset Purchase Agreement. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 2] 10.20 -- Amended and Restated Revolving Credit Loan and Term Loan Agreement, dated October 20, 1998, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS EO, Inc., DRS FPA, L.P. and Mellon Bank, N.A. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 3] 22 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.21 -- Agreement and Plan of Merger dated August 26, 1998, as amended, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1, Exhibit 2.1]). 10.22 -- Amendment to Agreement and Plan of Merger, dated February 17, 1999, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Form 8-K, March 5, 1999, File No. 1-8533, Exhibit 2] 10.23 -- 1991 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.4] 10.24 -- 1993 Stock Option Plan for Directors of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.5] 10.25 -- 1996 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.6] 10.26 Employment Agreement, dated as of November 20, 1996, by and between the Company and Mark S. Newman [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.47] 10.27 Employment Agreement, dated as of April 30, 1997, by and between the Company and Nina Laserson Dunn [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.48] 10.28 Employment Agreement, dated as of February 19, 1999, by and between the Company and Richard A. Schneider [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.49] 10.29[P] 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, 1995, File No. 1-8533, Exhibit 10.37] 10.30[P] Purchase Order No. 10606321 1, dated October 28, 1998, between the Company and Raytheon TI Systems, Inc. 10.31[P] Contract DAAH01-97-C-0390, dated September 24, 1997, between Hughes Georgia, Inc. and the U.S. Army 10.32[P] Modification P00001, dated January 16, 1998, to Contract DAAH01-97-C-0390 10.33[P] Modification P00008, dated October 30, 1998, to Contract DAAH01-97-C-0390 10.34[P] Contract DAAB07-97-C-J430, dated April 1, 1997, between Hughes Aircraft Co. and the U.S. Army 10.35[P] Modification P00037, dated March 31, 1999, to Contract DAAB07-97-C-J430 *10.36 First Amendment and Modification Agreement, dated August 15, 1999, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS Sensor Systems, Inc., formerly known as "DRS EO, Inc.", and DRS Infrared Technologies, LP, formerly known as "DRS FPA, L.P." and Mellon Bank, N.A. as the Agent and Lender *10.37 Second Amendment and Modification Agreement, dated February 4, 2000, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS Sensor Systems, Inc., formerly known as "DRS EO, Inc.", and DRS Infrared Technologies, LP, formerly known as "DRS FPA, L.P." and Mellon Bank, N.A. as the Agent and Lender *13 -- Portions of the 2000 Annual Report to Stockholders of the Company *21 -- List of subsidiaries of the Company as of March 31, 2000 *23.1 -- Consent of KPMG LLP *27 -- Financial Data Schedule 23 EX-10.36 2 0002.txt FIRST AMENDMENT AND MODIFICATION AGREEMENT FIRST AMENDMENT AND MODIFICATION AGREEMENT by and among DRS TECHNOLOGIES, INC., DRS TECHNOLOGIES CANADA COMPANY, DRS TECHNOLOGIES CANADA, INC., DRS SENSOR SYSTEMS, INC., FORMERLY KNOWN AS "DRS EO, INC.", AND DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", collectively as the Co-Borrowers AND LAUREL TECHNOLOGIES PARTNERSHIP D/B/A DRS LAUREL TECHNOLOGIES. DRS ELECTRONIC SYSTEMS, INC., DRS PHOTRONICS, INC., DRS PRECISION ECHO, INC., DRS AHEAD TECHNOLOGY, INC., DRS OPTRONICS, INC., DRS SYSTEMS MANAGEMENT CORPORATION, DRS/MS, INC., DRS TECHNICAL SERVICES, INC., DRS INTERNATIONAL, INC., DRS AIR, INC., DRS HADLAND, INC., NAI TECHNOLOGIES, INC., AS SUCCESSOR-IN-INTEREST TO DRS MERGER SUB, INC., DRS FPA, INC., DRS RUGGED SYSTEMS, INC. AND DRS ADVANCED PROGRAMS, INC., collectively as the Guarantors AND MELLON BANK, N.A., as the Agent and as a Lender AND MELLON BANK CANADA, THE CIT GROUP / EQUIPMENT FINANCING, INC., NATIONAL BANK OF CANADA, SUMMIT BANK, UNION BANK OF CALIFORNIA, N.A., TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, THE TORONTO-DOMINION BANK AND TORONTO DOMINION (NEW YORK), INC., each as a Lender Dated: August 15, 1999 FIRST AMENDMENT AND MODIFICATION AGREEMENT THIS FIRST AMENDMENT AND MODIFICATION AGREEMENT (hereinafter referred to as this "First Amendment"), is made this 15 day of August, 1999, by and among DRS TECHNOLOGIES, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS"), AND DRS TECHNOLOGIES CANADA, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Canada Inc."), AND DRS TECHNOLOGIES CANADA COMPANY, A Nova Scotia company, having its principal office and chief executive office located at 365 March Road, Kanata, Ontario K2K 1 X3 (hereinafter referred to as "DRS Flight Safety"), AND DRS SENSOR SYSTEMS, INC., FORMERLY KNOWN AS "DRS EO, INC.", A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2000 East El Segundo Blvd., El Segundo, California 90245 (hereinafter referred to as "DRS Sensor Systems"), AND DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", A limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 13588 North Central Expressway, Dallas, Texas 75243 (hereinafter referred to as "DRS Infrared" and hereinafter DRS, DRS Canada Inc., DRS Flight Safety, DRS Sensor Systems and DRS Infrared shall be collectively referred to as the "Co-Borrowers" and sometimes individually referred to as a "Co-Borrower"), AND LAUREL TECHNOLOGIES PARTNERSHIP D/B/A DRS LAUREL TECHNOLOGIES, A general partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 423 Walters Avenue, Johnstown, Pennsylvania 15904 (hereinafter sometimes referred to as "Laurel Technologies" and sometimes referred to as the "Partnership Guarantor"), -1- AND DRS ELECTRONIC SYSTEMS, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 200 Professional Drive, Gaithersburg, Maryland 20879 (hereinafter referred to as "DRS Electronic Systems"), AND DRS PHOTRONICS, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 138 Bauer Drive, Oakland, New Jersey 07436 (hereinafter referred to as "DRS Photronics"), AND DRS PRECISION ECHO, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 3105 Patrick Henry Drive, Santa Clara, California 95054 (hereinafter referred to as "DRS Precision Echo"), AND DRS AHEAD TECHNOLOGY, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 6410 Via Del Oro, San Jose, California 95054 (hereinafter referred to as "DRS Ahead Technology"), AND DRS OPTRONICS, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2330 Commerce Park Drive, N.E., Second Floor, Palm Bay, Florida 32905 (hereinafter referred to as "DRS Optronics"), AND DRS SYSTEMS MANAGEMENT CORPORATION, A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Systems Management"), AND DRS/MS, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS/MS"). -2- AND DRS TECHNICAL SERVICES, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2535 Camino Del Rio, Suite 300, San Diego, California 92108 (hereinafter referred to as "DRS Technical Services"), AND DRS INTERNATIONAL, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS International"), AND DRS AIR, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Air"), AND DRS HADLAND, INC., A corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, having its principal office located at 20480 Pacifica Drive, Suite D, Cupertino, California 95014 (hereinafter referred to as "DRS Hadland"), AND DRS FPA, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS FPA" and hereinafter DRS Electronic Systems, DRS Photronics, DRS Precision Echo, DRS Ahead Technology, DRS Optronics, DRS Systems Management, DRS/MS, DRS Technical Services, DRS International, DRS Air, DRS Hadland and DRS FPA shall be collectively referred to as the "Original Corporate Guarantors" and hereinafter the Original Corporate Guarantors, the Partnership Guarantor and DRS Merger Sub, Inc., a New York corporation (hereinafter referred to as "DRS Merger Sub"), shall be collectively referred to as the "Original Guarantors"), AND NAI TECHNOLOGIES, INC., AS SUCCESSOR-IN-INTEREST TO DRS MERGER SUB, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 5 Sylvan Way. Parsippany, New Jersey 07054 (hereinafter referred to as "NAI Technologies"), AND -3- DRS RUGGED SYSTEMS, INC., FORMERLY KNOWN AS "CODAR TECHNOLOGY, INC.", A corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, having its principal office located at 2405 Trade Centre Avenue, Longmont, Colorado 80503 (hereinafter referred to as "DRS Rugged Systems"), AND DRS ADVANCED PROGRAMS, INC., FORMERLY KNOWN AS "NAI TECHNOLOGIES --SYSTEMS DIVISION CORPORATION", A corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 7125 Riverwood Drive, Columbia, Maryland 21046 (hereinafter referred to as "DRS Advanced Programs" and hereinafter NAI Technologies, DRS Rugged Systems and DRS Advanced Programs shall be collectively referred to as the "New Corporate Guarantors" and hereinafter the Original Corporate Guarantors, the New Corporate Guarantors and the Partnership Guarantor shall be collectively referred to as the "Guarantors") AND MELLON BANK, N.A., A national banking association duly organized and validly existing under the laws of the United States of America, having an office located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania 19101, STRICTLY IN ITS CAPACITY as a lender (hereinafter sometimes referred to as "Mellon US" and/or as a "Lender"), AND MELLON BANK CANADA, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having an office located at Royal Trust Tower, 32nd Floor, Toronto Dominion Center, Toronto, Ontario M5K 1 K2, as a lender (hereinafter sometimes referred to as "Mellon Canada" and/or as a "Lender" and hereinafter Mellon US and Mellon Canada shall be sometimes collectively referred to as the "Original Lenders"), AND THE CIT GROUP / EQUIPMENT FINANCING, INC., A corporation duly organized, validly existing and in good standing under the laws of the State of New York, having an office located at 900 Ashwood Parkway, Suite 600, Atlanta, GA 30338, Attention: Vice President--Credit (hereinafter sometimes referred to as "CIT Group" and sometimes referred to as a "Lender"), AND NATIONAL BANK OF CANADA, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having notice addresses located at both (i) Post Office Plaza, 50 Division Street, Suite 201, Somerville, New Jersey 08876 and (ii) Suite 305, 350 Burnhamthorpe Road, Mississaugua, Ontario, Canada L5B 3J1 (hereinafter sometimes referred to as "NBC" and sometimes referred to as a "Lender"), -4- AND SUMMIT BANK, a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, 250 Moore Street, 2n Floor, Hackensack, New Jersey 07601, Attention: George Barrow, Vice President (hereinafter sometimes referred to as "Summit" and sometimes referred to as a "Lender"), AND UNION BANK OF CALIFORNIA, N.A., a corporation duly organized, validly existing and in good standing under the laws of the State of California, 445 South Figueroa Street, 16th Floor, Los Angeles, California 90071, Attention: Mr. Hagop Jazmadarian, Vice President/Credit Executive (hereinafter sometimes referred to as "Union Bank" and sometimes referred to as a "Lender"), AND TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having an office located at 5080 Spectrum Drive, Suite 1100 West, Dallas, Texas 75248, Attention: Mel Renfro, Vice President/Division Operations Manager (hereinafter sometimes referred to as "Transamerica" and sometimes referred to as a "Lender"), AND THE TORONTO-DOMINION BANK, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having an office located at TD Tower, 9th Floor, 55 King Street West, Toronto, Ontario, Canada M5K 1A2 (hereinafter sometimes referred to as "Toronto-Dominion" and sometimes referred to as a "Lender"), AND TORONTO DOMINION (NEW YORK), INC., a state banking institution organized and existing under the laws of the State of New York, having an office located at 31 West 52nd Street, New York, New York 10019-6101 (hereinafter sometimes referred to as "Toronto-Dominion NY" and sometimes referred to as a "Lender" and hereinafter the Original Lenders, CIT Group, NBC, Summit, Union Bank, Transamerica, Toronto-Dominion and Toronto-Dominion NY shall be sometimes collectively referred to as the "Lenders"), AND MELLON BANK, N.A., a national banking association duly organized and validly existing under the laws of the United States of America, having an office located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania 19101, STRICTLY IN ITS CAPACITY as the agent for the Lenders hereunder (hereinafter referred to as the "Agent"). -5- WITNESSETH: WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Revolving Credit Loan and Term Loan Agreement dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Loan Agreement"), executed by and among the Co-Borrowers, as the co-borrowers, and the Original Lenders, as the lenders, the Original Lenders agreed to make to the Co-Borrowers (i) an amended and restated secured recourse revolving credit loan in the aggregate principal amount of up to Seventy Million and 00/100 (US$70,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electro-optical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital (including, without limitation, the issuance of trade / commercial and standby letters of credit) and (d) general corporate purposes (hereinafter referred to as the "Revolving Credit Loan Facility"), (ii) an amended and restated secured recourse term loan in the aggregate principal amount of Thirty Million and 00/100 (US$30,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electro-optical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital and (d) general corporate purposes (hereinafter referred to as the "Term Loan Facility #1") and (iii) a secured recourse term loan in the aggregate principal amount of Fifty Million and 00/100 (US$50,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electrooptical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital and (d) general corporate purposes (hereinafter referred to as the "Term Loan Facility #2"), all subject to the terms, conditions and provisions of the Loan Agreement; and WHEREAS, for the purposes of this First Amendment, the Revolving Credit Loan Facility, the Term Loan Facility #1 and the Term Loan Facility #2, as they may be from time to time hereafter amended, modified, extended, refinanced and/or otherwise supplemented, shall be collectively referred to as the "Loan Facilities"; and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Agreement of Guaranty dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Agreement of Guaranty"), executed by the Original Guarantors, ON A JOINT AND SEVERAL BASIS, in favor of the Agent, on behalf of the Lenders, the Original Guarantors unconditionally agreed to guaranty the "Liability of the Co-Borrowers" and the "Liabilities of the Co-Borrowers" (as such terms are defined in the Agreement of Guaranty); and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Security Agreement #1 dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #1"), executed by and among DRS, DRS Canada Inc., DRS Sensor Systems, DRS Infrared and the Agent, on behalf of the Lenders, DRS and DRS Canada Inc., DRS Sensor Systems and DRS Infrared granted to the Agent, on behalf of the Lenders, a security interest in -6- all of the "Collateral" (as such term is defined in the Security Agreement #1), as security for all of the "Obligations" (as such term is defined in the Security Agreement #1) of the Co-Borrowers; and WHEREAS, on October 20, 1998. pursuant to a certain Amended and Restated Security Agreement #2 dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #2"), executed by and among the Original Guarantors and the Agent, on behalf of the Lenders, the Original Guarantors granted to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #2). as security for all of the "Obligations" (as such term is defined in the Security Agreement #2) of the Co-Borrowers; and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Security Agreement #3 dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #3" and hereinafter the Security Agreement #1, the Security Agreement #2 and the Security Agreement #3 shall be collectively referred to as the "Security Agreements"), executed by and between DRS Flight Safety and the Agent, on behalf of the Lenders, DRS Flight Safety granted to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #3), as security for all of the "Obligations" (as such term is defined in the Security Agreement #3) of the Co-Borrowers; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Amended and Restated Revolving Credit Loan Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Revolving Credit Note"). in the original aggregate principal amount of Seventy Million and 00/100 (US$70,000,000.00) Dollars, which Mellon US Revolving Credit Note evidenced the maximum amount of the Revolving Credit Loan Facility; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon Canada, as the payee, a certain Amended and Restated Revolving Credit Loan Note dated October 20, 1998 (hereinafter referred to as the "Mellon Canada Revolving Credit Note"), in the original aggregate principal amount of Ten Million and 00/100 (US$10,000,000.00) Dollars, which Mellon Canada Revolving Credit Note evidenced the "Revolving Credit Commitment" (as such term is defined in the Loan Agreement) of Mellon Canada; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Amended and Restated Term Loan #1 Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Term Loan #1 Note"), in the original aggregate principal amount of Twelve Million Five Hundred Thousand and 00/100 (US$12,500,000.00) Dollars, which Mellon US Term Loan #1 Note evidenced the "Term Loan #1 Commitment" (as such term is defined in the Loan Agreement) of Mellon US; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon Canada, as the payee, a certain Amended and Restated Term Loan #1 Note -7- dated October 20, 1998 (hereinafter referred to as the "Mellon Canada Term Loan #1 Note"), in the original aggregate principal amount of Seventeen Million Five Hundred Thousand and 00/100 (US$17,500,000.00) Dollars, which Mellon Canada Term Loan #1 Note evidenced the "Term Loan #1 Commitment" (as such term is defined in the Loan Agreement) of Mellon Canada; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Term Loan #2 Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Term Loan #2 Note"), in the original aggregate principal amount of Fifty Million and 00/100 (US$50,000,000.00) Dollars, which Mellon US Term Loan #2 Note evidenced the original amount of the Term Loan Facility #2; and WHEREAS, pursuant to that certain Certificate of Amendment of Certificate of Incorporation filed in the Office of the Secretary of State of the State of Delaware on November 2, 1998, DRS EO, Inc. changed its name to "DRS Sensor Systems, Inc."; and WHEREAS, pursuant to that certain Certificate of Amendment of Certificate of Limited Partnership filed in the Office of the Secretary of State of the State of Delaware on November 2, 1998, DRS FPA, L.P. changed its name to "DRS Infrared Technologies, LP"; and WHEREAS, on December 31, 1998, pursuant to a certain Assignment and Acceptance Agreement dated as of December 31, 1998 (hereinafter referred to as the "CIT Group Agreement"), executed by and between CIT Group, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Term Loans #2" and "Term Loan #2 Commitment" (as such terms are defined in the Loan Agreement) to CIT Group; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain First Substituted and Replacement Term Loan #2 Note dated December 31. 1998 (hereinafter as it may be from time to time amended, modified, extended, referred to as the "Mellon US Term Loan #2 Note #2"), in the original aggregate principal amount of Forty-Five Million and 00/100 (US$45,000,000.00) Dollars, which Mellon US Term Loan #2 Note #2 evidenced the Term Loan #2 Commitment of Mellon US after giving effect to the CIT Group Agreement; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to CIT Group, as the payee, a certain First Substituted and Replacement Term Loan #2 Note dated December 31, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "CIT Group Term Loan #2 Note"), in the original aggregate principal amount of Five Million and 00/100 (US$5,000,000.00) Dollars, which CIT Group Term Loan #2 Note evidenced the Term Loan #2 Commitment of CIT Group after giving effect to the CIT Group Agreement; and WHEREAS, the Mellon US Term Loan #2 Note was cancelled and replaced by the Mellon US Term Loan #2 Note #2 and the CIT Group Term Loan #2 Note; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "NBC US Agreement"), -8- executed by and between NBC, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Revolving Credit Loans" and "Revolving Credit Commitments" (as such terms are defined in the Loan Agreement) to NBC; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to NBC, as the payee, a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "NBC US Revolving Credit Note"), in the original aggregate principal amount of Ten Million and 00/100 (US$l0,000,000.00) Dollars, which NBC US Revolving Credit Note evidenced the Revolving Credit Commitment of NBC after giving effect to the NBC Agreement; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "Summit Agreement"), executed by and between Summit, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Revolving Credit Loans", "Revolving Credit Commitments", "Term Loans #1" and "Term Loan #1 Commitments" (as such terms are defined in the Loan Agreement) to Summit; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Summit, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Summit Revolving Credit Note"), in the original aggregate principal amount of Eight Million Four Hundred Eighty-Four Thousand Eight Hundred Fifty and 00/100 (US$8,484,850.00) Dollars, which Summit Revolving Credit Note evidenced the Revolving Credit Commitment of Summit after giving effect to the Summit Agreement and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Summit Term Loan #1 Note"), in the original aggregate principal amount of One Million Five Hundred Fifteen Thousand One Hundred Fifty and 00/100 (US$1,515,150.00) Dollars, which Summit Term Loan #1 Note evidenced the Term Loan #1 Commitment of Summit after giving effect to the Summit Agreement; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "Union Bank Agreement"), executed by and between Union Bank, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Revolving Credit Loans", "Revolving Credit Commitments", "Term Loans #1" and "Term Loan #1 Commitments" (as such terms are defined in the Loan Agreement) to Union Bank; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Union Bank, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Union Bank Revolving Credit Note"), in the original aggregate principal amount of Twelve Million Seven Hundred Twenty-Seven Thousand Two Hundred Seventy-Five and 00/100 (US$12,727,275.00) -9- Dollars, which Union Bank Revolving Credit Note evidenced the Revolving Credit Commitment of Union Bank after giving effect to the Union Bank Agreement and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Union Bank Term Loan #1 Note"), in the original aggregate principal amount of Two Million Two Hundred Seventy-Two Thousand Seven Hundred Twenty-Five and 00/100 (US$2,272,725.00) Dollars, which Union Bank Term Loan #1 Note evidenced the Term Loan #1 Commitment of Union Bank after giving effect to the Union Bank Agreement; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "Transamerica Agreement"), executed by and between Transamerica, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Term Loans #2" and "Term Loan #2 Commitment" (as such terms are defined in the Loan Agreement) to Transamerica; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Transamerica, as the payee, a certain Second Substituted and Replacement Term Loan #2 Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Transamerica Term Loan #2 Note"), in the original aggregate principal amount of Ten Million and 00/100 (US$10,000,000.00) Dollars, which Transamerica Term Loan #2 Note evidenced the Term Loan #2 Commitment of Transamerica after giving effect to the Transamerica Agreement; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "Toronto-Dominion NY Agreement"), executed by and between Toronto-Dominion NY, as the assignee, and Mellon US, as the assignor, Mellon US assigned a portion of its outstanding "Revolving Credit Loans", "Revolving Credit Commitments", "Term Loans #1" and "Term Loan #1 Commitments" (as such terms are defined in the Loan Agreement) to Toronto-Dominion NY; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Toronto-Dominion NY, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Toronto-Dominion NY Revolving Credit Note"), in the original aggregate principal amount of Twelve Million Seven Hundred Twenty-Seven Thousand Two Hundred Seventy-Five and 00/100 (US$12,727,275.00) Dollars, which Toronto-Dominion NY Revolving Credit Note evidenced the Revolving Credit Commitment of Toronto-Dominion NY after giving effect to the Toronto-Dominion NY Agreement and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Toronto-Dominion NY Term Loan #1 Note"), in the original aggregate principal amount of Two Million Two Hundred Seventy-Two Thousand Seven Hundred Twenty-Five and 00/100 (US$2,272,725.00) Dollars, which Toronto-Dominion NY Term Loan #1 Note evidenced the Term Loan #1 Commitment of Toronto-Dominion NY after giving effect to the Toronto-Dominion NY Agreement; and -10- WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "NBC Canada Agreement"), executed by and between NBC, as the assignee, and Mellon Canada, as the assignor, Mellon Canada assigned a portion of its outstanding "Canadian Revolving Credit Loans", "Canadian Revolving Credit Commitments", "Canadian Term Loans" and "Canadian Term Loan Commitments" (as such terms are defined in the Loan Agreement) to NBC; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to NBC, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note (Canadian Revolving Credit Note) dated January 22, 1999 (hereinafter as it may he from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "NBC Canada Revolving Credit Note"), in the original aggregate principal amount of Two Million Five Hundred Thousand and 00/100 (US$2,500,000.00) Dollars, which NBC Canada Revolving Credit Note evidenced the Canadian Revolving Credit Commitment of NB(: after giving effect to the NBC Canada Agreement and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note (Canadian Term Loan Note) dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "NBC Canada Term Loan #1 Note"), in the original aggregate principal amount of Five Million and 00/100 (US$5,000,000.00) Dollars, which NBC Canada Term Loan #1 Note evidenced the Canadian Term Loan Commitment of NBC after giving effect to the NBC Canada Agreement; and WHEREAS, on January 22, 1999, pursuant to a certain Assignment and Acceptance Agreement dated as of January 22, 1999 (hereinafter referred to as the "Toronto-Dominion Agreement"), executed by and between Toronto-Dominion, as the assignee, and Mellon Canada, as the assignor, Mellon Canada assigned a portion of its outstanding "Canadian Revolving Credit Loans", "Canadian Revolving Credit Commitments", "Canadian Term Loans" and "Canadian Term Loan Commitments" (as such terms are defined in the Loan Agreement) to Toronto-Dominion; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Toronto-Dominion, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note (Canadian Revolving Credit Note) dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Toronto-Dominion Revolving Credit Note"), in the original aggregate principal amount of Two Million Five Hundred Thousand and 00/100 (US$2,500,000.00) Dollars, which Toronto-Dominion Revolving Credit Note evidenced the Canadian Revolving Credit Commitment of Toronto-Dominion after giving effect to the Toronto-Dominion Agreement and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note (Canadian Term Loan Note) dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Toronto-Dominion Term Loan #1 Note"), in the original aggregate principal amount of Five Million and 00/100 (US$5,000,000.00) Dollars, which Toronto-Dominion Term Loan #1 Note evidenced the Canadian Term Loan Commitment of Toronto-Dominion after giving effect to the Toronto-Dominion Agreement; and -11- WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as he payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Mellon US Revolving Credit Note #2"), in the original aggregate principal amount of Twenty-Six Million Sixty Thousand Six Hundred and 00/100 (US$26,060,600.00) Dollars, which Mellon US Revolving Credit Note #2 evidenced the Revolving Credit Commitment of Mellon US after giving effect to (a) the NBC US Agreement, (b) the Summit Agreement, (c) the Union Bank Agreement, (d) the Transamerica Agreement and (e) the Toronto-Dominion NY Agreement; (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Mellon US Term Loan #1 Note #2"), in the original aggregate principal amount of Six Million Four Hundred Thirty-Nine Thousand Four Hundred and 00/100 (US$6,439,400.00) Dollars, which Mellon US Term Loan #1 Note #2 evidenced the Term Loan #1 Commitment of Mellon US after giving effect to (a) the NBC US Agreement, (b) the Summit Agreement, (c) the Union Bank Agreement, (d) the Transamerica Agreement and (e) the Toronto-Dominion NY Agreement; and (iii) a certain Second Substituted and Replacement Term Loan #2 Note dated January 22, 1999 (hereinafter referred to as the "Mellon US Term Loan #2 Note #3"), in the original aggregate principal amount of Thirty-Five Million and 00/100 (US$35,000,000.00) Dollars, which Mellon US Term Loan #2 Note #3 evidenced the Term Loan #2 Commitment of Mellon US after giving effect to (a) the NBC US Agreement, (b) the Summit Agreement, (c) the Union Bank Agreement, (d) the Transamerica Agreement and (e) the Toronto-Dominion NY Agreement; and WHEREAS, the Co-Borrowers, as the makers, executed and delivered to Mellon Canada, as the payee, (i) a certain First Substituted and Replacement Amended and Restated Revolving Credit Loan Note (Canadian Revolving Credit Loan Note dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Mellon Canada Revolving Credit Note #2"), in the original aggregate principal amount of Five Million and 00/100 (US$5,000,000.00) Dollars, which Mellon Canada Revolving Credit Note #2 evidenced the Canadian Revolving Credit Commitment of Mellon Canada after giving effect to (a) the NBC Canada Agreement, (b) the Summit Agreement, (c) the Union Bank Agreement, (d) the Transamerica Agreement and (e) the Toronto-Dominion Agreement; and (ii) a certain First Substituted and Replacement Amended and Restated Term Loan #1 Note (Canadian Term Loan Note) dated January 22, 1999 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Mellon Canada Term Loan #1 Note #2"), in the original aggregate principal amount of Seven Million Five Hundred Thousand and 00/100 (US$7,500,000.00) Dollars, which Mellon Canada Term Loan #1 Note #2 evidenced the Canadian Term Loan Commitment of Mellon Canada after giving effect to (a) the NBC Canada Agreement, (b) the Summit Agreement, (c) the Union Bank Agreement, (d) the Transamerica Agreement and (e) the Toronto-Dominion Agreement; and WHEREAS, the Mellon US Revolving Credit Note, the Mellon Canada Revolving Credit Note, the Mellon US Term Loan #1 Note, Mellon Canada Term Loan #1 Note and the Mellon US Term Loan #2 Note #2 were cancelled and replaced by the Mellon US Revolving Credit Note #2, the Mellon Canada Revolving Credit Note #2, the Mellon US Term Loan #1 -12- Note #2, the Mellon Canada Term Loan #1 Note #2, the Mellon US Term Loan #2 Note #3, the NBC Revolving Credit Note, the Summit Revolving Credit Note, the Summit Term Loan #1 Note, the Union Bank Revolving Credit Note, the Union Bank Term Loan #1 Note, the Transamerica Term Loan #2 Note, the Toronto-Dominion NY Revolving Credit Note, the Toronto-Dominion NY Term Loan #1 Note, the NBC Canada Revolving Credit Note, the NBC Canada Term Loan #1 Note, the Toronto-Dominion Revolving Credit Note and the Toronto-Dominion Term Loan #1 Note; and WHEREAS, for the purposes of this First Amendment, the Mellon US Revolving Credit Note #2, the Mellon Canada Revolving Credit Note #2, the Mellon US Term Loan #1 Note #2, the Mellon Canada Term Loan #1 Note #2, the Mellon US Term Loan #2 Note #3. the CIT Group Term Loan #2 Note, the NBC Revolving Credit Note, the Summit Revolving Credit Note, the Summit Term Loan #1 Note, the Union Bank Revolving Credit Note, the Union Bank Term Loan #1 Note, the Transamerica Term Loan #2 Note, the Toronto-Dominion NY Revolving Credit Note, the Toronto-Dominion NY Term Loan #1 Note, the NBC Canada Revolving Credit Note, the NBC Canada Term Loan #1 Note, the Toronto-Dominion Revolving Credit Note and the Toronto-Dominion Term Loan #1 Note, as they each may be from time to time amended, modified, extended, refinanced and/or otherwise supplemented, shall be hereinafter collectively referred to as the "Notes"; and WHEREAS, pursuant to that certain Certificate of Merger filed in the office of the Secretary of State of the State of New York on February 22, 1999, DRS Merger Sub was merged with and into NAJ Technologies (hereinafter referred to as the "Merger") with NAI Technologies surviving as a wholly-owned Subsidiary of DRS; and WHEREAS, as a result of the Merger, NAI Technologies became the successor-in-interest to DRS Merger Sub and the Co-Borrowers acquired the following "Subsidiaries and/or Affiliates" (as such terms are defined in the Loan Agreement and, specifically, used in SECTION 6.12 of the Loan Agreement): (i) DRS Rugged Systems, (ii) DRS Advanced Programs, (iii) DRS Rugged Systems (Europe) Limited, formerly known as "Lynwood Rugged Systems Limited", a company incorporated under the laws of England and Wales (hereinafter referred to as "DRS Rugged Systems UK") and (iv) DRS Rugged Systems Australia PTY Limited, formerly known as "Lynwood Australia PTY", a company incorporated under the laws of Australia (hereinafter referred to as "DRS Rugged Systems Australia"); and WHEREAS, pursuant to the terms, conditions and provisions of SECTION 6.12 of the Loan Agreement, the Co-Borrowers are required to cause any Subsidiaries and/or Affiliates which are acquired or formed after the Closing Date of the Loan Facilities to execute the Agreement of Guaranty, as guarantors; and WHEREAS, in order to comply with the requirements of SECTION 6.12 of the Loan Agreement, the Co-Borrowers, the Guarantors, the Agent and all of the Lenders have agreed that (i) DRS Rugged Systems and DRS Advanced Programs shall each assume and accept all of the rights, obligations, responsibilities and liabilities of a "Guarantor" under the Agreement of Guaranty on A JOINT AND SEVERAL BASIS with all of the other Guarantors, through their execution and delivery of this First Amendment and (ii) in lieu of having DRS Rugged Systems UK and DRS Rugged Systems Australia become "Guarantors" under the Agreement of Guaranty, (a) -13- DRS Rugged Systems UK shall execute a certain Pledge of Stock Agreement #5 dated of even date herewith (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Pledge of Stock Agreement #5"), pursuant to which DRS Rugged Systems UK shall pledge to the Agent, on behalf of the Lenders, no more than sixty-five percent (65%) of the authorized, issued and outstanding capital stock of DRS Rugged Systems Australia, as security for all of the "Obligations" (as such term is defined in the Pledge of Stock Agreement #5) and (b) NAI Technologies shall execute a certain Pledge of Stock Agreement #6 dated of even date herewith (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Pledge of Stock Agreement #6"), pursuant to which NAI Technologies shall pledge to the Agent, on behalf of the Lenders, no more than sixty-five percent (65%) of the authorized, issued and outstanding capital stock of DRS Rugged Systems UK, as security for all of the "Obligations" (as such term is defined in the Pledge of Stock Agreement #6); and WHEREAS, the Co-Borrowers, the Guarantors, the Agent and all of the Lenders have agreed to amend and modify SECTION 6.12 of the Loan Agreement to provide for (i) the execution of the Agreement of Guaranty by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (ii) the execution of the Security Agreement #2 by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (iii) the pledge of one-hundred percent (100%) of the authorized, issued and outstanding stock of any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date and (iv) the pledge of no more than sixty-five percent (65%) of the authorized, issued and outstanding stock of any foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, all as additional collateral security for the Loan Facilities; and WHEREAS, in conjunction with the amendment and modification of SECTION 6.12 of the Loan Agreement, the Co-Borrowers, the Guarantors, the Agent and all of the Lenders have further agreed that, DRS Rugged Systems and DRS Advanced Programs shall each further assume and accept all of the rights, obligations, responsibilities and liabilities of a "Debtor" under the Security Agreement #2 through their execution and delivery of this First Amendment and shall grant to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #2), as security for all of the "Obligations" (as such term is defined in the Security Agreement #2) of the Co-Borrowers; and WHEREAS, in further conjunction with the amendment and modification of SECTION 6.12 of the Loan Agreement the Co-Borrowers, the Guarantors, the Agent and all of the Lenders have further agreed that (i) DRS shall execute a certain Pledge of Stock Agreement #7 dated of even date herewith (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Pledge of Stock Agreement #7"), pursuant to which DRS shall pledge to the Agent, on behalf of the Lenders, one-hundred percent (100%) of the authorized, issued and outstanding capital stock of NAI Technologies, as security for all of the "Obligations" (as such term is defined in the Pledge of Stock Agreement #7) and (ii) NAI Technologies shall execute a certain Pledge of Stock Agreement #8 dated of even date herewith (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Pledge of Stock Agreement #8"), pursuant to which NAI Technologies shall pledge to the Agent, on behalf of the Lenders, (a) one-hundred -14- percent (100%) of the authorized, issued and outstanding capital stock of DRS Rugged Systems and (h) one-hundred percent (100%) of the authorized, issued and outstanding capital stock of DRS Advanced Programs, all as security for all of the "Obligations" (as such term is defined in the Pledge of Stock Agreement #8); and WHEREAS, the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements, the Pledge of Stock Agreement #5, the Pledge of Stock Agreement #6, the Pledge of Stock Agreement #7, the Pledge of Stock Agreement #8, this First Amendment and any and all other documents, agreements, instruments or certificates executed in connection with the Loan Facilities shall hereinafter collectively be referred to as the "Loan Documents"; and WHEREAS, all words, terms, definitions and provisions not otherwise expressly defined herein shall have their respective meanings and he construed as provided for in the Loan Agreement. All words, terms, definitions and provisions of the Loan Agreement are incorporated herein by reference, as if set forth in their entirety; and WHEREAS, the Co-Borrowers, the Guarantors and the Lender now desire to amend and modify the Loan Agreement and the other Loan Documents for the purposes of (i) in ARTICLE I, SECTION 1.01 of the Loan Agreement, amending and modifying the definition of "Loan Documents" to provide for this First Amendment; (ii) in ARTICLE I, SECTION 1.01 of the Loan Agreement, providing for a new definition of "First Amendment"; (iii) in ARTICLE I, SECTION 1.01 of the Loan Agreement, amending and modifying the definition of "Pledge of Stock Agreements" to provide for the Pledge of Stock Agreement #5, the Pledge of Stock Agreement #6, the Pledge of Stock Agreement #7 and the Pledge of Stock Agreement #8; (iv) in ARTICLE VI, SECTION 6.12 of the Loan Agreement, amending and modifying SECTION 6.12 to provide for (a) the execution of the Agreement of Guaranty by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (b) the execution of the Security Agreement #2 by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (c) the pledge of one-hundred percent (100%) of the authorized, issued and outstanding stock of any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date and (d) the pledge of no more than sixty-five percent (65%) of the authorized, issued and outstanding stock of any foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, all as additional collateral security for the Loan Facilities; (v) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and inserting a new reference to NAI Technologies in their place and stead; (vi) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by adding DRS Rugged Systems and DRS Advanced Programs as "Guarantors" ON A jOINT AND SEVERAL BASIS with all of the other Guarantors; (vii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Thc." and inserting a new reference to NAI Technologies in their place and stead; (viii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by adding DRS Rugged Systems and DRS Advanced Programs as "Debtors"; (ix) in the Security Agreement #2, amending and modifying SCHEDULE "B" to add the locations of the Collateral pledged to the Agent, on behalf of the Lenders, by DRS Rugged Systems and DRS Advanced Programs; (x) in the Loan Agreement and in all of the other Loan Documents, providing for a new notice address for the Co-Borrowers, the -15- Corporate Guarantors and the Partnership Guarantor; and (xi) in the Loan Documents, providing that any and all references to the Loan Documents shall be deemed to refer to each Loan Document as amended and modified up through and including this First Amendment. NOW, THEREFORE, intending to be legally bound hereby, the Co-Borrowers, the Guarantors and the Lenders hereby promise, covenant and agree as follows: 1. PRINCIPAL BALANCE OF THE REVOLVING CREDIT LOAN FACILITY. There is, as of August 9, 1999, presently due and owing on the Revolving Credit Loan Facility, the principal sum of US$43,590,318.56 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. The foregoing principal balance is allocated as follows: (i) US$34,175,000.00 for Revolving Credit Loans; (ii) US$5,429 for Letter of Credit Obligations; (iii) US$3,985,593.84 for Canadian Revolving Credit Loans; (iv) US$0.00 for Canadian Letter of Credit Obligations; and (v) US$0.00 for Canadian Bankers Acceptances. 2. PRINCIPAL BALANCE OF THE TERM LOAN FACILITY #1. There is, as of August 9, 1999, presently due and owing on the Term Loan Facility #1, the principal sum of US$29,490,777.61 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. The foregoing principal balance is allocated as follows: (i) US$12,083,333.33 for Term Loans #1; and (ii) US$17,407,444.28 for Canadian Term Loans. 3. PRINCIPAL BALANCE OF THE TERM LOAN FACILITY #2. There is, as of August 9,1999, presently due and owing on the Term Loan Facility #2, the principal sum of US$49,937,500.00 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. 4. LOAN AGREEMENT. The Loan Agreement is hereby amended and modified as follows: (i) ARTICLE I, SECTION 1.01 is hereby amended and modified as follows: (a) The definition of "Loan Documents" shall be amended and modified by inserting after the existing phrase "the Swap Agreement(s)" the following new phrase: "and the First Amendment". (b) The definition of "Pledge of Stock Agreements" shall be amended and modified by inserting after the existing definition the following new language: "; and (xi) that certain Pledge of Stock Agreement #5, dated August ____, 1999, executed by DRS Rugged Systems (Europe) Limited, as pledgor, pledging no more than 65% of the authorized, issued and outstanding voting capital stock of DRS Rugged Systems Australia PTY Limited, as hereafter amended, modified, extended, renewed, refinanced and/or supplemented; (xii) that certain Pledge of Stock Agreement #6, dated August __, 1999, executed by NAI Technologies, Inc., as pledgor, pledging no more than 65% of the authorized, issued and outstanding voting capital stock of DRS Rugged Systems (Europe) Limited, as -16- hereafter amended, modified, extended, renewed, refinanced and/or supplemented; (xiii) that certain Pledge of Stock Agreement #7, dated August ____, 1999, executed by DRS Technologies, Inc., as pledgor, pledging 100% of the authorized, issued and outstanding voting capital stock of NAI Technologies, Inc., as hereafter amended, modified, extended, renewed, refinanced and/or supplemented; and (xiv) that certain Pledge of Stock Agreement #8, dated August ____ 1999, executed by NAI Technologies, Inc., as pledgor, pledging 100% of the authorized, issued and outstanding voting capital stock of (a) DRS Rugged Systems, Inc. and (b) DRS Advanced Programs, Inc., as hereafter amended, modified, extended, renewed, refinanced and/or supplemented; and (xv) any and all additional Pledge of Stock Agreements, in form and substance satisfactory to the Agent in its sole and absolute discretion, executed, made and/or entered into subsequent to the Closing Date, including, without limitation, any and all such Pledge of Stock Agreements which are consummated for the purposes of pledging (a) in the case of any and all domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, the pledge of one-hundred percent (100%) of the authorized, issued and outstanding stock of any such Subsidiaries and/or Affiliates and (b) in the case of any and all foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the CoBorrowers after the Closing Date, the pledge of no more than sixty-five percent (65%) of the authorized, issued and outstanding stock of any such Subsidiaries and/or Affiliates, all as provided for in SECTION 6.12 of this Loan Agreement." (c) The following new definitions shall be inserted: ""FIRST AMENDMENT" shall mean that certain First Amendment and Modification Agreement dated August 15, 1999, executed by and among the Co-Borrowers, as the co-borrowers, the Guarantors, as the guarantors, the Agent, as the agent for the lenders, and the Lenders, as the lenders, whereby the parties agreed to amend and modify this Loan Agreement and the other Loan Documents, all as previously amended and modified, for the purposes of (i) in ARTICLE I, SECTION 1.01 of this Loan Agreement, amending and modifying the definition of "Loan Documents" to provide for the First Amendment; (ii) in ARTICLE I, SECTION 1.01 of this Loan Agreement, providing for a new definition of "First Amendment"; (iii) in ARTICLE I SECTION 1.01 of this Loan Agreement, amending and modifying the definition of "Pledge of Stock Agreements" to provide for the Pledge of Stock Agreement #5, the Pledge of Stock Agreement #6, the Pledge of Stock Agreement #7 and the Pledge of Stock Agreement #8; (iv) in ARTICLE VI, SECTION 6.12 of this Loan Agreement, amending and modifying SECTION 6.12 to provide for (a) the execution of the Agreement of Guaranty by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (b) the execution of the Security Agreement #2 by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (c) the pledge of one-hundred percent (100%) of the authorized, issued and outstanding stock of any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date and (d) the pledge of no more than sixty-five percent (65%) of the authorized, issued and -17- outstanding stock of any foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, all as additional collateral security for the Loan Facilities; (v) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and inserting a new reference to "NAI Technologies, Inc., a New York corporation" in their place and stead; (vi) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by adding DRS Rugged Systems and DRS Advanced Programs as "Guarantors", ON A JOINT AND SEVERAL BASIS with all of the other Guarantors; (vii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and inserting a new reference to "NAI Technologies, Inc., a New York corporation" in their place and stead; (viii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by adding DRS Rugged Systems and DRS Advanced Programs as "Debtors"; (ix) in the Security Agreement #2, amending and modifying SCHEDULE "B" to add the locations of the Collateral pledged to the Agent, on behalf of the Lenders, by DRS Rugged Systems and DRS Advanced Programs; (x) in the Loan Documents, providing for a new notice address for the Co-Borrowers, the Corporate Guarantors and the Partnership Guarantor; and (xi) in the Loan Documents, providing that any and all references to the Loan Documents shall be deemed to refer to each Loan Document as amended and modified up through and including the First Amendment." (ii) ARTICLE VI, SECTION 6.12 is hereby amended and modified by deleting the existing SECTION 6.12 in its entirety and substituting the following new SECTION 6.12 in its place and stead: "Section 6.12 ADDITIONAL CORPORATE GUARANTORS AND/OR PARTNERSHIP GUARANTORS. The Co-Borrowers shall cause any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date (i) to execute the Agreement of Guaranty and (ii) to execute the Security Agreement #2. The Co-Borrowers shall further execute or cause to be executed (a) a Pledge of Stock Agreement, in form and substance satisfactory to the Agent in its sole and absolute discretion, pledging one-hundred percent (100%) of the authorized, issued and outstanding stock of any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date and (b) a Pledge of Stock Agreement, in form and substance satisfactory to the Agent in its sole and absolute discretion, pledging no more than sixty-five percent (65%) of the authorized, issued and outstanding stock of any foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, all as additional collateral security for the Loan Facilities." -18- (iii) Any and all references to the "Loan Documents" shall be deemed to refer to the Loan Documents as amended and modified up through and including this First Amendment. 5. AGREEMENT OF GUARANTY. The Agreement of Guaranty is hereby amended and modified by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and inserting new references to "NAI Technologies, Inc., a New York corporation, as successor-in-interest to DRS Merger Sub, Inc." in their place and stead. 6. ADDITION OF NAI TECHNOLOGIES, DRS RUGGED SYSTEMS, DRS ADVANCED PROGRAMS TO THE AGREEMENT OF GUARANTY AS GUARANTORS. In consideration of the Loan Facilities being made available to the Co-Borrowers and with knowledge that the Lenders would not have made the Loan Facilities available but for the promises of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs hereunder, NAI Technologies, DRS Rugged Systems and DRS Advanced Programs, by their execution and delivery of this First Amendment, hereby assume and accept, ON A JOINT AND SEVERAL BASIS with all of the other Guarantors, all of the rights, obligations, responsibilities and liabilities of a "Guarantor" under the Agreement of Guaranty and are hereby deemed to be each a "Guarantor" under the Agreement of Guaranty as if each had originally executed the Agreement of Guaranty. NAI Technologies, DRS Rugged Systems and DRS Advanced Programs each hereby represent and warrant to the Agent and to all of the Lenders that they have read, understand and agree to each of the terms, conditions and provisions of the Agreement of Guaranty. The addition of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs as "Guarantors" shall in no way affect, change, modify or diminish the obligations, responsibilities and liabilities of any of the other Guarantors under the Agreement of Guaranty. 7. SECURITY AGREEMENT #2. The Security Agreement #2 is hereby amended and modified as follows: (1) Any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." shall be deleted and new references to "NAI Technologies, Inc., a New York corporation, as successor-in-interest to DRS Merger Sub, Inc." shall be inserted in their place and stead; and (ii) The following locations of the Collateral shall be added to SCHEDULE "B": (a) 2405 Trade Centre Avenue, Longmont, Colorado 80503; and (b) 7125 Riverwood Drive, Columbia, Maryland 21046. 8. ADDITION OF NAI TECHNOLOGIES. DRS RUGGED SYSTEMS AND DRS ADVANCED PROGRAMS TO THE SECURITY AGREEMENT #2 AS DEBTORS. (i) In consideration of the Loan Facilities being made available to the Co-Borrowers and with knowledge that the Lenders would not have made the Loan Facilities available but for the promises of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs hereunder, NAI Technologies, DRS Rugged Systems and DRS Advanced Programs, by their execution and delivery of this First Amendment, hereby assume and accept all of the rights, obligations, responsibilities and liabilities of a "Debtor" under the Security Agreement #2 and are -19- hereby deemed to be each a "Debtor" under the Security Agreement #2 as if each had originally executed the Security Agreement #2. (ii) As collateral security for the prompt and complete payment and performance when due by NAI Technologies DRS Rugged Systems and DRS Advanced Programs of all obligations and liabilities under the Agreement of Guaranty and all of the other Loan Documents executed in connection with the Loan Facilities including, without limitation, the following: (i) all indebtedness of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs owed to the Agent and/or the Lenders arising on or after the date hereof under the Agreement of Guaranty, both principal and interest, and any extensions, renewals, refundings, substitutions of or for such indebtedness in whole or in part, (ii) all indebtedness of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs owed to the Agent and/or the Lenders for reasonable fees and expenses contemplated by the Agreement of Guaranty, (iii) all obligations of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs to the Agent and/or the Lenders arising under the other Loan Documents, (iv) all other indebtedness, obligations and liabilities of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs owed to the Agent and/or the Lenders now or hereafter existing, in connection with the Agreement of Guaranty or the other Loan Documents whether or not contemplated by the Agent, the Lenders and/or NAI Technologies, DRS Rugged Systems and DRS Advanced Programs at the date hereof and whether direct or indirect, matured or contingent, joint or several or otherwise, (v) all future advances made by the Agent for the protection or preservation of the Collateral, including, without limitation, reasonable advances for storage and transportation charges, taxes, insurance, repairs and the like when and as the same become due whether at maturity or by declaration, acceleration or otherwise, or if not due when payment thereof shall be demanded by the Agent and (vi) any and all costs and expenses, including costs and expenses of collection, paid or incurred by the Agent, on behalf of and for the benefit of the Lenders, in connection with the collection of the amounts referred to in the preceding CLAUSES (I), (II), (III), (IV) OR (V), in connection with the enforcement or realization upon my or all of the collateral or the Agent's and/or the Lenders' security interest therein or in connection with the taking of any other action permitted by the Security Agreement #2, NAI Technologies, DRS Rugged Systems and DRS Advanced Programs hereby collaterally assign, mortgage, hypothecate, convey, transfer and grant to the Agent, on behalf of and for the benefit of the Lenders, a continuing security interest in all of their respective present and future rights, title and interests in and to all of their personal property, tangible and intangible, including, without limitation, the personal property described on SCHEDULE "A" of the Security Agreement #2, wherever said personal property may be located, including, without limitation, those addresses set forth on SCHEDULE "B" of the Security Agreement #2, as such personal property may he hereinafter amended and modified from time to time. (iii) NAI Technologies, DRS Rugged Systems and DRS Advanced Programs each hereby represent and warrant to the Agent and to all of the Lenders that they have read, understand and agree to each of the terms, conditions and provisions of the Security Agreement #2. The addition of NAI Technologies, DRS Rugged Systems and DRS Advanced Programs as "Debtors" shall in no way affect, change, modify or diminish the obligations, responsibilities and liabilities of any of the other Debtors under the Security Agreement #2. 9. CHANGES IN NOTICE PROVISIONS FOR THE CO-BORROWERS, THE CORPORATE GUARANTORS AND THE PARTNERSHIP GUARANTOR. The Loan Agreement and each of the other Loan Documents are -20- hereby amended and modified to provide that any and all references to notices which are required by the terms, conditions and provisions of the Loan Agreement and the other Loan Documents to he sent (i) to the attention of "Nancy R. Pitek, Vice President - Finance and Treasurer" shall be deleted and new references to "Richard Schneider, Executive Vice President and Chief Financial Officer" shall be inserted in their place and stead and (ii) to "Hannoch Weisman, A Professional Corporation, 4 Becker Farm Road, Roseland, New Jersey 07068, Attn.: Jonathan M. Gross, Esq., Telecopy No.: (973) 994-7198" shall be deleted and new references to "Orloff, Lowenbach, Stifelman & Siegel, P.A., 101 Eisenhower Parkway, Roseland, New Jersey 07068, Attn.: Geralyn G. Humphrey, Esq., Telecopy No.: (973) 622-3073" shall be inserted in their place and stead. 10. LOAN DOCUMENTS. The Loan Documents are hereby amended and modified to provide that any and all references to the Loan Documents shall be deemed to refer to each Loan Document as amended and modified up through and including this First Amendment. 11. REAFFIRMATION. Each of the Co-Borrowers and the Guarantors hereby expressly confirm and reaffirm all of their respective liabilities, obligations and responsibilities under and pursuant to the Loan Documents as amended, modified and/or supplemented by this First Amendment. 12. FURTHER AGREEMENTS AND REPRESENTATIONS. The Co-Borrowers and the Guarantors do hereby: (i) ratify, confirm and acknowledge that, as amended and modified, the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and all of the other Loan Documents continue to be valid, binding and in full force and effect; (ii) covenant and agree to perform all of their respective obligations contained herein and under the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and all of the other Loan Documents, as amended and modified; (iii) acknowledge and agree that as of the date hereof, the Co-Borrowers and the Guarantors have no defense, set-off, counterclaim or challenge against the payment of any sums due and owing to the Agent or to any Lender or the enforcement of any of the terms of the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and/or any of the other Loan Documents, all as amended and modified; (iv) acknowledge and agree that all of the representations and warranties of the Co-Borrowers and/or the Guarantors contained in the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and/or all of the other Loan Documents, are true, accurate and correct in all material respects as of the date hereof as if made on and as of the date hereof; (v) represent and warrant that, after giving effect to the transactions contemplated by this First Amendment, no "Event of Default" (as such term is defined in the Loan Agreement), exists or will exist upon the delivery of notice, passage of time, or both, and all information described in the recitals is true and accurate; (vi) acknowledge and agree that nothing contained herein and no actions taken pursuant to the terms hereof are intended to constitute a novation of any of the Notes, the -21- Revolving Credit Loan Facility, the Term Loan Facility #1 and/or the Term Loan Facility #2, or any waiver of any of the other Loan Documents, and do not constitute a release, termination or waiver of any of the rights and/or remedies granted to the Agent, on behalf of the Lenders, or to any of the Lenders under the Loan Documents, all of which rights and/or remedies are hereby expressly ratified and confirmed; and (vii) acknowledge and agree that the failure by the Co-Borrowers and/or the Guarantors to comply with or perform any of their respective covenants, agreements or obligations contained herein shall constitute an Event of Default under the Loan Agreement and each of the Loan Documents, as amended and modified. 13. SECURITY INTEREST. The Co-Borrowers and the Guarantors hereby affirm and confirm that the security interests granted to the Agent on behalf of the Lenders in the Security Agreements, as amended and modified by this First Amendment, continues to be a valid first lien on the Collateral. 14. ADDITIONAL DOCUMENTS: FURTHER ASSURANCES. The Co-Borrowers hereby covenant and agree to execute and/or deliver to the Agent, on behalf of the Lenders, or to cause to be executed and/or delivered to the Agent, on behalf of the Lenders contemporaneously herewith, at the sole cost and expense of the Co-Borrowers, any and all other documents, agreements, statements, resolutions, certificates, opinions, consents, searches and information as the Agent, on behalf of the Lenders, may reasonably request in connection with the matters or actions described herein. The Co-Borrowers hereby further covenant and agree to execute and/or deliver to the Lender, or to use their reasonable efforts to cause to be executed and/or delivered to the Agent, on behalf of the Lender, at the sole cost and expense of the Co-Borrowers, from time to lime, any and all other documents, agreements, statements, certificates and information as the Agent, on behalf of the Lenders, shall reasonably request to evidence or effect the terms of the Loan Agreement, as amended, or any of the other Loan Documents, as amended, or to enforce or protect the Lenders' interest in the Collateral. All such documents, agreements, statements, etc., shall be in form and content reasonably acceptable to the Agent. 15. FEES, COSTS, EXPENSES AND EXPENDITURES. The Co-Borrowers shall pay all of the Agent's and the Lenders' reasonable expenses in connection with the review, preparation, negotiation, documentation and closing of this First Amendment and the consummation of the transactions contemplated hereunder, including, without limitation, fees, expenses and disbursements of legal counsel retained by the Agent and/or the Lenders and all fees related to filings, recordings of documents and searches, whether or not the transactions contemplated hereunder are consummated. 16. NO NOVATION. It is the intention of the parties hereto that this First Amendment SHALL NOT constitute a novation and shall in no way adversely affect or impair the lien priority of the Loan Documents. In the event that this First Amendment, or any portion hereof, or any of the instruments executed in connection herewith, shall be construed or shall operate to affect the lien priority of the Loan Documents, then to the extent such instrument creates a charge upon the Loan Documents in excess of that contemplated and permitted thereby and to the extent third parties acquiring an interest in the Loan Documents between the time of recording of the Loan Documents and the recording of this First Amendment are prejudiced hereby, if any, this First Amendment shall be void and of no force and effect; PROVIDED, HOWEVER, that notwithstanding the -22- foregoing, the parties hereto, as between themselves, shall be bound by all of the terms, conditions and provisions contained herein until all obligations of the Co-Borrowers to the Agent and the Lenders under the Loan Documents shall have been paid in full and the Loan Facilities shall have been terminated. 17. NO WAIVER. Nothing contained herein constitutes an agreement or obligation by the Agent or by any Lender to grant any further amendments to any of the Loan Documents and nothing contained herein constitutes a waiver or release by the Agent or by any Lender of any rights or remedies available to the Agent or such Lender under the Loan Documents, at law or in equity, provided that the foregoing is not intended to revoke the Agent's or any Lender's previous consent to the requested actions by the Co-Borrowers and/or the Guarantors where such consent was delivered by the Agent or such Lender in writing. 18. INCONSISTENCIES. To the extent of any inconsistency between the terms and conditions of this First Amendment and the terms and conditions of the Loan Agreement or the Loan Documents, the terms and conditions of this First Amendment shall prevail. All terms and conditions of the Loan Agreement and the Loan Documents not inconsistent herewith shall remain in full force and effect and are hereby ratified and confirmed by the Co-Borrowers and/or the Guarantors. 19. CONSTRUCTION. Any capitalized terms used in this First Amendment not otherwise defined shall have the meaning as set forth in the Loan Agreement. All references to the Loan Agreement therein or in any of the other Loan Documents shall be deemed to be a reference to the Loan Agreement, as amended and modified hereby. 20. BINDING EFFECT. This First Amendment shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 21. COUNTERPARTS. This First Amendment may be executed by one or more of the parties to this First Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. -23- IN WITNESS WHEREOF, the Co-Borrowers, the Guarantors, the Agent and the Lenders have cuased this First Amendment to be executed and delivered by their duly authorized coporate officers, all as of the day and year first written above. [SEAL] DRS TECHNOLOGIES, INC., ATTEST: a Delaware corporation, as a Co-Borrower /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President [SEAL] DRS TECHNOLOGIES CANADA COMPANY, ATTEST: a Nova Scotia company, as a Co-Borrower /s/ NINA LASERSON DUNN By: /s/ DAVID STAPLEY - ------------------------------ ------------------------------------- Nina Laserson Dunn David Stapley Secretary President [SEAL] DRS TECHNOLOGIES CANADA, INC., ATTEST: a Delaware corporation, as a Co-Borrower /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President [SEAL] DRS SENSOR SYSTEMS, INC, FORMERLY KNOWN ATTEST: AS "DRS EO, INC.", a Delaware corporation, as a Co-Borrower /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President -24- DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", a Delaware limited partnership, as a Co-Borrower [SEAL] By: DRS FPA, INC., a Delaware ATTEST: corporation as the general partner /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ -------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President LAUREL TECHNOLOGIES PARTNERSHIP, (ALSO DOING BUSINESS AS DRS LAUREL TECHNOLOGIES), a Delaware general partnership, as a Guarantor [SEAL] By: DRS SYSTEMS MANAGEMENT CORPORATION ATTEST: as the General Partner /s/ RICHARD A. SCHNEIDER By: /s/ PAUL G. CASNER, JR. - ------------------------------ -------------------------------- Richard A. Schneider Paul G. Casner, Jr. Secretary President [SEAL] DRS ELECTRONIC SYSTEMS, INC., ATTEST: a Delaware corporation, as a Guarantor /s/ DAVID M. kNOTT By: /s/ TERRENCE L. DEROSA - ------------------------------ ------------------------------------- David M. Knott Terrence L. DeRosa Secretary President [SEAL] DRS PHOTRONICS, INC. ATTEST: a New York Corporation, as a Guarantor /s/ ROBERT RUSSO By: /s/ RICHARD ROSS - ------------------------------ ------------------------------------- Robert Russo Richard Ross Secretary President -25- [SEAL] DRS PRECISION ECHO, INC., ATTEST: a Delaware corporation, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ DAVID STAPLEY - ------------------------------ ------------------------------------- Richard A. Schneider David Stapley Secretary President [SEAL] DRS AHEAD TECHNOLOGY, INC., a Delaware ATTEST: corporation, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ DENNIS CHARLEBOIS - ------------------------------ ------------------------------------- Richard A. Schneider Dennis charlebois Secretary President [SEAL] DRS OPTRONICS, INC., a Delaware ATTEST: corporation, as a Guarantor /s/ ROBERT RUSSO By: /s/ RICHARD ROSS - ------------------------------ ------------------------------------- Robert Russo Richard Ross Secretary President [SEAL] DRS SYSTEMS MANAGEMENT CORPORATION, a ATTEST: Delaware corporations, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ PAUL G. CASNER, JR. - ------------------------------ ------------------------------------- Richard A. Schneider Paul G. Casner, Jr. Secretary President [SEAL] DRS/MS, INC., a Delaware corporation, ATTEST: as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Richard A. Schneider Mark S. Newman Secretary President -26- [SEAL] DRS TECHNICAL SERVICES, INC., a Delaware ATTEST: corporation, as a Guarantor /s/ DAVID M. KNOTT By: /s/ TERRENCE L. DEROSA - ------------------------------ ------------------------------------- David M. Knott Terrence L. DeRosa Secretary President [SEAL] DRS INTERNATIONAL, INC., a Delaware ATTEST: corporation, as a Guarantor /s/ NINA LASERSON DUNN by: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President [SEAL] DRS AIR, INC., a Delaware corporation, ATTEST: as a Guarantor /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President [SEAL] DRS HADLAND, INC., a Massachusetts ATTEST: corporation, as a Guarantor /s/ ROBERT RUSSO By: /s/ RICHARD ROSS - ------------------------------ ------------------------------------- Robert Russo Richard Ross Secretary President NAI TECHNOLOGIES, INC., AS SUCCESSOR- [SEAL] IN-INTEREST TO DRS MERGER SUB, INC., a ATTEST: a New York corporation, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ TERRENCE L. DEROSA - ------------------------------ ------------------------------------- Richard A. Schneider Terrence L. DeRosa Secretary President -27- [SEAL] DRS FPA, INC., a Delaware corporation, ATTEST: as a Guarantor /s/ NINA LASERSON DUNN By: /s/ MARK S. NEWMAN - ------------------------------ ------------------------------------- Nina Laserson Dunn Mark S. Newman Secretary President [SEAL] DRS RUGGED SYSTEMS, INC., a Colorado ATTEST: corporation, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ DAVID PRIOR - ------------------------------ ------------------------------------- Richard A. Schneider David Prior Secretary President [SEAL] DRS ADVANCED PROGRAMS, INC., a New ATTEST: York corporation, as a Guarantor /s/ RICHARD A. SCHNEIDER By: /s/ STEVEN RICE - ------------------------------ ------------------------------------- Richard A. Schneider Steven Rice Secretary President -28- MELLON BANK, N.A., as a Lender By: /s/ PETER A. DONTAS ------------------------------------- Peter A. Dontas MELLON BANK CANADA, as a Lender By: /s/ WENDY B. H. BOCTI ------------------------------------- Wendy B. H. Bocti Vice President THE CIT GROUP/EQUIPMENT FINANCING, INC., as a Lender By: /s/ DANIEL E. A. NICHOLS ------------------------------------- Daniel E. A. Nichols Assistant Vice President NATIONAL BANK OF CANADA, as a Lender By: /s/ KAREN A. GREXA By: /s/ JOHN P. LEIFER - ------------------------- AND ------------------------------------- Karen A. Grexa John p. Leifer Vice President Vice President SUMMIT BANK, as a Lender By: /s/ GEORGE W. D. BARRON ------------------------------------- George W. D. Barron Vice President -29- UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ HAGOP V. JAZMADARIAN ------------------------------------- Hagop V. Jazmadarian Vice Presient TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, as a Lender By: /s/ SEAN D. MCALISTER ------------------------------------- Sean D. McAlister V.P. Region Credit Manager THE TORONTO-DOMINION BANK, as a Lender By: /s/ R. G. HARRIS ------------------------------------- R. G. Harris Vice President & Director TORONTO DOMINION (NEW YORK), INC., as a Lender By: /s/ R. G. HARRIS ------------------------------------- R. G. Harria Vice President & Director MELLON BANK, N.A., as a Agent By: /s/ PETER A. DONTAS ------------------------------------- Peter A. Dontas Vice President -30- EX-10.37 3 0003.txt SECOND AMENDMENT AND MODIFICATION AGRMT SECOND AMENDMENT AND MODIFICATION AGREEMENT by and among DRS TECHNOLOGIES, INC., DRS TECHNOLOGIES CANADA COMPANY, DRS TECHNOLOGIES CANADA, INC., DRS SENSOR SYSTEMS, INC., FORMERLY KNOWN AS "DRS EO, INC.", AND DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", collectively as the Co-Borrowers AND LAUREL TECHNOLOGIES PARTNERSHIP D/B/A DRS LAUREL TECHNOLOGIES, DRS ELECTRONIC SYSTEMS, INC., DRS PHOTRONICS, INC., DRS PRECISION ECHO, INC., DRS AHEAD TECHNOLOGY, INC., DRS OPTRONICS, INC., DRS SYSTEMS MANAGEMENT CORPORATION, DRS/MS, INC., DRS TECHNICAL SERVICES, INC., DRS INTERNATIONAL, INC., DRS AIR, INC., DRS HADLAND, INC., NAI TECHNOLOGIES, INC., AS SUCCESSOR-IN-INTEREST TO DRS MERGER SUB, INC., DRS EPA, INC., DRS RUGGED SYSTEMS, INC. AND DRS ADVANCED PROGRAMS, INC., collectively as the Ciuarantors AND MELLON BANK, N.A., as the Agent and as a Lender AND MELLON BANK CANADA, THE CIT GROUP / EQUIPMENT FINANCING, INC., NATIONAL BANK OF CANADA, SUMMIT BANK, UNION BANK OF CALIFORNIA, N.A., TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, THE TORONTO-DOMINION BANK, TORONTO DOMINION (NEW YORK), INC., NATIONAL CITY BANK OF PENNSYLVANIA, GALAXY CLO 1999-1, LTD., KZH SOLEIL LLC, STEIN ROE & FARNHAM CLO I LTD. AND IBM CREDIT CORPORATION, each as a Lender Dated: February 4, 2000 SECOND AMENDMENT AND MODIFICATION AGREEMENT ------------------------------------------- THIS SECOND AMENDMENT AND MODIFICATION AGREEMENT (hereinafter referred to as this "Second Amendment"), is made this 4th day of February, 2000, by and among DRS TECHNOLOGIES, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS"), AND DRS TECHNOLOGIES CANADA, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Canada Inc."), AND DRS TECHNOLOGIES CANADA COMPANY, a Nova Scotia company, having its principal office and chief executive office located at 365 March Road, Kanata, Ontario K2K 1X3 (hereinafter referred to as "DRS Flight Safety"), AND DRS SENSOR SYSTEMS, INC., FORMERLY KNOWN AS "DRS EO, INC.", a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2000 East El Segundo Blvd., El Segundo, California 90245 (hereinafter referred to as "DRS Sensor Systems"), AND DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 13588 North Central Expressway, Dallas, Texas 75243 (hereinafter referred to as "DRS infrared" and hereinafter DRS, DRS Canada Inc., DRS Flight Safety, DRS Sensor Systems and DRS Infrared shall be collectively referred to as the "Co-Borrowers" and sometimes individually referred to as a "Co-Borrower"), AND LAUREL TECHNOLOGIES PARTNERSHIP D/B/A DRS LAUREL `TECHNOLOGIES, a general partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 423 Walters -1- Avenue, Johnstown, Pennsylvania 15904 (hereinafter sometimes referred to as "Laurel Technologies" and sometimes referred to as the "Partnership Guarantor"), AND DRS ELECTRONIC SYSTEMS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 200 Professional Drive, Gaithersburg, Maryland 20879 (hereinafter referred to as "DRS Electronic Systems"), AND DRS PHOTRONICS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 138 Bauer Drive, Oakland, New Jersey 07436 (hereinafter referred to as "DRS Photronics"), AND DRS PRECISION ECHO, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 3105 Patrick Henry Drive, Santa Clara, California 95054 (hereinafter referred to as "DRS Precision Echo"), AND DRS AHEAD TECHNOLOGY, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 6410 Via Del Oro, San Jose, California 95054 (hereinafter referred to as "DRS Ahead Technology"), AND DRS OPTRONICS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2330 Commerce Park Drive, N.E., Second Floor, Palm Bay, Florida 32905 (hereinafter referred to as "DRS Optronics"), AND DRS SYSTEMS MANAGEMENT CORPORATION, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Systems Management"), AND -2- DRS/MS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS/MS"), AND DRS TECHNICAL SERVICES, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 2535 Camino Del Rio, Suite 300, San Diego, California 92108 (hereinafter referred to as "DRS Technical Services"), AND DRS INTERNATIONAL, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS International"), AND DRS AIR, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS Air"), AND DRS HADLAND, INC., a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, having its principal office located at 20480 Pacifica Drive, Suite D, Cupertino, California 95014 (hereinafter referred to as "DRS Hadland"), AND DRS FPA, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "DRS FPA" and hereinafter DRS Electronic Systems, DRS Photronics, DRS Precision Echo, DRS Ahead Technology, DRS Optronics, DRS Systems Management, DRS/MS, DRS Technical Services, DRS International, DRS Air, DRS Hadland and DRS FPA shall be collectively referred to as the "Original ("Corporate Guarantors" and hereinafter the Original Corporate Guarantors, the Partnership Guarantor and DRS Merger Sub, Inc., a New York corporation (hereinafter referred to as "DRS Merger Sub"), shall be collectively referred to as the "Original Guarantors"), -3- AND NAI TECHNOLOGIES, INC., AS SUCCESSOR-IN-INTEREST TO DRS MERGER SUB, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as "NAI Technologies"), AND DRS RUGGED SYSTEMS, INC., FORMERLY KNOWN AS "CODAR TECHNOLOGY, INC.", a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, having its principal office located at 2405 Trade Centre Avenue, Longmont, Colorado 80503 (hereinafter referred to as "DRS Rugged Systems"), AND DRS ADVANCED PROGRAMS, INC., FORMERLY KNOWN AS "NAI TECHNOLOGIES - SYSTEMS DIVISION CORPORATION", a corporation duly organized, validly existing and in good standing under the laws of the State of New York, having its principal office located at 7125 Riverwood Drive, Columbia, Maryland 21046 (hereinafter referred to as "DRS Advanced Programs" and hereinafter NAI Technologies, DRS Rugged Systems and DRS Advanced Programs shall be collectively referred to as the "New Corporate Guarantors" and hereinafter the Original Corporate Guarantors, the New Corporate Guarantors and the Partnership Guarantor shall be collectively referred to as the "Guarantors"), AND MELLON BANK, N.A., a national banking association duly organized and validly existing under the laws of the United States of America, having an office located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania 19101, strictly in its capacity as a lender (hereinafter sometimes referred to as "Mellon US" and/or as a "Lender"), AND MELLON BANK CANADA, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having an office located at Royal Trust Tower, 32nd Floor, Toronto Dominion Center, Toronto, Ontario M5K 1K2, as a lender (hereinafter sometimes referred to as "Mellon Canada" and/or as a "Lender" and hereinafter Mellon US and Mellon Canada shall be sometimes collectively referred to as the "Original Lenders"), AND THE CIT GROUP / EQUIPMENT FINANCING, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of New York, having an office located at 900 Ashwood Parkway, Suite 600, Atlanta, GA 30338, Attention: Vice President - Credit (hereinafter sometimes referred to as "CIT Group" and sometimes referred to as a "Lender"), -4- AND NATIONAL BANK OF CANADA, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having notice addresses located at both (i) Post Office Plaza, 50 Division Street, Suite 201, Somerville, New Jersey 08876 and (ii) Suite 305, 350 Burnhamthorpe Road, Mississaugua, Ontario, Canada L5B 3J1 (hereinafter sometimes referred to as "NBC" and sometimes referred to as a "Lender"), AND SUMMIT BANK, a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, having an office located at 250 Moore Street, 2nd Floor, Hackensack, New Jersey 07601, Attention: George Barrow, Vice President (hereinafter sometimes referred to as "Summit" and sometimes referred to as a "Lender"), AND UNION BANK OF CALIFORNIA, N.A., a corporation duly organized, validly existing and in good standing under the laws of the State of California, having an office located at 445 South Figueroa Street, 16th Floor, Los Angeles, California 90071, Attention: Mr. Hagop Jazmadarian, Vice President/Credit Executive (hereinafter sometimes referred to as "Union Bank" and sometimes referred to as a "Lender"), AND TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having an office located at 5080 Spectrum Drive, Suite 1100 West, Dallas, Texas 75248, Attention: Mel Renfro, Vice President/Division Operations Manager (hereinafter sometimes referred to as "Transamerica" and sometimes referred to as a "Lender"), AND THE TORONTO-DOMINION BANK, one of the chartered banks of Canada, duly organized and validly existing under the laws of Canada, having an office located at TD Tower, 9th Floor, 55 King Street West, Toronto, Ontario, Canada M5K 1 A2 (hereinafter sometimes referred to as "Toronto-Dominion" and sometimes referred to as a "Lender"), AND TORONTO DOMINION (NEW YORK), INC., a state banking institution organized and existing under the laws of the State of New York, having an office located at 31 West 52nd Street, New York, New York 10019-6101 (hereinafter sometimes referred to as "Toronto-Dominion NY" and sometimes referred to as a "Lender"), -5- AND NATIONAL CITY BANK OF PENNSYLVANIA, a national banking association organized and existing under the laws of the United States of America, having an office located at National City Center, 20 Stanwix Street, Pittsburgh, Pennsylvania 15222-4802 (hereinafter sometimes referred to as "National City Bank" and sometimes referred to as a "Lender"), AND GALAXY CLO 1999-1, LTD., a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands, British West Indies and acting hereunder by SAI INVESTMENT ADVISER, INC., its collateral manager, having an office located at 1 SunAmerica Center - 34th Floor, Century City, Los Angeles, California 90067-6022 (hereinafter sometimes referred to as "Galaxy" and sometimes referred to as a "Lender"), AND KZH SOLEIL LLC, a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, having an office located at c/o The Chase Manhattan Bank, 450 West 33rd Street - 15th Floor, New York, New York 10001 (hereinafter Sometimes referred to as "KZH Soleil" and sometimes referred to as a "Lender"), AND STEIN ROE & FARNHAM CLO I LTD., a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands, and acting hereunder by Stein Roe & Farnham Incorporated, its portfolio manager, having an office located at One South Wacker Drive, 33rd Floor, Chicago, Illinois 60606-4685 (hereinafter sometimes referred to as Stein Roe and sometimes referred to as a "Lender"), AND IBM CREDIT CORPORATION, a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware, having an office located at North Castle Drive, Armonk, New York 10504 (hereinafter sometimes referred to as "IBM Credit" and sometimes referred to as a "Lender" and hereinafter the Original Lenders, CIT Group, NBC, Summit, Union Bank, Transamerica, Toronto-Dominion, Toronto-Dominion NY, National City Bank, Galaxy, KZH Soleil, Stein Roe and IBM Credit shall be sometimes collectively referred to as the "Lenders"), AND MELLON BANK, N.A., a national banking association duly organized and validly existing under the laws of the United States of America, having an office located at Mellon Bank -6- Center, 1735 Market Street, Philadelphia, Pennsylvania 19101, strictly in its capacity as the agent for the Lenders hereunder (hereinafter referred to as the "Agent"). WITNESSETH: ----------- WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Revolving Credit Loan and Term Loan Agreement dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Loan Agreement"), executed by and among the Co-Borrowers, as the co- borrowers, and the Original Lenders, as the lenders, the Original Lenders agreed to make to the (Co-Borrowers (i) an amended and restated secured recourse revolving credit loan in the aggregate principal amount of up to Seventy Million and 00/100 (US$70,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electro-optical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital (including, without limitation, the issuance of trade / commercial and standby letters of credit) and (d) general corporate purposes (hereinafter referred to as the "Revolving Credit Loan Facility"), (ii) an amended and restated secured recourse term loan in the aggregate principal amount of Thirty Million and 00/100 (US$30,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electro-optical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital and (d) general corporate purposes (hereinafter referred to as the "Term Loan Facility #1") and (iii) a secured recourse term loan in the aggregate principal amount of Fifty Million and 00/100 (US$50,000,000.00) Dollars for the purposes of financing (a) the purchase of the scanning and staring infrared detector business and electro-optical business of Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., (b) the refinance of existing indebtedness, (c) working capital and (d) general corporate purposes (hereinafter referred to as the "Term Loan Facility #2"), all subject to the terms, conditions and provisions of the Loan Agreement; and WHEREAS, for the purposes of this Second Amendment, the Revolving Credit Loan Facility, the Term Loan Facility #1 and the Term Loan Facility #2, as they may be from time to time hereafter amended, modified, extended, refinanced and/or otherwise supplemented, shall he collectively referred to as the "Loan Facilities"; and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Agreement of Guaranty dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Agreement of Guaranty"), executed by the Original Guarantors, on a joint and several basis, in favor of the Agent, on behalf of the Lenders, the Original Guarantors unconditionally agreed to guaranty the "Liability of the Co-Borrowers" and the "Liabilities of the Co-Borrowers" (as such terms are defined in the Agreement of Guaranty); and -7- WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Security Agreement #1 dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #1"), executed by and among DRS, DRS Canada Inc., DRS Sensor Systems, DRS Infrared and the Agent, on behalf of the Lenders, DRS and DRS Canada Inc., DRS Sensor Systems and DRS Infrared granted to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #1), as security for all of the "Obligations" (as such term is defined in the Security Agreement #1) of the Co-Borrowers; and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Security Agreement #2 dated October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #2"), executed by and among the Original Guarantors and the Agent, on behalf of the Lenders, the Original Guarantors granted to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #2), as security for all of the "Obligations" (as such term is defined in the Security Agreement #2) of the Co-Borrowers; and WHEREAS, on October 20, 1998, pursuant to a certain Amended and Restated Security Agreement #3 dated October 20, 1998 (hereinafter as it may be from time to time amended. modified, extended, renewed, refinanced and/or supplemented referred to as the "Security Agreement #3" and hereinafter the Security Agreement #1, the Security Agreement #2 and the Security Agreement #3 shall be collectively referred to as the "Security Agreements"), executed by and between DRS Flight Safety and the Agent, on behalf of the Lenders, DRS Flight Safety granted to the Agent, on behalf of the Lenders, a security interest in all of the "Collateral" (as such term is defined in the Security Agreement #3), as security for all of the "Obligations" (as such term is defined in the Security Agreement #3) of the Co-Borrowers; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Amended and Restated Revolving Credit Loan Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Revolving Credit Note"), in the original aggregate principal amount of Seventy Million and 00/100 (US$70,000,000.00) Dollars, which Mellon US Revolving Credit Note evidenced the maximum amount of the Revolving Credit Loan Facility; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon Canada, as the payee, a certain Amended and Restated Revolving Credit Loan Note dated October 20, 1998 (hereinafter referred to as the "Mellon Canada Revolving Credit Note"), in the original aggregate principal amount of Ten Million and 00/100 (US$10,000,000.00) Dollars, which Mellon Canada Revolving Credit Note evidenced the "Revolving Credit Commitment" (as such term is defined in the Loan Agreement) of Mellon Canada; and -8- WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Amended and Restated Term Loan #1 Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Term Loan #1 Note"), in the original aggregate principal amount of Twelve Million Five Hundred Thousand and 00/100 (US$l2,500,000.00) Dollars, which Mellon US Term Loan #1 Note evidenced the "Term Loan #1 Commitment" (as such term is defined in the Loan Agreement) of Mellon US; and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon Canada, as the payee, a certain Amended and Restated Term Loan #1 Note dated October 20, 1998 (hereinafter referred to as the "Mellon Canada Term Loan #1 Note"), in the original aggregate principal amount of Seventeen Million Five Hundred Thousand and 00/100 (US$17,500,000.00) Dollars, which Mellon Canada Term Loan #1 Note evidenced the "Term Loan #1 Commitment" (as such term is defined in the Loan Agreement) of Mellon Canada, and WHEREAS, on October 20, 1998, the Co-Borrowers, as the makers, executed and delivered to Mellon US, as the payee, a certain Term Loan #2 Note dated October 20, 1998 (hereinafter referred to as the "Mellon US Term Loan #2 Note"), in the original aggregate principal amount of Fifty Million and 00/100 (US$50,000,000.00) Dollars, which Mellon US Term Loan #2 Note evidenced the original amount of the Term Loan Facility #2; and WHEREAS, for the purposes of this Second Amendment, the Mellon US Revolving Credit Note, the Mellon Canada Revolving Credit Note, the Mellon US Term Loan #1 Note, the Mellon Canada Term Loan #1 Note and the Mellon US Term Loan Note #2 shall be collectively referred to as the "Original Notes"; and WHEREAS, pursuant to that certain Certificate of Amendment of Certificate of Incorporation filed in the Office of the Secretary of State of the State of Delaware on November 2, 1998, DRS EO, Inc. changed its name to "DRS Sensor Systems, Inc."; and WHEREAS, pursuant to that certain Certificate of Amendment of Certificate of Limited Partnership filed in the Office of the Secretary of State of the State of Delaware on November 2, 1998, DRS FPA, L.P. changed its name to "DRS Infrared Technologies, LP"; and WHEREAS, pursuant to that certain Certificate of Merger filed in the office of the Secretary of State of the State of New York on February 22, 1999, DRS Merger Sub was merged with and into NAI Technologies (hereinafter referred to as the "Merger") with NAI Technologies surviving as a wholly-owned Subsidiary of DRS; and WHEREAS, as a result of the Merger, NAI Technologies became the successor-in- interest to DRS Merger Sub and the Co-Borrowers acquired the following "Subsidiaries and/or Affiliates" (as such terms are defined in the Loan Agreement and, specifically, used in Section 6.12 of the Loan Agreement): (i) DRS Rugged Systems, (ii) DRS Advanced Programs, (iii) DRS Rugged Systems (Europe) Limited, formerly known as "Lynwood Rugged Systems Limited", a company incorporated under the laws of England and Wales (hereinafter referred to as "DRS -9- Rugged Systems UK") and (iv) DRS Rugged Systems Australia PTY Limited, formerly known as Lynwood Australia PTY", a company incorporated under the laws of Australia (hereinafter referred to as "DRS Rugged Systems Australia"); and WHEREAS, pursuant to that certain First Amendment and Modification, dated August 15, 1999 (hereinafter referred to as the "First Amendment"), the Co-Borrowers, the Guarantors and the Lender agreed to amend and modify the Loan Agreement and the other Loan Documents for the purposes of (i) in Article I, Section 1.01 of the Loan Agreement, amending and modifying the definition of "Loan Documents" to provide for the First Amendment; (ii) in Article 1, Section 101 of the Loan Agreement, providing for a new definition of "First Amendment"; (iii) in Article 1, Section 1.01 of the Loan Agreement, amending and modifying the definition of "Pledge of Stock Agreements" to provide for the "Pledge of Stock Agreement #5", the "Pledge of Stock Agreement #6", the "Pledge of Stock Agreement #7" and the "Pledge of Stock Agreement #8" (as each such term is defined in the First Amendment); (iv) in Article VI, Section 6.12 of the Loan Agreement, amending and modifying Section 6.12 to provide for (a) the execution of the Agreement of Guaranty by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (b) the execution of the Security Agreement #2 by any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, (c) the pledge of one-hundred percent (100%) of the authorized, issued and outstanding stock of any domestic Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date and (d) the pledge of no more than sixty-five percent (650%) of the authorized, issued and outstanding stock of any foreign Subsidiaries and/or Affiliates which are acquired or formed by any of the Co-Borrowers after the Closing Date, all as additional collateral security for the Loan Facilities; (v) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and inserting a new reference to NAI Technologies in their place and stead; (vi) in the Agreement of Guaranty, amending and modifying the Agreement of Guaranty by adding DRS Rugged Systems and DRS Advanced Programs as "Guarantors" on a joint and several basis with all of the other Guarantors; (vii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by deleting any and all references to "DRS Merger Sub" and to "DRS Merger Sub, Inc." and Inserting a new reference to NAI Technologies in their place and stead; (viii) in the Security Agreement #2, amending and modifying the Security Agreement #2 by adding DRS Rugged Systems and DRS Advanced Programs as "Debtors"; (ix) in the Security Agreement #2, amending and modifying Schedule "B" to add the locations of the Collateral pledged to the Agent, on behalf of the Lenders, by DRS Rugged Systems and DRS Advanced Programs; (x) in the Loan Agreement and in all of the other Loan Documents, providing for a new notice address for the Co-Borrowers, the Corporate Guarantors and the Partnership Guarantor; and (xi) in the Loan Documents, providing that any and all references to the Loan Documents shall be deemed to refer to each Loan Document as amended and modified up through and including the First Amendment; and WHEREAS, on July 21, 1999, pursuant to the terms, conditions and provisions of that certain Agreement for Sale and Purchase of Global Data Systems Limited, DRS Rugged Systems UK acquired one hundred percent (100%) of the authorized, issued and outstanding voting -10- capital stock in Global Data Systems Limited, a company incorporated under the laws of England and Wales (hereinafter referred to as the "Global Acquisition"); and WHEREAS, the Global Acquisition was a permitted acquisition under the terms, conditions and provisions of Section 7.05(iv) of the Loan Agreement; and WHEREAS, the Co-Borrowers, the Guarantors and the Lender now desire to further amend and modify the Loan Agreement and the other Loan Documents, all as previously amended and modified, for the purposes of (i) increasing the aggregate principal amount of the Revolving Credit Commitments from the aggregate principal amount of "up to $70,000,000.00" to a new increased aggregate principal amount of "up to $80,000,000.00"; (ii) in the Recitals and in Article I, Section 1.01 of the Loan Agreement, amending and modifying the definition of "Revolving Credit Loan Facility" to amend and modify the aggregate principal amount of the Revolving Credit Loan Facility from the existing aggregate principal amount of "up to $70,000,000.00" to a new increased aggregate principal amount of "up to $80,000,000.00"; (iii) in Article 1, Section 1.01 of the Loan Agreement, deleting the existing definition of "Advance Limit" and inserting a new definition of "Advance Limit" in its place and stead; (iv) in Article I, Section 1.01 of the Loan Agreement, deleting the existing definition of "Eligible Assignee" and inserting a new definition of "Eligible Assignee" in its place and stead; (v) in Article 1, Section 1 .01 of the Loan Agreement, amending and modifying the definition of "Loan Documents" to provide for this Second Amendment; (vi) in Article I, Section 1.01 of the Loan Agreement, providing for a new definition of "Second Amendment"; (vii) in Article II, Section 2.11 of the Loan Agreement, amending and modifying Section 2.11 to provide for non-bank entities as Lenders"; (viii) in Article VII, Section 7.05 of the Loan Agreement, providing for a reference to any ~acquisition" in addition to the existing references to any "merger or consolidation"; (ix) in the Loan Documents, providing that any and all references to the "Revolving Credit Loan Facility" shall be deemed to refer to the Revolving Credit Loan Facility in the aggregate increased principal amount of"up to $80,000,000.00"; and (x) in the Loan Documents, providing that any and all references to the Loan Documents shall be deemed to refer to each Loan Document as amended and modified up through and including this Second Amendment; and WHEREAS, at various times since the Closing Date, the Lenders have sold, assigned and/or transferred a portion or portions of their respective interests in the Loan Facilities to other Persons and, as a result of such sales, assignments and/or transfers, the Original Notes have been superceded and replaced by various "Notes" (as such term is defined in the Loan Agreement) which represent the current Commitments of the Lenders, as such Commitments are set forth on Schedule "A" attached hereto and made a part hereof; and WHEREAS, all words, terms, definitions and provisions not otherwise expressly defined herein shall have their respective meanings and be construed as provided for in the Loan Agreement. All words, terms, definitions and provisions of the Loan Agreement are incorporated herein by reference, as if set forth in their entirety. -11- NOW, THEREFORE, intending to be legally bound hereby, the Co-Borrowers, the Guarantors and the Lenders hereby promise, covenant and agree as follows: 1. PRINCIPAL BALANCE OF THE REVOLVING CREDIT LOAN FACILITY. There is, as of Deccmber 17, 1999, presently due and owing on the Revolving Credit Loan Facility, the principal sum of US$41,864,120.23 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. The foregoing principal balance is allocated as follows: (i) US$31,541,000.00 for Revolving Credit Loans (ii) US$6,250,189.43 for Letter of Credit Obligations; (iii) US$4,072,930.80 for Canadian Revolving Credit Loans; (iv) US$0.00 for Canadian Letter of Credit Obligations; and (v) US$0.00 for Canadian Bankers Acceptances. 2. PRINCIPAL BALANCE OF THE TERM LOAN FACILITY #1. There is, as of December 17, 1999, presently due and owing on the Term Loan Facility #1, the principal sum of US$28,842,152.86 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. The foregoing principal balance is allocated as follows: (i) US$11,666,666.66 for Term Loans #1; and (ii) US$17,175,486.20 for Canadian Term Loans. 3. PRINCIPAL BALANCE OF THE TERM LOAN FACILITY #2. There is, as of December 17, 1999, presently due and owing on the Term Loan Facility #2, the principal sum of I US$49,875,000.00 without offset, defense or counterclaim, all of which are hereby expressly waived by the Co-Borrowers and the Guarantors as of the date hereof. 4. INCREASED REVOLVING CREDIT COMMITMENTS. The Agent, the Lenders, the Co-Borrowers and the Guarantors hereby covenant and agree that: (i) the aggregate principal amount (of the Revolving Credit Commitments available to the Co-Borrowers under the Loan Agreement shall be increased from $70,000,000.00 to $80,000,000.00, all as more fully set forth and described on Schedule "A" attached hereto and made a part hereof; and (ii) the Canadian Revolving Credit Sublimit shall not be amended, modified or otherwise affected by any of the terms, conditions and/or provisions of this Second Amendment and shall remain at the maximum aggregate principal amount of $10,000,000.00 as described in Section 2.O2(i)(a) of the Loan Agreement. 5. LOAN AGREEMENT. The Loan Agreement is hereby amended and modified as follows: (i) Article I, Section 1.01 is hereby amended and modified as follows: (a) In the Recitals and in Article I, Section 1.01, the definition of "Revolving Credit Loan Facility" shall be amended and modified to provide for the increased aggregate principal amount of the Revolving Credit Loan Facility of "up to $80,000,000.00". -12- (b) The definition of "Loan Documents" shall be amended and modified by inserting after the existing phrase "the First Amendment" the following new phrase: "and the Second Amendment". (c) In Article I, Section 1.01, the definition of "Advance Limit" shall be deleted and the following new definition of "Advance Limit" shall be inserted in its place and stead: "ADVANCE LIMIT" shall mean the Dollar Equivalent of the amount of the Revolving Credit Loan Facility which the Lenders may from time to time advance to the Co-Borrowers in the form of either direct Revolving Credit Loans or Letters of Credit or Canadian Bankers Acceptances, and which amount shall not in the aggregate at any time outstanding exceed the lesser of (i) US$80,000,000.00 or (ii) the sum of (a) eighty percent (80%) of all Qualified Billed Accounts Receivable (including Qualified Billed Government Accounts Receivable), as of the date of determination, plus (b) fifty percent (50%) of all Accrued Unbilled Government Accounts Receivable, as of the date of determination plus (c) fifty percent (50%) of the Qualified Inventory (net of all progress billings and/or payments), as of the date of determination, provided, however, in no event shall the amount described in this clause (c) ever exceed fifty percent (50%) of the total Revolving Credit Loans outstanding, as of the date of determination, plus (d) an amount of up to $5,000,000.00 in the aggregate at any time which the Agent, in its sole and absolute discretion, may agree to advance to the Co-Borrowers against Accounts which do not satisfy the test for Qualified Billed Accounts Receivable solely as a result of novation and administrative issues which cause the Account to remain unpaid for a period of more than ninety (90) days but less than one hundred and fifty (150) days from the invoice date." (d) In Article I, Section 1.01, the definition of "Eligible Assignee" shall be deleted and the following new definition of "Eligible Assignee" shall be inserted in its place and stead: "ELIGIBLE ASSIGNEE" shall mean any Person(s), each of whom must be acceptable to the Agent and the Co-Borrowers; provided, however, in each such instance where said Person is a bank or other institutional lender, said Person must then be in compliance with all then applicable Laws regarding regulatory capital requirements after giving effect to any "phase-in" provisions thereof; provided, further, that such Person shall have an Affiliate Canadian Lender in each case where such Person is purchasing and assuming a Pro Rata Share of the Canadian Revolving Credit Sublimit and/or the Canadian Term Loan, as applicable (and, in such instance, the term Eligible Assignee as used herein shall include such Person and such Affiliate Canadian Lender as the context requires)." (e) The following new definitions shall be inserted: "SECOND AMENDMENT" shall mean that certain Second Amendment and Modification Agreement dated February 4, 2000, executed by and among the Co-Borrowers, as the co-borrowers, the Guarantors, as the guarantors, the Agent, as the agent for the lenders, and -13- the Lenders, as the lenders, whereby the parties agreed to amend and modify this Loan Agreement and the other Loan Documents, all as previously amended and modified, for the purposes of (i) increasing the aggregate principal amount of the Revolving Credit Commitments from the aggregate principal amount of "up to $70,000,000.00" to a new increased aggregate principal amount of "up to $80,000,000.00"; (ii) in the Recitals and in Article I, Section 1.01 of this Loan Agreement, amending and modifying the definition of "Revolving Credit Loan Facility" to amend and modify the aggregate principal amount of the Revolving Credit Loan Facility from the existing aggregate principal amount of "up to $70,000,000.00" to a new increased aggregate principal amount of "up to $80,000,000.00"; (iii) in Article I, Section 1.01 of this Loan Agreement, deleting the existing definition of "Advance Limit" and inserting a new definition of "Advance Limit" in its place and stead; (iv) in Article I, Section 1.01 of this Loan Agreement, deleting the existing definition of "Eligible Assignee" and inserting a new definition of "Eligible Assignee" in its place and stead; (v) in Article 1, Section 1.01 of this Loan Agreement, amending and modifying the definition of "Loan Documents" to provide for the Second Amendment; (vi) in Article I, Section 1.01 of this Loan Agreement, providing for a new definition of "Second Amendment"; (vii) in Article II, Section 2.11 of this Loan Agreement, amending and modifying Section 2.11 to provide for non-bank entities as "Lenders"; (viii) in Article VII, Section 7.05 of this Loan Agreement, providing for a reference to any "acquisition" in addition to the existing references to any "merger or consolidation"; (ix) in the Loan Documents, providing that any and all references to the "Revolving Credit Loan Facility" shall be deemed to refer to the Revolving Credit Loan Facility in the aggregate increased principal amount of"up to $80,000,000.00"; and (x) in the loan Documents, providing that any and all references to the Loan Documents shall he deemed to refer to each Loan Document as amended and modified up through and including the Second Amendment." (ii) Article II, Section 2.11 is hereby amended and modified as follows: (a) Section 2.1l(iii)(a)(l) is hereby amended and modified by deleting the existing Section 2.11(iii)(a)(l) and inserting the following new Section 2.1l(iii)(a)(l) in its place and stead: "(I) (A) in the case of a Lender which is a "bank" within the meaning of Section 881(c)(3)(A) of the Code, two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Loan Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes and (B) in the case of a Lender which is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code, a certificate in substantially the form attached to the Second Amendment as Exhibit "A" with blanks appropriately filled (hereinafter each referred to as a "Non-Bank Compliance Certificate"; and". -14- (b) Section 2.11(iii)(a) is hereby amended and modified by inserting a reference to "and/or Non-Bank Compliance Certificate, as applicable," after each reference contained therein to "a Form 1001 or 4224" and "a Form 1001 or Form 4224". (iii) Article VII, Section 7.05 is hereby amended and modified by deleting the existing reference therein to "any merger or consolidation" and inserting a new reference to "any merger, consolidation or acquisition" in its place and stead. (iv) The following new exhibit shall be added to the Loan Agreement: (a) Exhibit "L" - Form of Non-Bank Compliance Certificate, attached to this Second Amendment as Exhibit "A". (v) Any and all references to one or more of the "Loan Documents" shall be deemed to refer to said Loan Documents as amended and modified up through and including this Second Amendment. 6. Loan Documents. The Loan Documents, as previously amended and modified, are hereby further amended and modified as follows: (i) Any and all references to the "Loan Agreement" shall be deemed to refer to the Loan Agreement, as amended and modified up through and including this Second Amendment. (ii) Any and all references to any or all of the "Loan Documents" shall be deemed to refer to each such Loan Document as amended and modified up through and including this Second Amendment. (iii) Any and all references to the "Revolving Credit Loan Facility" shall be deemed to refer to the "Revolving Credit Loan Facility" in the increased aggregate principal amount of "up to $80,000,000.00". 7. NAI TECHNOLOGIES PATENTS, TRADEMARKS AND COPYRIGHTS. The Co-Borrowers and the Guarantors hereby represent and warrant that those patents, trademarks and copyrights set forth and described on Schedule "B" attached hereto and made a part hereof (i) to the Co-Borrowers' and the Guarantors' best knowledge, are not presently used in connection with any of the Co-Borrowers', the Guarantors' and/or any of their respective Subsidiaries' and/or Affiliates businesses, (ii) are not presently of any material value, either to the Co-Borrowers and/or the Guarantors or to any unrelated third parties, (iii) the loss of one or all of said patents, trademarks and/or copyrights would not have a Material Adverse Effect and (iv) to the Co-Borrowers' and the Guarantors' best knowledge, represent all of the patents, trademarks and copyrights obtained by the Co-Borrowers and/or the Guarantors in connection with the Merger. 8. REAFFIRMATION. Each of the Co-Borrowers and the Guarantors hereby expressly confirm and reaffirm all of their respective liabilities, obligations and responsibilities under and -15- pursuant to the Loan Documents as amended, modified and/or supplemented by this Second Amendment. 9. FURTHER AGREEMENTS AND REPRESENTATIONS. The Co-Borrowers and the Guarantors do hereby: (i) ratify, confirm and acknowledge that, as amended and modified, the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and all of the other Loan Documents continue to be valid, binding and in full force and effect, (ii) covenant and agree to perform all of their respective obligations contained herein and under the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and all of the other Loan Documents, as amended and modified; (iii) acknowledge and agree that as of the date hereof, the Co-Borrowers and the Guarantors have no defense, set-off, counterclaim or challenge against the payment of any sums due and owing to the Agent or to any Lender or the enforcement of any of the terms of the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and/or any of the other Loan Documents, all as amended and modified; (iv) acknowledge and agree that all of the representations and warranties of the Co-Borrowers and/or the Guarantors contained in the Loan Agreement, the Notes, the Agreement of Guaranty, the Security Agreements and/or all of the other Loan Documents, are true, accurate and correct in all material respects as of the date hereof as if made on and as of the date hereof, (v) represent and warrant that, after giving effect to the transactions contemplated by this Second Amendment, no "Event of Default" (as such term is defined in the Loan Agreement), exists or will exist upon the delivery of notice, passage of time, or both, and all information described in the recitals is true and accurate; (vi) acknowledge and agree that nothing contained herein and no actions taken pursuant to the terms hereof are intended to constitute a novation of any of the Notes, the Revolving Credit Loan Facility, the Term Loan Facility #1 and/or the Term Loan Facility #2, or any waiver of any of the other Loan Documents, and do not constitute a release, termination or waiver of any of the rights and/or remedies granted to the Agent, on behalf of the Lenders, or to any of the Lenders under the Loan Documents, all of which rights and/or remedies are hereby expressly ratified and confirmed; and (vii) acknowledge and agree that the failure by the Co-Borrowers and/or the Guarantors to comply with or perform any of their respective covenants, agreements or obligations contained herein shall constitute an Event of Default under the Loan Agreement and each ot the Loan Documents, as amended and modified. 10. SECURITY INTEREST. The Co-Borrowers and the Guarantors hereby affirm and confirm that the security interests granted to the Agent on behalf of the Lenders in the Security -16- Agreements, as amended and modified by this Second Amendment, continue to be valid first liens on the Collateral. 11. ADDITIONAL DOCUMENTS FURTHER ASSURANCES. The Co-Borrowers hereby covenant and agree to execute and/or deliver to the Agent, on behalf of the Lenders, or to cause to be executed and/or delivered to the Agent, on behalf of the Lenders contemporaneously herewith, at the sole cost and expense of the Co-Borrowers, any and all other documents, agreements, statements, resolutions, certificates, opinions, consents, searches and information as the Agent, on behalf of the Lenders, may reasonably request in connection with the matters or actions described herein. The Co-Borrowers hereby further covenant and agree to execute and/or deliver to the I.ender, or to use their reasonable efforts to cause to be executed and/or delivered to the Agent, on behalf of the Lender, at the sole cost and expense of the Co-Borrowers, from time to time, any and all other documents, agreements, statements, certificates and information as the Agent, on behalf of the Lenders, shall reasonably request to evidence or effect the terms of the Loan Agreement, as amended, or any of the other Loan Documents, as amended, or to enforce or protect the Lenders' interest in the Collateral. All such documents, agreements, statements, etc., shall he in form and content reasonably acceptable to the Agent. 12. FEES, COSTS, EXPENSES AND EXPENDITURES. The Co-Borrowers shall pay all of the Agent's and the Lenders' reasonable expenses in connection with the review, preparation, negotiation, documentation and closing of this Second Amendment and the consummation of the transactions contemplated hereunder, including, without limitation, fees, expenses and disbursements of legal counsel retained by the Agent and/or the Lenders and all fees related to Filings, recordings of documents and searches, whether or not the transactions contemplated hereunder are consummated. 13. NO NOVATION. It is the intention of the parties hereto that this Second Amendment shall not constitute a novation and shall in no way adversely affect or impair the lien priority of the Loan Documents. In the event that this Second Amendment, or any portion hereof, or any of the instruments executed in connection herewith, shall he construed or shall operate to affect the lien priority of the Loan Documents, then to the extent such instrument creates a charge upon the Loan Documents in excess of that contemplated and permitted thereby and to the extent third parties acquiring an interest in the Loan Documents between the time of recording of the Loan Documents and the recording of this Second Amendment are prejudiced hereby, if any, this Second Amendment shall be void and of no force and effect; provided, however, that notwithstanding the foregoing, the parties hereto, as between themselves, shall be bound by all of the terms, conditions and provisions contained herein until all obligations of the Co-Borrowers to the Agent and the Lenders under the Loan Documents shall have been paid in full and the Loan Facilities shall have been terminated. 14. NO WAIVER. Nothing contained herein constitutes an agreement or obligation by the Agent or by any Lender to grant any further amendments to any of the Loan Documents and nothing contained herein constitutes a waiver or release by the Agent or by any Lender of any rights or remedies available to the Agent or such Lender under the Loan Documents, at law or in equity, provided that the foregoing is not intended to revoke the Agent's or any Lender's -17- previous consent to the requested actions by the Co-Borrowers and/or the Guarantors where such consent was delivered by the Agent or such Lender in writing. 15. INCONSISTENCIES. To the extent of any inconsistency between the terms and conditions of this Second Amendment and the terms and conditions of the Loan Agreement or the Loan Documents, the terms and conditions of this Second Amendment shall prevail. All terms and conditions of the Loan Agreement and the Loan Documents not inconsistent herewith shall remain in full force and effect and are hereby ratified and confirmed by the Co-Borrowers and/or the Guarantors. 16. CONSTRUCTION. Any capitalized terms used in this Second Amendment not otherwise defined shall have the meaning as set forth in the Loan Agreement. All references to the Loan Agreement therein or in any of the other Loan Documents shall be deemed to be a reference to the Loan Agreement, as amended and modified up through and including the date hereof. 17. BINDING EFFECT. This Second Amendment shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 18. COUNTERPARTS. This Second Amendment may be executed by one or more of the parties to this Second Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. -18- IN WITNESS WHEREOF, the Co-Borrowers, the Guarantors, the Agent and the lenders have caused this Second Amendment to be executed and delivered by their duly authoried corporate officers, all as of the day and year first written above. DRS TECHNOLOGIES, INC., a Delaware corporation, as a Co-Borrower DRS TECHNOLOGIES CANADA, INC., a Delaware corporation, as a Co-Borrower DRS SENSOR SYSTEMS, INC. FORMERLY KNOWN AS "DRS EO, INC.", a Delaware corporation, as a Co-Borrower DRS AIR, INC., a Delaware corporation, as a Guarantor DRS INTERNATIONAL, INC., a Delaware corporation, as a Guarantor DRS FPA, INC., a Delaware corporation, as a Guarantor DRS INFRARED TECHNOLOGIES, LP, FORMERLY KNOWN AS "DRS FPA, L.P.", a Delaware limited partnership, as a Co-Borrower By: DRS FPA, INC., a Delaware corporation, as the general partner DRS/MS, INC., a Delaware corporation, as a Guarantor By: /s/ MARK S. NEWMAN ------------------------------------------ Mark S. Newman In his capacity as the President of each of the above-referenced corporations -19- DRS TECHNOLOGIES CANADA COMPANY, a Nova Scotia company, as a Co-Borrower DRS PRECISION ECHO, INC., a Delaware corporation, as a Guarantor By: /s/ DAVID STAPLEY ------------------------------------------ David Stapley President LAUREL TECHNOLOGIES PARTNERSHIP, (ALSO DOING BUSINESS AS DRS LAUREL TECHNOLOGIES), a Delaware general partnership, as a Guarantor By: DRS SYSTEMS MANAGEMENT CORPORATION, as the General Partner DRS ELECTRONIC SYSTEMS, INC., a Delaware corporation, as a Guarantor DRS SYSTEMS MANAGEMENT CORPORATION, a Delaware corporation, as a Guarantor DRS TECHNICAL SERVICES, INC., a Delaware corporation, as a Guarantor NAI TECHNOLOGIES, INC., AS SUCCESSOR-IN- INTEREST TO DRS MERGER SUB, INC., a New York corporation, as a Guarantor By: /s/ TERRENCE L. DEROSA ------------------------------------------ Terrence L. DeRosa President -20- DRS PHOTRONICS, INC., a New York corporation, as a Guarantor By: /s/ PAUL G. CASNER, JR. ------------------------------------------ Paul G. Casner, Jr. President DRS AHEAD TECHNOLOGY, INC., a Delaware corporation, as a Guarantor By: /s/ DENNIS CHARLEBOIS ------------------------------------------ Dennis Charlebois President DRS OPTRONICS, INC., a Delaware corporation, as a Guarantor By: /s/ FRED MARION ------------------------------------------ Fred Marion President DRS HADLAND, INC., a Massachusetts corporation, as a Guarantor By: /s/ DOUGLAS STUART ------------------------------------------ Douglas Stuart President DRS RUGGED SYSTEMS, INC., a Colorado corporation, as a Guarantor By: /s/ DAVID PRIOR ------------------------------------------ David Prior President -21- DRS ADVANCED PROGRAMS, INC., a New York corporation, as a Guarantor By: /s/ STEVEN RICE ------------------------------------------ Steven Rice President MELLON BANK, N.A., as a Lender By: /s/ RUSS J. LOPINTO ------------------------------------------ Russ J. Lopinto President MELLON BANK CANADA, as a Lender By: /s/ WENDY B.H. BOCTI ------------------------------------------ Wendy B.H. Bocti Chief Operating Officer THE CIT GROUP/EQUIPMENT FINANCING, INC., as a Lender By: /s/ DANIEL E. A. NICHOLS ------------------------------------------ Daniel E. A. Nichols Assistant Vice President NATIONAL BANK OF CANADA, as a Lender By: /s/ TIPETHY J. SMITH By: /s/ KAREN A. GREXA - ------------------------- AND ------------------------------------------ Tipethy J. Smith Karen A. Grexa Vice President & Vice President Manager -22- SUMMIT BANK, as a Lender By: /s/ GEORGE BARRON ------------------------------------------ George Barron Vice President UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ HAGOP V. JAZMADARIAN ------------------------------------------ Hagop V. Jazmadarian Vice President TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION, as a Lender By: /s/ SEAN D. MCALISTER ------------------------------------------ Sean D. McAlister Vice President Region Credit Manager THE TORONTO-DOMINION BANK, as a Lender By: /s/ PARIN KANJI ------------------------------------------ Parin Kanji Assistant Manager TORONTO DOMINION (NEW YORK), INC., as a Lender By: /s/ JORGE A. GARCIA ------------------------------------------ Jorge A. Garcia Vice President -23- NATIONAL CITY BANK OF PENNSYLVANIA, as a Lender By: /s/ W. CHRISTOPHER KOHLER ------------------------------------------ W. christopher Kohler Assistant Vice President KZH SOLEIL LLC, as a Lender by: /s/ PETER CHIN ------------------------------------------ Peter Chin Authorized Agent GALAXY CLO 1999-1, LTD., as a Lender By: SAI INESTMENT ADVISER, INC., ITS COLLATERAL MANAGER By: /s/ STEVEN STAVER ------------------------------------- Steven Staver Authorized Agent STEIN ROE & FARNHAM CLO I LTD., as a Lender By: STEIN ROE & FARNHAM INCORPORATED, AS PORTFOLIO MANAGER By: /s/ JAMES R. FELLOWS ------------------------------------- James R. Fellows Vice President IBM CREDIT CORPORATION, as a Lender By: /s/ THOMAS S. GARCIA ------------------------------------------ Thomas S. Garcia Manager of Credit -24- MELLON BANK, N.A., as the Agent By: /s/ RUSS J. LOPINTO ------------------------------------------ Russ J. Lopinto Vice President -25- EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECOND AMENDMENT AND MODIFICATION AGREEMENT BY AND AMONG DRS TECHNOLOGIES, INC. ET AL., AND MELLON BANK, N.A. ET AL, DATED FEBRUARY 4,2000 FORM OF NON-BANK COMPLIANCE CERTIFICATE [INSERT DATE] Mellon Bank, N.A., as Agent DRS Technologies, Inc. Mellon Financial Services DRS Technologies Canada Company Raritan Center DRS Technologies Canada, Inc. Edison, New Jersey 08837 DRS EO, Inc. Fax: (732) 225-4820 DRS FPA, L.P. 5 Sylvan Way Parsippany, New Jersey 07054 Fax: (973) 898-4730 Re: Amended and Restated Revolving Credit Loan and Term Loan Agreement among DRS Technologies, Inc., DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS EO. Inc. DRS FPA, L.P., Mellon Bank, N.A., as Agent, Mellon Bank Canada, and certain Lenders dated as of October 20, 1998 (hereinafter as it may be from time to time amended, modified, extended, renewed, refinanced and/or supplemented referred to as the "Loan Agreement") ________________________________ (hereinafter referred to as the "Company") hereby certifies as of the date hereof that: (1) the Company is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended (hereinafter referred to as the ~Code"), is not subject to regulatory or other legal requirements as a bank in any jurisdiction, and has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any governmental authority, and application made to a rating agency or qualification for any exemption for tax, securities law or other legal requirements; (2) the Company is not a ten percent (10%) shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of any obligor under the Loan Agreement; (3) the Company is not a "controlled foreign corporation" related to any obligor under the Loan Agreement (within the meaning of Section 864(d)(4) of the Code); and (4) the Company is entitled to receive payments under the Loan Agreement without deduction or withholding of any United States Federal income taxes. [INSERT COMPANY NAME] By: ________________________ Name: Title: -26- SCHEDULE "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECOND AMENDMENT AND MODIFICATION AGREEMENT BY AND AMONG DRS TECHNOLOGIES, INC. ET AL., AND MELLON BANK, N.A. ET AL, DATED FEBRUARY 4,2000 CURRENT COMMITMENTS OF THE LENDERS(1) (i) MELLON BANK, N.A. a. Revolving Credit Commitment $14,987,625.43 b. Term Loan #1 Commitment $ 4,417,904.70 c. Term Loan #2 Commitment $ 0.00 (ii) MELLON BANK CANADA a. Canadian Revolving Credit Commitment $ 5,000,000.00 b. Canadian Term Loan Commitment $ 7,220,641.31 (iii) THE CIT GROUP / EQUIPMENT FINANCING, INC. a. Revolving Credit Commitment $ 0.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 9,974,984.34 (iv) NATIONAL BANK OF CANADA - CANADA a. Canadian Revolving Credit Commitment $ 2,500,000.00 b. Canadian Term Loan Commitment $ 4,813,592.39 (v) NATIONAL BANK OF CANADA - US a. Revolving Credit Commitment $11,428,571.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 0.00 (vi) SUMMIT BANK a. Revolving Credit Commitment $ 9,696,971.00 b. Term Loan #1 Commitment $ 1,363,635.00 c. Term Loan #2 Commitment $ 0.00 - --------------- 1 All Revolving Credit Commitments reflect the $10,000,000.00 increase in the aggregate principal amount of the Revolving Credit Loan Facility contemplated and effected by this Second Amendment. -27- (vii) UNION BANK OF CALIFORNIA, N.A. a. Revolving Credit Commitment $14,545,457.00 b. Term Loan #1 Commitment $ 2,045,454.52 c. Term Loan #2 Commitment $ 4,993,734.34 (viii) TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION a. Revolving Credit Commitment $ 0.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 9,962,500.00 (ix) THE TORONTO-DOMINION BANK a. Canadian Revolving Credit Commitment $ 2,500,000.00 b. Canadian Term Loan Commitment $ 4,813,592.39 (x) TORONTO DOMINION (NEW YORK), INC. a. Revolving Credit Commitment $14,545,457.00 b. Term Loan #1 Commitment $ 2,045,454.52 c. Term Loan #2 Commitment $ 0.00 (xi) NATIONAL CITY BANK OF PENNSYLVANIA a. Revolving Credit Commitment $ 9,795,918.57 b. Term Loan #1 Commitment $ 1,377,551.25 c. Term Loan #2 Commitment $ 0.00 (xii) GALAXY CLO 1999-1, LTD. a. Revolving Credit Commitment $ 0.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $12,484,335.84 (xiii) KZH SOLEIL LLC a. Revolving Credit Commitment $ 0.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 2,496,867.17 (xiv) STEIN ROE & FARNHAM CLO I LTD. a. Revolving Credit Commitment $ 0.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 4,993,734.34 (xv) IBM CREDIT CORPORATION a. Revolving Credit Commitment $ 5,000,000.00 b. Term Loan #1 Commitment $ 0.00 c. Term Loan #2 Commitment $ 4,906,343.98 -28- SCHEDULE "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECOND AMENDMENT AND MODIFICATION AGREEMENT BY AND AMONG DRS TECHNOLOGIES, INC. ET AL., AND MELLON BANK, N.A. ET AL, DATED FEBRUARY 4,2000 PATENTS, TRADEMARKS AND COPYRI2HTS PATENT DATE REG. NO. ------ ---- -------- POWER SUPPLY SYSTEM July 24, 1990 4,943,762 MICROCOMPUTER HOUSING AND January 15, 1991 4,985,804 VENTILATION ARRANGEMENT RUGGED MODULAR PORTABLE COMPUTER July 4, 1995 5,430,607 INCLUDING MODULE SHINGLED ALONG AN EDGE ELECTRONIC SYSTEM WITH VARIABLE July 25, 1995 5,437,040 THRESHOLD POWER FAILURE SIGNALING MAGNETICALLY ACTUATED EQUIPMENT May 4, 1982 4,327,638 APPARATUS FOR SECURING AND RELEASING December 1, 1981 4,303,955 TAPE CARTRIDGES FROM TAPE DECKS. THERMAL PRINTER September 5, 1995 5,447,380 TRADEMARKS TRADEMARK DATE REG. NO. --------- ---- --------- NORTH ATLANTIC June 22, 1965 791,368 CODAR TECHNOLOGY, INC. April 20, 1993 1,765,709 NAI March 28, 1995 1,886,576 NAI (Stylized) March 28, 1995 1,886,577 EAGLE April 23, 1996 1,969,238 CODAR EXPLORER May 7, 1996 1,972,902 COMMON LAW TRADEMARKS MARK GOODS ---- ----- Codar Eagle Codar Genesis computer hardware and peripherals and accessaries Codar Falcon computer hardware, namely, flat panel dispalys and peripherals and accessories -29- COPYRIGHTS Copyright Title Owner Registration No. Date --------------- ----- ---------------- ------------- * NAI prom numbers North Atlantic TX1253576 July 18, 1981 885281, 885282 & Industries, Inc. 885458 for Quantex model 7030 printer * NAI prom, numbers North Atlantic TX1248096 Sept. 16, 1983 885540, 884451, Industries, Inc. 885543-A, 885844-A for model 7020 printer * RS-232 DTU North Atlantic TX1246882 March 24, 1983 controller program, Industries, Inc. Quantex model 2766 * Arinc 429 DTU North Atlantic TX1246881 March 24, 1983 controller program: Industries, Inc. Quantex model 2760 * Prom control North Atlantic TX1246154 July 15, 1983 drawing Industries, Inc. * Prom control North Atlantic TX1246153 July 15, 1983 drawing Industries, Inc. * NAI prom control North Atlantic TX1245230 Oct. 27, 1983 drawing no. 885565-A Industries, Inc. for Quantiex model 7010 printer * NAI prom number North Atlantic TX1240391 July 15, 1983 885177, 885178-1A, Industries, Inc. 885179 for Quantex model 7040 printer * PROM 884189 North Atlantic TX1209165 April 22, 1983 Industries, Inc. *PROM 884235-01 North Atlantic TX1209164 April 22, 1983 Industries, Inc. ARINC 429 DTU North Atlantic TX1177041 May 2, 1983 controller program Industries, Inc. Quantex model 2760 * Series 1000 PROG North Atlantic TX1067134 Jan. 18, 1983 SEG COMCO.SA Industries, Inc. * Tape storage system North Atlantic TX822889 Dec. 21, 1981 model 2710 QNTX Industries, Inc. TM 1005 reference manual * Tape Storage system North Atlantic TX789718 Oct. 26, 1981 model 2720 QNTX Industries, Inc. -30- Copyright Title Owner Registration No. Date --------------- ----- ---------------- ------------- TM 1019 reference manual * Tape cartridge North Atlantic TX785983 Oct. 19, 1981 system; model 2765, Industries, Inc. QNTX TM 1030 reference manual * Quantex Tape North Atlantic TX769075 Sep. 21, 1981 cartridge data loader Industries, Inc. model 2760 reference manual * Cartridge tape drive North Atlantic TX758570 May 6, 1981 models 400 and 401 Industries, Inc. QNTX TM 1011 reference manual * Tape storage system North Atlantic TX739703 May 21, 1981 model 5100-1D Industries, Inc. reference manual QNTX-TM 1006 * Rolm interface North Atlantic TX714423 June 22, 1981 model 786020 QNTX Industries, Inc. TM 1015 reference manual *Tape storage system, North Atlantic TX712884 June 18, 1981 model 2420, Industries, Inc. QNTX TM 1004, reference manual * Communications North Atlantic TX707486 June 8, 1981 tape terminal model Industries, Inc. 1000; QNTX TM 1022 reference manual * Cartridge tape drive, North Atlantic TX703253 June 1, 1981 model 651, QNTX Industries, Inc. TM 1029 reference manual *Tape storage system, North Atlantic TX699359 May 28, 1981 model 5100-2D, Industries, Inc. QNTX TM 1026, reference manual * Tape formatter, North Atlantic TX679918 April 28, 1981 model 786700 QNTX Industries, Inc. TM 1021 reference manual -31- Copyright Title Owner Registration No. Date --------------- ----- ---------------- ------------- * Quantex formatter North Atlantic TX676547 Apr. 20, 1981 model 786008: Industries, Inc. QNTX TM 1013 reference manual * Quantex PDP-11 North Atlantic TX676546 Apr. 20, 1981 interface model Industries, Inc. 786011/743 QNTx TM 1009 reference manual * Nova interface North Atlantic TX673942 Apr. 16, 1981 model 786014 Industries, Inc. reference manual * Series 6000 printer North Atlantic TX651162 Mar. 16, 1981 QNTX TM 1025 Industries, Inc. reference manual * Tape storage system North Atlantic TX651155 Mar. 16, 1981 model 2200 QNTX Industries, Inc. TM 1002 reference manual * Cartridge tape drive, North Atlantic TX485776 June 4, 1980 model 650, QNTX Industries, Inc. TM 1001 reference manual * XpressStation 4-Te NAI Technologies, TX3788977 Feb. 28, 1994 hardware reference Inc. Systems manual and user's guide Division EX-13 4 0004.txt PORTIONS OF 2000 A/R DRS TECHNOLOGIES INC. AND SUBSIDIARIES Selected Financial Data
(dollars in thousands, except per-share data) Years Ended March 31, ........................... 2000 1999 1998 1997 1996 -------------------------------------------------------- SUMMARY OF EARNINGS REVENUES(1) ..................................... $391,467 $265,849 $180,750 $135,286 $100,983 OPERATING INCOME(1) ............................. $ 26,178 $ 15,301 $ 14,419 $ 11,551 $ 8,545 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .......... $ 12,832 $ 5,780 $ 9,706 $ 8,256 $ 6,725 EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM .................... $ 7,661 $ 3,865 $ 6,634 $ 5,047 $ 4,102 NET EARNINGS .................................... $ 4,310 $ 680 $ 6,372 $ 5,663 $ 4,103 -------------------------------------------------------- PER SHARE DATA - FROM CONTINUING OPERATIONS(2), (3) BASIC EARNINGS PER SHARE ........................ $ 0.83 $ 0.58 $ 1.18 $ 0.91 $ 0.75 DILUTED EARNINGS PER SHARE ...................... $ 0.76 $ 0.57 $ 0.96 $ 0.77 $ 0.69 BOOK VALUE PER SHARE ............................ $ 8.43 $ 7.96 $ 7.16 $ 5.90 $ 4.86 -------------------------------------------------------- SUMMARY OF FINANCIAL POSITION WORKING CAPITAL ................................. $ 21,384 $ 13,491 $ 46,180 $ 32,838 $ 33,990 NET PROPERTY, PLANT AND EQUIPMENT ............... $ 29,006 $ 32,124 $ 20,783 $ 17,944 $ 16,191 TOTAL ASSETS .................................... $320,098 $329,639 $162,813 $ 96,408 $ 97,251 LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS ......................... $ 97,695 $102,091 $ 56,532 $ 30,801 $ 32,608 TOTAL STOCKHOLDERS' EQUITY ...................... $ 78,184 $ 73,442 $ 44,335 $ 32,987 $ 26,566 -------------------------------------------------------- FINANCIAL RATIOS PRETAX RETURN ON REVENUES(2) .................... 3.3% 2.2% 5.4% 6.1% 6.7% AFTER TAX RETURN ON REVENUES(2) ................. 2.0% 1.5% 3.7% 3.7% 4.1% RETURN ON AVERAGE STOCKHOLDERS' EQUITY(2) ....... 10.1% 6.6% 17.2% 16.9% 30.9% CURRENT RATIO ................................... 1.2 1.1 1.8 1.8 1.8 LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS, TO TOTAL CAPITALIZATION ........ 55.5% 58.2% 56.0% 48.3% 55.1% INTEREST COVERAGE RATIO(7) ...................... 3.37X 2.86X 4.12X 4.59X 4.69X -------------------------------------------------------- SUPPLEMENTAL INFORMATION EBIT(4) ......................................... $ 25,432 $ 15,137 $ 14,804 $ 11,838 $ 9,406 EBITDA(5) ....................................... $ 42,502 $ 26,738 $ 20,992 $ 16,450 $ 12,573 FREE CASH FLOW(6) ............................... $ 36,292 $ 20,184 $ 14,733 $ 11,347 $ 6,242 CAPITAL EXPENDITURES ............................ $ 6,210 $ 6,554 $ 6,259 $ 5,103 $ 6,331 DEPRECIATION AND AMORTIZATION ................... $ 17,070 $ 11,601 $ 6,188 $ 4,612 $ 3,167 INTERNAL RESEARCH AND DEVELOPMENT ............... $ 9,867 $ 5,104 $ 3,919 $ 3,852 $ 649 EMPLOYEES(8) .................................... 2,001 1,825 1,206 929 809 REVENUES PER EMPLOYEE(9) ........................ $ 196 $ 154 $ 139 $ 147 $ 59 --------------------------------------------------------
(1) Results for the five-year period ended March 31, 2000 reflect the Company's continuing operations. (See Note 4 of Notes to Consolidated Financial Statements.) (2) Earnings per share and financial ratios presented and calculated before extraordinary item in fiscal 1999. (3) No cash dividends have been distributed in any of the years in the five-year period ended March 31, 2000. (4) Earnings before extraordinary item, interest and related expenses, and income taxes. (5) Earnings from continuing operations before extraordinary item, interest and related expenses, income taxes, depreciation and amortization. (6) EBITDA less capital expenditures. (7) Ratio of EBITDA to interest and related expenses (primarily amortization of debt issuance costs). (8) Indicates the number of employees at March 31 from continuing operations for each of the fiscal years presented. (9) Based on average number of employees from continuing operations. 20 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis (MD&A) of the consolidated financial condition and results of operations of DRS Technologies, Inc. and Subsidiaries (hereinafter, the Company or DRS) as of March 31, 2000 and 1999, and for each of the fiscal years in the three-year period ended March 31, 2000. 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 risks and uncertainties are inherent to forward-looking statements. Accordingly, the Company's actual results could differ materially from those suggested by such forward-looking statements. Risks 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 Technologies is a leading supplier of defense electronics systems and has served the defense industry for over thirty years. The Company provides advanced technology products and services to government and commercial customers worldwide, developing and manufacturing a broad range of mission critical products -- from rugged computers and peripherals to systems and components in the areas of communications, combat systems, data storage, digital imaging, electro-optics, flight safety and space. The Company's defense electronics systems and subsystems are sold to all branches of the U.S. military, U.S. government intelligence agencies, major aerospace/defense contractors and international military forces. The Company has grown substantially in recent years, as a result of internal business development and strategic acquisitions. Acquisitions have significantly expanded the Company's business base and have increased and further diversified DRS's backlog. Over the past five fiscal years, revenues and earnings from continuing operations before extraordinary items, interest and related expenses, income taxes, depreciation and amortization (EBITDA) have grown at compound average annual rates of approximately 42% and 39%, respectively. In fiscal 2000, the Company's total revenues increased by approximately 47%. Funded backlog also has increased substantially. At March 31, 2000, DRS's funded backlog was approximately $388.1 million, an increase of 7% from March 31, 1999. As of March 31, 2000, approximately 45% and 28% of the Company's backlog related to products and services for the U.S. Army and U.S. Navy, as compared with 47% and 27% at March 31, 1999, respectively. To achieve this level of growth and business development, DRS has executed a consistent long-term business strategy. The Company's goal is to secure its emerging position as a mid-tier defense technology supplier by maintaining its reputation for technical excellence, focusing on the development of profitable long-term contracts and acquiring businesses that complement or extend existing product lines. COMPANY ORGANIZATION AND PRODUCTS DRS operates in three principal business segments on the basis of products and services offered. Each operating unit is comprised of separate and distinct businesses: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG). All other operations are grouped in "Other." During fiscal 2000, DRS's ultra high-speed digital imaging subsidiary, DRS Hadland, was combined with DRS's Flight Safety and Communications Group for management purposes, based primarily on operational synergies. DRS Hadland previously had been managed as part of EOSG. Prior-year balances and results of operations disclosed in this MD&A for both FSCG and EOSG have been restated to give effect to this management reporting change. In addition, as a result of an acquisition completed in fiscal 2000, ESG now includes the operations of DRS Rugged Systems (Europe) Products Ltd. (see Business Combinations and Disposals). ESG is a leading provider of computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustic signal processing and display equipment, and combat control systems. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in U.S. Army and international battlefield digitization programs. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES EOSG produces systems and subsystems for infrared night vision and targeting systems used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV) scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures, regardless of the ambient light level. This Group is also a leading designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the AH-64 Apache attack helicopter and AC-130U gunship. EOSG is also leveraging its significant technology base by expanding into related non-defense markets. FSCG is a leading manufacturer of deployable flight emergency or "black box" recording equipment used by military and search and rescue aircraft. FSCG also manufactures shipboard communications and infrared surveillance systems for the U.S., Canadian and other navies. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. FSCG, recognized for its technical expertise and capabilities, also provides advanced manufacturing services for international military and space customers. FSCG products are used on such platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target verification and battle damage assessment. FSCG is also a leading producer of ultra high-speed digital imaging systems. Other includes the activities of the parent company, DRS Corporate Headquarters (DRS Corporate) and DRS Ahead Technology, Inc. (DRS Ahead). DRS Ahead produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead also services and manufactures magnetic heads used in broadcast television equipment. DISCONTINUED OPERATIONS On May 18, 2000, the Company's Board of Directors approved an agreement to sell DRS's magnetic tape head business units located in St. Croix Falls, Wisconsin, and Razlog, Bulgaria. The St. Croix Falls and Bulgarian operations produce primarily magnetic tape recording heads for transaction products that read data from magnetic cards, tapes and ink. Management anticipates that the sale will be completed at the beginning of the second quarter of fiscal 2001. The pending sale of the magnetic tape head business represents a strategic decision by the Company to focus its resources on its core businesses. The Company has restated its financial statements to present the operating results of these business units as discontinued operations. BUSINESS COMBINATIONS AND DISPOSALS The following summarizes certain business combinations and transactions DRS completed, which significantly affect the comparability of the period-to-period results presented in this MD&A. Fiscal 2000 Transactions On July 21, 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total purchase price of $10.2 million. Located in Chippenham, Wiltshire, the United Kingdom, and now operating as DRS Rugged Systems (Europe) Products Ltd. (RSEP), the company designs and develops rugged computers and peripherals primarily for military applications. The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $8.7 million and is being amortized on a straight-line basis over twenty years. Any additional consideration paid by the Company would be an adjustment to goodwill. The financial position and results of operations of RSEP were not significant to those of the Company as of the acquisition date. Fiscal 1999 Transactions On October 20, 1998, the Company acquired, through certain of its subsidiaries, certain assets of the Second Generation Ground-Based Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the Company and Raytheon, as amended (the EOS Acquisition). The Company paid approximately $45 million in cash for the acquisition at closing; the purchase price is subject to a post-closing working capital adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment, if any, is the subject of arbitration between DRS and Raytheon. Although the Company cannot, at this time, predict the outcome of such arbitration, management does not expect that the final adjustment 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 identifiable net assets acquired and the appraised value of certain identified intangible assets were approximately $34.1 million and $30.8 million, respectively, and are being amortized on a straight-line basis over twenty years. DRS incurred professional fees and other costs related to the EOS Acquisition of approximately $2.0 million, which were also capitalized as part of the total purchase price. The Company has valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on the Company's effort to complete such contracts. The EOS Business, now operating as DRS Sensor 22 Systems, Inc. and DRS Infrared Technologies, LP, provides products used in the detection, identification and acquisition of targets based on infrared data. On February 19, 1999, a wholly-owned subsidiary of the Company merged with and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary of DRS, for stock and other consideration valued at approximately $24.8 million (the NAI Merger). The excess of cost over the estimated fair value of identifiable net assets acquired was approximately $26.7 million and is being amortized on a straight-line basis over twenty years. Prior to the NAI Merger, the Company began to assess and formulate a plan to close NAI's Longmont, Colorado facility and transfer engineering and production to other DRS locations. In January 2000, the Company announced its plan, which included relocating/terminating approximately 45 employees. A cost of approximately $1.5 million has been recorded as an adjustment to the acquisition cost during fiscal 2000. The Company expects to complete its exit plan during the first quarter of fiscal 2001. A summary of the costs and the related liability as of March 31, 2000 is as follows:
TOTAL COSTS INCURRED LIABILITY AT (in thousands) COSTS IN FISCAL 2000 MARCH 31, 2000 ------------------------------------------ SEVERANCE/EMPLOYEE COSTS ................................... $1,332 $ 137 $1,195 ESTIMATED LEASE COMMITMENTS AND RELATED FACILITY COSTS ..... 215 -- 215 ------------------------------------------ TOTAL ...................................................... $1,547 $ 137 $1,410 ------------------------------------------
No significant additional liabilities are expected to be incurred that would result in an adjustment of the acquisition cost allocation. DRS also incurred professional fees and other costs related to the NAI Merger of approximately $2.8 million, which were capitalized as part of the total purchase price. Operating as DRS Advanced Programs, Inc. and DRS Rugged Systems (Europe) Ltd., these units provide rugged computers, peripherals and integrated systems primarily for military and special government applications. Fiscal 1998 Transactions On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems (a partnership formed in February 1996 in which the Company held a 90% interest) to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $0.1 million and the reversal of accrued obligations of $0.3 million. The results of operations of this partnership were not material to the consolidated operating results of the Company during the periods presented. On 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 Spar 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 Spar 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 identifiable net assets acquired was approximately $20.0 million and is being amortized on a straight-line basis over thirty years. DRS incurred professional fees and other costs related to the Spar Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Headquartered in Carleton Place, Ontario, Canada, and operating as DRS Flight Safety and Communications, the company is an international provider of aviation and defense systems. 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. and subsidiaries for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating as DRS Hadland, the company is a leader in the ultra high-speed image capture and analysis market. It designs, manufactures and markets ultra high-speed digital imaging cameras and integrates 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 identifiable net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over thirty years. 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 EOS Acquisition and the NAI Merger, the financial position and results of operations of these 23 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES businesses were not significant to those of the Company as of their respective effective dates of acquisition. DRS selectively targets acquisition candidates that complement or expand the Company's products, services or technical capabilities. As part of the selection process, the Company assesses the potential for near-term accretion to earnings and typically selects only those businesses that can be accretive within twelve to eighteen months. The Company continues to seek acquisition opportunities consistent with its overall business strategy and is engaged in preliminary discussions regarding other potential acquisitions. There can be no assurance, however, that definitive agreements will be reached or that any further acquisitions will be consummated. RESTRUCTURING In addition to the closure of the Longmont, Colorado production facility, during the third and fourth quarters of fiscal 2000 the Company announced plans to restructure other operations, which resulted in the Company recording restructuring charges totaling approximately $2.2 million. The Company's restructuring initiatives impacted the EOSG and FSCG operating segments and DRS Corporate. EOSG recorded a restructuring charge of approximately $831,000 primarily for costs relating to consolidating two operating facilities into one in Oakland, New Jersey. As of March 31, 2000, FSCG recorded restructuring charges of approximately $669,000 and $143,000 at its DRS Hadland Ltd. ("DRS Hadland") and DRS Precision Echo, Inc. ("DRS Precision Echo") operating units, respectively, for severance and other employee related costs. The DRS Hadland restructuring charge was recorded in connection with the transition of the day-to-day management of DRS Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In addition, DRS Corporate recorded a restructuring charge of approximately $560,000 also for severance and other employee related costs. Severance and other employee costs were recorded in connection with the termination of 13 employees. As of March 31, 2000, all terminations had occurred. A portion of the termination benefits will be paid in accordance with contractual terms over the next two years. The following table reconciles the restructuring charge to the related liability account balance as of March 31, 2000:
FISCAL 2000 UTILIZED LIABILITY AT (in thousands) CHARGE FISCAL 2000 MARCH 31, 2000 ------------------------------------------------- ASSET WRITE OFFS ........................................... $ 503 $ 503 $ -- ESTIMATED LEASE COMMITMENTS AND RELATED FACILITY COSTS ..... 328 -- 328 SEVERANCE/EMPLOYEE COSTS ................................... 1,372 682 690 ------------------------------------------------- TOTAL ...................................................... $2,203 $1,185 $1,018 -------------------------------------------------
The Company believes that the overall reduction in direct and indirect operating expenses resulting from these management actions will have a positive effect on the Company's future operating results beginning in the first quarter of fiscal 2001. RESULTS OF OPERATIONS The Company's operating cycle is long-term and involves various types of production contracts and varying production delivery schedules. Accordingly, operating results of a particular year, or year- to-year comparisons of recorded revenues and earnings, may not be indicative of future operating results. The following comparative analysis should be viewed in this context. COMPARISON OF FISCAL 2000 WITH FISCAL 1999 Revenues and operating income for the year ended March 31, 2000 increased approximately $126.0 million and $11.0 million, respectively, as compared with the prior fiscal year. These increases were primarily attributable to the inclusion of a full year of operations of the Company's fiscal 1999 third quarter EOS Acquisition and the fiscal 1999 fourth quarter NAI Merger. In addition to the impact of the fiscal 1999 acquisitions, fiscal 2000 revenues and operating income were positively impacted by the Company's second quarter acquisition of RSEP (see discussion of operating segments below for additional information). Fiscal 2000 consolidated operating income also was impacted by the approximately $2.2 million charge recorded in connection with restructuring certain operations (see Restructuring). Interest and related expenses for the year ended March 31, 2000 were approximately $12.6 million, as compared with $9.4 million for the year ended March 31, 1999. This $3.2 million increase was primarily due to higher average borrowings outstanding in fiscal 2000 related to the fiscal 1999 EOS Acquisition, and also to the impact of the fiscal 2000 second quarter acquisition of RSEP. Interest also increased as a result of higher average working capital borrowings in fiscal 2000, as compared with fiscal 1999. The Company's effective tax rate was 40% and 33% in the fiscal years ended March 31, 2000 and 1999, respectively. The effective rate for fiscal 2000 reflected the continued growth in domestic earnings, which were taxed at higher overall rates in comparison to the Company's foreign tax jurisdictions. The effective rate also increased, due to the effect of non-deductible goodwill associated with the NAI Merger in February 1999 and the acquisition of RSEP in July 1999. 24 The Company's effective tax rate may increase in fiscal 2001 as certain domestic and foreign tax benefits are not expected to be recurring. However, the Company is currently in the process of evaluating certain tax planning strategies which, if implemented, could significantly limit such an increase and potentially reduce the effective tax rate. Minority interest was approximately $1.3 million and $1.0 million in fiscal 2000 and 1999, respectively. The increase was due to higher operating income generated by ESG's DRS Laurel Technologies unit, in which the Company has an 80% interest. In fiscal 2000, the Company recorded a $1.3 million loss, net of tax, from discontinued operations and a $2.1 million loss, net of tax, on the disposal of discontinued operations relating to the pending sale of the Company's magnetic tape head business. COMPARISON OF FISCAL 1999 WITH FISCAL 1998 Revenues and operating income for the year ended March 31, 1999 increased approximately $85.1 million and $0.9 million, respectively, as compared with the prior fiscal year. These increases were primarily attributable to the inclusion of approximately five months of the operating results of the Company's fiscal 1999 third quarter EOS Acquisition, approximately two months of the operating results of the Company's fiscal 1999 fourth quarter NAI Merger and a full year of the operations of the Company's fiscal 1998 acquisitions (see discussion of operating segments below for additional information). Interest and other income, net, was $0.9 million for the fiscal year ended March 31, 1999, as compared with $1.3 in the prior fiscal year. Interest and other income, net, in fiscal 1998 included approximately $0.3 million from the sale of the net assets of DRS Medical Systems in September 1997. Minority interest was approximately $1.0 million in both fiscal 1999 and 1998. Minority interest represents 20% of the net income generated by ESG's DRS Laurel Technologies unit, in which the Company has an 80% interest. Interest and related expenses were approximately $9.4 million and $5.1 million for the fiscal years ended March 31, 1999 and 1998, respectively. The increase was primarily attributable to debt associated with the EOS Acquisition and the Spar Acquisition in October 1998 and 1997, respectively. The increase in interest expense was also due, in part, to higher average working capital borrowings in fiscal 1999. The Company's effective tax rate was 33% and 32% in the fiscal years ended March 31, 1999 and 1998, respectively. The lower effective tax rate for fiscal 1998 included the effect of a one-time benefit associated with the utilization of a U.S. Federal capital loss carryforward. The effective tax rate in fiscal 1999 reflected the effect of U.S. tax return benefits that were not recognized previously for financial statement purposes. The fiscal 1999 effective rate also reflected the effect of lower average foreign statutory tax rates, as domestic earnings were proportionately less than fiscal 1998. DRS recorded an extraordinary charge of approximately $2.3 million, net of tax, in the fiscal quarter ended December 31, 1998 in connection with a modification of the Company's credit facility. OPERATING SEGMENTS 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:
o ESG PERCENT CHANGES -------------------- 2000 vs. 1999 vs. Years Ended March 31, 2000 1999 1998 1999 1998 ---------------------------------------------------------- REVENUES .................................... $187,794 $123,558 $ 95,054 52.0% 30.0% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES .... $ 16,370 $ 9,497 $ 9,481 72.4% 0.2% OPERATING INCOME ............................ $ 14,593 $ 9,292 $ 9,454 57.0% (1.7%) OPERATING MARGIN ............................ 7.8% 7.5% 9.9% 4.0% (24.2%) ---------------------------------------------------------- o EOSG PERCENT CHANGES -------------------- 2000 vs. 1999 vs. Years Ended March 31, 2000 1999 1998 1999 1998 ---------------------------------------------------------- REVENUES .................................... $141,108 $ 69,972 $ 30,320 101.7% 130.8% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES .... $ 14,804 $ 5,077 $ 937 191.6% 441.8% OPERATING INCOME ............................ $ 11,404 $ 3,581 $ 801 218.5% 347.1% OPERATING MARGIN ............................ 8.1% 5.1% 2.6% 58.8% 96.1% ----------------------------------------------------------
25 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES
o FSCG PERCENT CHANGES --------------------- 2000 vs. 1999 vs. Years Ended March 31, 2000 1999 1998 1999 1998 -------------------------------------------------------- REVENUES ....................................... $54,209 $60,438 $38,463 (10.3%) 57.1% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES ....... $ 3,799 $ 5,672 $ 2,621 (33.0%) 116.4% OPERATING INCOME ............................... $ 2,762 $ 4,684 $ 2,124 (41.0%) 120.5% OPERATING MARGIN ............................... 5.1% 7.8% 5.5% (34.6%) 41.8% -------------------------------------------------------- o OTHER PERCENT CHANGES --------------------- 2000 vs. 1999 vs. Years Ended March 31, 2000 1999 1998 1999 1998 --------------------------------------------------------------- REVENUES ....................................... $ 8,356 $ 11,881 $ 16,913 (29.7%) (29.8%) OPERATING (LOSS) INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES ....... $ (2,391) $ (2,022) $ 2,302 18.2% (187.8%) OPERATING (LOSS) INCOME ........................ $ (2,581) $ (2,256) $ 2,040 14.4% (210.6%) OPERATING MARGIN ............................... (30.9%) (19.0%) 12.1% 62.6% (257.0%) ---------------------------------------------------------------
COMPARISON OF FISCAL 2000 WITH FISCAL 1999 ESG: ESG's increase in revenues and operating income for the year ended March 31, 2000, as compared with the prior year, was due primarily to the inclusion of the full-year operating results of the Company's fiscal 1999 fourth quarter NAI Merger. Revenues and operating income for the year ended March 31, 2000 attributable to the NAI Merger increased by $51.8 million and $3.8 million, respectively, as compared with the prior-year period. Following its acquisition in July 1999, RSEP contributed approximately $7.4 million and $1.4 million in additional revenues and operating income, respectively, for the year ended March 31, 2000. The overall increase in ESG's revenues and operating income were also attributable to continued growth of the Company's military display workstation programs, primarily the AN/UYQ-70 Advanced Display System (Q-70). EOSG: EOSG's increase in revenues and operating income for the year ended March 31, 2000 was primarily attributable to the October 1998 EOS Acquisition. This acquisition contributed approximately $117.5 million in revenues and $13.9 million of operating income for the year ended March 31, 2000. Operating income for the year ended March 31, 2000 included a $2.9 million cumulative profit adjustment relating to a certain long-term production program. Estimates to complete this program were revised in the third quarter to reflect the benefit of management's efforts to reduce overall production costs, primarily by identifying and procuring certain materials and subassemblies from alternate suppliers. Shipments under the current production contract commenced early in the third quarter of fiscal 2000, and the benefits of management's cost reduction initiatives began to be realized at that time. Revenues and operating income for the year ended March 31, 2000 attributable to the EOS Acquisition increased by $70.2 million and $10.4 million, respectively, as compared with the corresponding prior period. Exclusive of the contributions of the EOS Business, EOSG's operating income decreased by $2.5 million for the year ended March 31, 2000. The decrease in operating income was primarily attributable to the following factors: restructuring charges totaling $0.8 million (See Restructuring), $0.8 million for anticipated costs to be incurred in connection with certain product warranty issues associated with a specific product line and a charge of approximately $0.5 million relating to additional development costs associated with one of the Group's commercial product lines. FSCG: FSCG's revenues and operating income for the year ended March 31, 2000 decreased by approximately $6.2 million and $1.9 million, respectively. The decrease in revenues was primarily due to a decrease in shipments of airborne video tape recording systems, and the fact that fiscal 1999 revenues included approximately $1.7 million relating to an equitable adjustment claim settlement between the Company and the U.S. Navy. The decrease in revenues was partially offset by increased revenues from contract manufacturing and surface ship systems. The decrease in operating income and operating margin was primarily due to the decrease in revenues, a change in product mix and restructuring charges of approximately $0.8 million recorded by the Group (see Restructuring). In addition, during fiscal 2000, FSCG management provided $1.6 million for estimated excess inventory and obsolescence relating to certain products. Other: DRS Ahead's revenues for the year ended March 31, 2000 decreased by $3.5 million, resulting from the continuing effects of the sluggish global computer disk drive marketplace. Operating losses of DRS Ahead for the year ended March 31, 2000 were approximately $0.7 million less than those posted in the prior year. The improvement resulted from the cumulative effect of DRS Ahead's ongoing cost reduction initiatives. The loss at DRS Corporate increased $1.0 million, primarily relating to $0.6 million of restructuring charges and increased general and administrative expenses. 26 COMPARISON OF FISCAL 1999 WITH FISCAL 1998 ESG: ESG's revenue growth was attributable primarily to increased shipments of the Group's military display workstations and coastal surveillance systems. Fiscal 1999 revenues included approximately $7.0 million from the NAI Merger in February 1999. The decrease in ESG's operating income and operating margin resulted primarily from a shift in revenue mix in fiscal 1999 to a higher percentage of revenues from the AN/UYQ-70 Advanced Display System tactical workstation (Q-70) program with the U.S. Navy. Margins are generally lower on the Q-70 program compared with certain other product lines, due to its significant commercial off-the-shelf (COTS) component content. EOSG: The increase in revenues at EOSG was primarily attributable to the acquisition of the EOS Business in October 1998. This increase was partially offset by the continued delay in shipping boresight systems, resulting from the complaint filed against an employee of DRS Photronics, Inc. To date, no claim has been made or threatened against the Company or DRS Photronics. Operating results for the fiscal year ended March 31, 1998 reflect the effect of a second quarter charge of $0.5 million, associated with the relocation of the Group's boresight operations from Hauppauge, New York to Oakland, New Jersey. The increases in operating income and margins in fiscal 1999 were primarily due to the acquisitions mentioned above. FSCG: FSCG's revenue growth was attributable to shipments of the Group's flight safety and communications products, revenues from contract manufacturing services, generated by the business acquired from Spar in the third quarter of fiscal 1998, and the inclusion of a full year of the operations of DRS Hadland, which was acquired in March 1998. In addition, revenues for the fiscal year ended March 31, 1999 included approximately $1.7 million relating to an equitable adjustment claim settlement between the Company and the U.S. Navy. This settlement represented a recovery of a portion of excess costs incurred on a contract, completed in fiscal 1994, to develop and produce a mission data recorder playback support system for use with the Company's AN/AQH-9 and AN/AQH-11 data recorders. The excess costs incurred on this contract were charged to earnings in prior periods. The increase in operating income and operating margin resulted from the increase in revenues, as explained above, partially offset by decreases in the Group's military data recording systems product line margins, resulting from lower revenues and a change in product mix. Operating results were impacted adversely by a charge in the third quarter of fiscal 1999 of approximately $1.0 million for reserves against inventory in excess of contract requirements at the Group's DRS Precision Echo, Inc. unit. Other: The decrease in revenues resulted from the continuing effects of the sluggish global computer disk drive marketplace at the Company's DRS Ahead operating unit, as well as the sale of DRS Medical Systems in September 1997. DRS Ahead experienced delays in orders expected from major customers and postponements of existing orders, resulting from these market conditions. The decrease in operating income and operating margin was the result of lower revenues and margins attributable to pricing pressure and less favorable absorption of fixed operating expenses at DRS Ahead, and increased general and administrative expenses at DRS Corporate. In November 1998, DRS Ahead implemented a 25% reduction in its work force in its San Jose, California operation in response to the decrease in sales volume. FINANCIAL CONDITION AND LIQUIDITY CASH FLOWS Cash and cash equivalents at March 31, 2000 and 1999 represented approximately 1% and 3%, respectively, of total assets. In fiscal 2000, net cash provided by operating activities decreased by approximately $7.7 million. This decrease was primarily driven by a significant decrease in accounts payable, accrued expenses and other current liabilities and the liquidation of customer advances relating to the Q-70 program. Advances are liquidated against progress billings based on terms negotiated at the time such advances are made. Fiscal 2000 cash flows from operating activities were net of approximately $11.1 million and $5.6 million for interest and income tax payments, respectively. Net cash used in investing activities for fiscal 2000 consisted of capital expenditures and the cost of fiscal 2000 acquisitions (primarily the cost of the RSEP acquisition). Net cash provided by financing activities for fiscal year 2000 was $2.2 million, including net proceeds from acquisition-related and other borrowings of $12.9 million. In addition, approximately $10.8 million was used for repayments of long-term debt which included approximately $0.7 million for the liquidation of the remaining balance of the 12% Convertible Subordinated Promissory Notes assumed in connection with the NAI Merger. Working capital borrowings under the Company's credit facility were $17.0 million and $8.0 million as of March 31, 2000 and 1999, respectively. WORKING CAPITAL Working capital as of March 31, 2000 was $21.4 million, an increase of $7.9 million, or 58%, from March 31, 1999. The increase was primarily due to a $13.7 million and $6.8 million decrease in accounts payable and accrued expenses and other current liabilities, respectively, offset in part by an $8.6 million increase in short-term bank debt and a $7.5 million decrease in inventories, net of progress payments. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES DEBT Total debt outstanding increased by approximately $4.1 million during the fiscal year ended March 31, 2000 to $121.2 million, primarily due to increased short-term working capital borrowings, offset, in part, by a $4.4 million decrease in long-term debt, excluding current installments. The ratio of long-term debt (excluding current installments) to total capitalization improved to 55.5% at March 31, 2000 from 58.2% at March 31, 1999. CAPITAL RESOURCES On October 20, 1998 and as amended on February 4, 2000, the Company and certain of its subsidiaries entered into a $160 million secured credit facility (Facility) with Mellon Bank, N.A., consisting of two term loans: the first in the principal amount of $30 million dollars (First Term Loan), and the second in the principal amount of $50 million dollars (Second Term Loan); and a revolving line of credit (Line of Credit) for $80 million, subject to a borrowing base calculation. As of March 31, 2000 and 1999, the Company had approximately $43.6 million and $38.4 million, respectively, of unused available credit after satisfaction of its borrowing base requirements. The maturity dates of the First Term Loan and the Second Term Loan are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments which began on June 30, 1999. The Line of Credit matures on October 20, 2003 and is available for working capital, general corporate purposes and acquisitions. The Facility is secured by substantially all of the assets of the Company. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The 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. As of March 31, 2000, the Company was in compliance with all covenants. The Facility amended, restated and replaced the Company's previously existing $60 million secured credit facility consisting of a $20 million term loan and a $40 million revolving line of credit. For accounting purposes, the modification of the Facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extraordinary charge of $2.3 million, net of tax, in the third quarter of fiscal 1999. The Company actively seeks to finance its business in a manner that preserves financial flexibility, while minimizing borrowing costs to the extent practicable. Management continually reviews the changing financial, market and economic conditions to manage the types, amounts and maturities of the Corporation's indebtedness. Cash and cash equivalents, internally generated cash flow from operations and other available financing resources are expected to be sufficient to meet anticipated operating, capital expenditure and debt service requirements during the next twelve months and the foreseeable future. Consistent with the Company's desire to generate cash to invest in its core businesses and reduce debt, management anticipates that, subject to prevailing financial, market and economic conditions, the Company may divest certain non-core businesses. BACKLOG Backlog at March 31, 2000 was approximately $388.1 million, as compared with $362.7 million at March 31, 1999. The Company booked $406.0 million in new orders in fiscal 2000. The increase in backlog was due to the net effect of bookings, partially offset by revenues. 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 COTS-based systems for the military, both of which favor shorter delivery times. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues and related backlog positions, may not be indicative of future results. Of the $406.0 million in new contract awards booked in fiscal 2000, ESG secured $189.9 million in new contracts, including significant awards of approximately $96.4 million for additional production and engineering for AN/UYQ-70 Advanced Display Systems used in U.S. Navy Aegis ships, aircraft and submarines; $27.2 million in engineering and production contracts for CHS-2 rugged, portable computers for the U.S. Army; $8.4 million for Sun(R) SPARC(TM)-based computers and peripherals for government applications; $6.1 million for Navy combat system emulators; and $3.5 million for AN/SPS-67 ship Radar Systems. DRS Ahead booked $6.5 million in new business in fiscal 2000. EOSG booked awards of $147.5 million in fiscal 2000, including awards totaling $43.0 million from the U.S. Army to provide Horizontal Technology Integration Second Generation Forward Looking Infrared (HTI SGF) Thermal Imaging Systems for the sighting systems of the Abrams M1A2 System Enhancement Package (SEP) and Bradley M2A3 Fighting Vehicles, $22.0 million for fire control acquisition systems, $19.8 million for Improved Bradley Acquisition Subsystems (IBAS) for the new Bradley M2A3 Fighting Vehicles, and $16.8 million to provide Standard Advanced Dewar Assemblies 28 Type II (SADA II) for the tracking and imaging systems on a variety of platforms, including the M2A3 Bradley and the M1A2 Abrams ground vehicles. Other significant EOSG awards for the year included $18.8 million to produce upper optics modules for optical laser surgery equipment and $7.5 million for high-speed digital imaging systems. FSCG received a total of $62.1 million in fiscal 2000, including approximately $15.7 million for advanced manufacturing services, $11.8 million for shipboard communications systems, $10.8 million for flight incident recorders and locator beacons and $1.5 million for 8mm military data recorders for use on F/A-18, A-10 and other fixed-wing aircraft. 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 2000, 1999 and 1998 were $9.9 million, $5.2 million and $4.0 million, respectively. INDUSTRY/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 continues 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 12 of Notes to the Consolidated Financial Statements, 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 a governmental investigation of certain equipment manufactured by DRS Photronics. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or DRS Photronics. During the Government's investigation, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of the investigation. At this time, however, the Company is unable to quantify the effect of the delayed shipments on its future operations or financial position, or to predict when regular shipments ultimately will resume, although the delays are expected to continue to impact the Company's fiscal year 2001 results. 29 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES 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. MARKET RISK In the normal course of business, the Company is exposed to market risks relating to fluctuations in interest rates and foreign currency exchange risk. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. INTEREST RATE RISK As the Company seeks debt financing to maintain its ongoing operations and sustain its growth, it is exposed to interest rate risk. Borrowings under the Company's $160 million secured credit facility with Mellon Bank, N.A. are sensitive to changes in interest rates, as such borrowings bear interest at variable rates. In January 1998 and January 1999, the Company entered into interest rate collar agreements to limit the impact of interest rate fluctuations on cash flow and interest expense. A summary of the interest rate collar agreements in place as of March 31, 2000 and 1999 follows:
(dollars in thousands) NOTIONAL AMOUNT EXPIRATION -------------------------------- VARIABLE RATE CEILING FLOOR Effective Date DATE MARCH 31, 2000 MARCH 31, 1999 BASE RATE RATE -------------------------------------------------------------------------------------------- APRIL 8, 1998 ............. JANUARY 8, 2001 $ 6,200 $ 6,200 CAD-BA* 6.35% 4.84% APRIL 26, 1999 ............ JANUARY 26, 2002 $20,000 $20,000 LIBOR** 5.75% 4.80% APRIL 26, 1999 ............ JANUARY 26, 2000 $ -- $20,000 LIBOR** 5.75% 4.77% --------------------------------------------------------------------------------------------
*Canadian Bankers Acceptance Rate **London Interbank Offered Rate The weighted average interest rate on the Company's LIBOR and Canadian Bankers Acceptance Rate-based borrowings outstanding during fiscal 2000 were 5.71% and 4.94%, respectively. FOREIGN CURRENCY EXCHANGE RISK DRS operates and conducts business in foreign countries and, as a result, is exposed to movements in foreign currency exchange rates. More specifically, the Company's net equity is impacted by the conversion of the net assets of foreign subsidiaries for which the functional currency is not the U.S. Dollar for U.S. reporting purposes. The Company's exposure to foreign currency exchange risk related to its foreign operations is not material to the Company's results of operations, cash flows or financial position. The Company, at present, does not hedge this risk but continues to evaluate such foreign currency translation risk exposure. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 provides authoritative guidance on accounting and financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Statement requires the recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and periodic measurement of those instruments at fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Upon adoption of this standard, existing hedging relationships, if any, must be designated anew and documented pursuant to the provisions of the Statement. Based on the Company's fiscal calendar and the current requirements of SFAS 133, this standard must be adopted no later than April 1, 2001. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial position or results of operations. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union established permanent, fixed conversion rates between their existing currencies and the European Union's common currency called the "Euro". The transition period for the introduction of the Euro is scheduled to phase in over a period ending January 1, 2002, with existing currencies being removed completely from circulation on July 1, 2002. The Company currently does not have significant transactions denominated in Euro-related currencies. This is not expected to change in the foreseeable future. Therefore, the Company believes the introduction of the Euro and the phasing out of the other currencies will not have a material impact on the Company's consolidated financial statements. 30 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Balance Sheets
(in thousands, except share data) March 31, 2000 1999 -------------------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS ...................................................... $ 3,778 $ 10,031 ACCOUNTS RECEIVABLE, NET (NOTE 5) .............................................. 80,894 74,673 INVENTORIES, NET OF PROGRESS PAYMENTS (NOTE 6) ................................. 62,326 69,868 PREPAID EXPENSES, DEFERRED INCOME TAXES AND OTHER CURRENT ASSETS (NOTE 10) ..... 6,326 4,029 NET CURRENT ASSETS OF DISCONTINUED OPERATIONS (NOTE 2) ......................... 5,309 4,123 -------------------- TOTAL CURRENT ASSETS ........................................................... 158,633 162,724 -------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 7) ................................ 57,039 69,701 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ................................. 28,033 37,577 -------------------- NET PROPERTY, PLANT AND EQUIPMENT .............................................. 29,006 32,124 -------------------- GOODWILL AND RELATED INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION OF $14,821 AND $8,384 AT MARCH 31, 2000 AND 1999, RESPECTIVELY ................. 125,321 120,595 DEFERRED INCOME TAXES AND OTHER NONCURRENT ASSETS (NOTE 10) .................... 7,138 10,379 NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS (NOTE 2) ...................... -- 3,817 -------------------- TOTAL ASSETS ................................................................... $320,098 $329,639 -------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES CURRENT INSTALLMENTS OF LONG-TERM DEBT (NOTES 4 AND 9) ......................... $ 5,699 $ 5,844 SHORT-TERM BANK DEBT (NOTE 9) .................................................. 17,781 9,169 ACCOUNTS PAYABLE ............................................................... 28,295 41,971 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (NOTE 8) ........................ 85,474 92,249 -------------------- TOTAL CURRENT LIABILITIES ...................................................... 137,249 149,233 -------------------- LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS (NOTES 4 AND 9) ................. 97,695 102,091 OTHER LIABILITIES (NOTES 11 AND 12) ............................................ 6,970 4,873 -------------------- TOTAL LIABILITIES .............................................................. 241,914 256,197 -------------------- STOCKHOLDERS' EQUITY (NOTES 9 AND 11) PREFERRED STOCK, NO PAR VALUE. AUTHORIZED 2,000,000 SHARES;- NONE ISSUED AT MARCH 31, 2000 AND 1999 ...................................... -- -- COMMON STOCK, $.01 PAR VALUE PER SHARE. AUTHORIZED 20,000,000 SHARES; ISSUED 9,717,020 AND 9,615,933 SHARES AT MARCH 31, 2000 AND 1999, RESPECTIVELY .................................... 97 96 ADDITIONAL PAID-IN CAPITAL ..................................................... 48,584 48,038 RETAINED EARNINGS .............................................................. 32,047 27,737 ACCUMULATED OTHER COMPREHENSIVE LOSSES ......................................... (86) (139) TREASURY STOCK, AT COST: 440,939 AND 385,164 SHARES OF COMMON STOCK AT MARCH 31, 2000 AND 1999, RESPECTIVELY ....................... (1,988) (1,493) UNAMORTIZED RESTRICTED STOCK COMPENSATION ...................................... (470) (797) -------------------- TOTAL STOCKHOLDERS' EQUITY ..................................................... 78,184 73,442 -------------------- COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 12) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $320,098 $329,639 --------------------
See accompanying Notes to Consolidated Financial Statements. 31 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statements of Earnings
(in thousands, except per-share data) Years Ended March 31, 2000 1999 1998 -------------------------------- REVENUES ............................................................. $391,467 $265,849 $180,750 COSTS AND EXPENSES (NOTE 6) .......................................... 363,086 250,548 166,331 RESTRUCTURING CHARGES (NOTE 3) ....................................... 2,203 -- -- -------------------------------- OPERATING INCOME ..................................................... 26,178 15,301 14,419 INTEREST AND OTHER INCOME, NET ....................................... (572) (857) (1,342) INTEREST AND RELATED EXPENSES ........................................ 12,600 9,357 5,098 -------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM, MINORITY INTERESTS AND INCOME TAXES ............................... 14,150 6,801 10,663 MINORITY INTERESTS ................................................... 1,318 1,021 957 -------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES .................................................. 12,832 5,780 9,706 INCOME TAXES (NOTE 10) ............................................... 5,171 1,915 3,072 -------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ........ 7,661 3,865 6,634 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX (NOTE 2) ............... (1,255) (879) (262) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX (NOTE 2) ..... (2,096) -- -- EXTRAORDINARY ITEM, NET OF TAX (NOTE 9) .............................. -- (2,306) -- -------------------------------- NET EARNINGS ......................................................... $ 4,310 $ 680 $ 6,372 -------------------------------- NET EARNINGS PER SHARE OF COMMON STOCK (NOTE 1) BASIC EARNINGS PER SHARE: EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 0.83 $ 0.58 $ 1.18 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (0.14) (0.13) (0.05) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (0.23) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (0.35) -- NET EARNINGS ...................................................... $ 0.47 $ 0.10 $ 1.13 DILUTED EARNINGS PER SHARE: EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 0.76 $ 0.57 $ 0.96 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (0.11) (0.13) (0.03) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (0.18) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (0.34) -- NET EARNINGS ...................................................... $ 0.47 $ 0.10 $ 0.93 --------------------------------
See accompanying Notes to Consolidated Financial Statements. 32 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Earnings
ACCUMULATED ADDITIONAL OTHER (in thousands, except share data) COMMON STOCK PAID-IN RETAINED COMPREHENSIVE Years Ended March 31, 2000, 1999 and 1998 SHARES AMOUNT CAPITAL EARNINGS LOSSES ----------------------------------------------------------- BALANCES AT MARCH 31, 1997 ............... 6,007,786 $60 $14,208 $20,685 $ -- COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 6,372 -- FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- -- (135) ----------------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 6,372 (135) ----------------------------------------------------------- STOCK OPTIONS EXERCISED .................. 23,480 -- 145 -- -- COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- 199 -- -- RESTRICTED STOCK BONUS AWARDS ............ -- -- 139 -- -- CONVERSION OF 9% DEBENTURES (NOTE 9) ..... 564,971 6 4,708 -- -- ----------------------------------------------------------- BALANCES AT MARCH 31, 1998 ............... 6,596,237 66 19,399 27,057 (135) ----------------------------------------------------------- COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 680 -- FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- -- (4) ----------------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 680 (4) ----------------------------------------------------------- STOCK OPTIONS EXERCISED .................. 63,600 1 143 -- -- COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- 427 -- -- RESTRICTED STOCK BONUS AWARDS ............ -- -- 173 -- -- CONVERSION OF 9% DEBENTURES (NOTE 9) ..... 97,830 1 855 -- -- EQUITY ISSUED IN CONNECTION WITH THE NAI MERGER (NOTES 4 AND 11) .. 2,858,266 28 27,041 -- -- ----------------------------------------------------------- BALANCES AT MARCH 31, 1999 ............... 9,615,933 96 48,038 27,737 (139) ----------------------------------------------------------- COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 4,310 -- FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- -- 53 ----------------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 4,310 53 ----------------------------------------------------------- STOCK OPTIONS EXERCISED .................. 101,087 1 502 -- -- COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- 44 -- -- ----------------------------------------------------------- BALANCES AT MARCH 31, 2000 ............... 9,717,020 $97 $48,584 $32,047 $ (86) ----------------------------------------------------------- UNAMORTIZED TREASURY STOCK RESTRICTED TOTAL (in thousands, except share data) (NOTE 11) STOCK STOCKHOLDERS' Years Ended March 31, 2000, 1999 and 1998 SHARES AMOUNT COMPENSATION EQUITY --------------------------------------------------- BALANCES AT MARCH 31, 1997 ............... 420,893 $(1,622) $(344) $ 32,987 COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 6,372 FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- (135) --------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 6,237 --------------------------------------------------- STOCK OPTIONS EXERCISED .................. 224 (2) -- 143 COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- (101) 98 RESTRICTED STOCK BONUS AWARDS ............ (18,656) 63 (46) 156 CONVERSION OF 9% DEBENTURES (NOTE 9) ..... -- -- -- 4,714 --------------------------------------------------- BALANCES AT MARCH 31, 1998 ............... 402,461 (1,561) (491) 44,335 --------------------------------------------------- COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 680 FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- (4) --------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 676 --------------------------------------------------- STOCK OPTIONS EXERCISED .................. -- -- -- 144 COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- (314) 113 RESTRICTED STOCK BONUS AWARDS ............ (17,297) 68 8 249 CONVERSION OF 9% DEBENTURES (NOTE 9) ..... -- -- -- 856 EQUITY ISSUED IN CONNECTION WITH THE NAI MERGER (NOTES 4 AND 11) .. -- -- -- 27,069 --------------------------------------------------- BALANCES AT MARCH 31, 1999 ............... 385,164 (1,493) (797) 73,442 --------------------------------------------------- 33 COMPREHENSIVE EARNINGS NET EARNINGS .......................... -- -- -- 4,310 FOREIGN CURRENCY TRANSLATION ADJUSTMENT .......................... -- -- -- 53 --------------------------------------------------- TOTAL COMPREHENSIVE EARNINGS ............. -- -- -- 4,363 --------------------------------------------------- STOCK OPTIONS EXERCISED .................. 55,775 (495) -- 8 COMPENSATION RELATING TO STOCK OPTIONS AND OTHER STOCK AWARDS, NET ........... -- -- 327 371 --------------------------------------------------- BALANCES AT MARCH 31, 2000 ............... 440,939 $(1,988) $(470) $ 78,184 ---------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 33A DRS TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(in thousands ) Years Ended March 31, 2000 1999 1998 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES NET EARNINGS ....................................................................... $ 4,310 $ 680 $ 6,372 ADJUSTMENTS TO RECONCILE NET EARNINGS TO CASH FLOWS FROM OPERATING ACTIVITIES: LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ................................... 1,255 879 262 LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ......................... 2,096 -- -- EXTRAORDINARY ITEM, NET OF TAX .................................................. -- 2,306 -- DEPRECIATION AND AMORTIZATION ................................................... 17,070 11,601 6,188 INVENTORY RESERVES AND PROVISION FOR DOUBTFUL ACCOUNTS .......................... 2,906 4,037 1,071 DEFERRED INCOME TAXES ........................................................... (550) (3,364) (91) OTHER, NET ...................................................................... 1,382 373 (363) CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM BUSINESS COMBINATIONS: INCREASE IN ACCOUNTS RECEIVABLE ................................................. (4,200) (21,002) (17,268) DECREASE (INCREASE) IN INVENTORIES .............................................. 7,052 (22,750) (9,754) DECREASE (INCREASE) IN PREPAID EXPENSES AND OTHER CURRENT ASSETS ................ 1,573 (646) (291) (DECREASE) INCREASE IN ACCOUNTS PAYABLE ......................................... (15,450) 12,202 10,985 (DECREASE) INCREASE IN ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES ........... (3,750) 16,168 2,725 (DECREASE) INCREASE IN CUSTOMER ADVANCES ........................................ (6,518) 14,613 683 OTHER, NET ...................................................................... 841 461 (703) -------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS ................. 8,017 15,558 (184) NET CASH USED IN OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS ................... (590) (477) (73) -------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................................ 7,427 15,081 (257) -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES CAPITAL EXPENDITURES ............................................................... (6,210) (6,554) (6,259) SALES OF CAPITAL ASSETS ............................................................ -- 103 2,277 PAYMENTS PURSUANT TO BUSINESS COMBINATIONS, NET OF CASH ACQUIRED ................... (8,386) (54,176) (33,782) PROCEEDS FROM SALE OF PARTNERSHIP NET ASSETS ....................................... -- -- 1,890 OTHER, NET ......................................................................... (230) -- 149 -------------------------------- NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS ..................... (14,826) (60,627) (35,725) NET CASH USED IN INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS ................... (130) (285) (634) -------------------------------- NET CASH USED IN INVESTING ACTIVITIES .............................................. (14,956) (60,912) (36,359) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES NET PROCEEDS FROM ACQUISITION-RELATED DEBT ......................................... 8,000 47,075 35,578 PAYMENTS ON LONG-TERM DEBT ......................................................... (10,096) (1,193) (2,294) RETIREMENT OF CONVERTIBLE DEBT ..................................................... (690) (4,992) -- OTHER BORROWINGS, NET .............................................................. 4,925 5,367 4,706 OTHER, NET ......................................................................... 106 191 (168) -------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES .......................................... 2,245 46,448 37,822 -------------------------------- EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS .............................. (969) (280) (13) -------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................... (6,253) 337 1,193 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................................... 10,031 9,694 8,501 -------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR ............................................. $ 3,778 $ 10,031 $ 9,694 --------------------------------
See accompanying Notes to Consolidated Financial Statements 34 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 Summary of Significant Accounting Policies - A. Organization DRS Technologies, Inc. and Subsidiaries (hereinafter DRS or the Company) is a supplier of defense electronic systems and has served the defense industry for over thirty years. The Company provides advanced technology products and services to government and commercial customers worldwide, developing and manufacturing a broad range of mission critical products -- from rugged computers and peripherals to systems and components in the areas of communications, combat systems, data storage, digital imaging, electro-optics, flight safety and space. The Company's defense electronics systems and sub systems are sold to all branches of the U.S. military, U.S. government intelligence agencies, major aerospace/defense contractors and international military forces. 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. On May 18, 2000, the Company's Board of Directors approved an agreement to sell its magnetic tape head business units in St. Croix, Wisconsin and Razlog, Bulgaria (see Note 2). Accordingly, the Company has restated its financial statements to present the operating results of these business units as discontinued operations for all periods presented. Certain other items in the prior year consolidated financial statements have been reclassified to conform to the fiscal 2000 presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenues utilized in the revenue recognition process, 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 foreign subsidiaries, other than Bulgaria, 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 functional currency of the Company's Bulgarian subsidiary is the U.S. dollar. The rates of exchange at each balance sheet date are used for translating balance sheet accounts, and a weighted 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. D. Classifications Unbilled receivables, inventories, losses and future costs accrued on uncompleted contracts, unearned income and accruals for future costs on uncompleted acquired contracts are primarily attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, these items are included in current assets and liabilities, respectively. E. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. F. Receivables Receivables consist of amounts billed and currently due from customers, and unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized for accounting purposes, but not yet billed to customers. G. 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. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of progress payments and advances. Accordingly, such progress payments and certain advances are reflected as an offset against the related inventory balances. To the extent that customer advances exceed related inventory levels, such advances are classified as current liabilities. 35 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES H. Property, Plant and Equipment Depreciation and amortization are calculated on the straight-line method. The ranges of estimated useful lives are: office furnishings, laboratory, production and other 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. Costs 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. I. Goodwill and Related Intangible Assets Goodwill and related intangible assets consist primarily of intangible assets 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 and certain identified acquired intangible assets (see Note 4). Goodwill and related intangible assets are being amortized on a straight-line basis over three to thirty years. J. Convertible Debentures The Company's outstanding 9% Senior Subordinated Convertible Debentures are due in 2003 (9% Debentures) and are convertible at any time into shares of the Company's Common Stock at the election of the holders. Upon conversion, the Company's policy is to credit stock holders' equity for the aggregate principal amount of debt 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 is credited to stockholders' equity. In the first quarter of fiscal 2000, the Company liquidated the remaining balance of the 12% Convertible Subordinated Promissory Notes (12% Notes) assumed in connection with the NAI Merger (see Note 4). K. Derivative Financial Instruments The Company does not use derivative financial instruments for speculative purposes. The Company utilizes, on a limited basis, derivative financial instruments in the form of interest rate collars to manage its exposure to interest rates (see Note 9). An interest rate collar is a combination of an interest rate cap and an interest rate floor. The collars in place allow the Company to manage a portion of its variable rate borrowings to an acceptable, predetermined range. Under the collar, no payments are required to be made by the Company or paid to the Company unless the prevailing market (based on the London Interbank Offered Rate or U.S. Prime Rate) drops below the floor or exceeds the ceiling. Any payment made or received by the Company in connection with the settlement of a collar is reflected as an adjustment to interest expense in the period in which it is settled. L. 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 performance incentives or award fees are included in total estimated revenues, when the Company can make a reasonable estimate of such amounts, and 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 2000, 1999 and 1998 approximated 11%, 10% 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 2000, 1999 and 1998 were $23.5 million, $15.4 million and $11.8 million, respectively, of customer-sponsored research and development. Revisions in profit estimates are reflected in the period in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 80%, 81% and 75% of the Company's revenues in fiscal 2000, 1999 and 1998, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government. In addition, approximately 12% in fiscal 2000, 8% in fiscal 1999 and 9% in fiscal 1998 of the Company's revenues were derived directly or indirectly from sales to foreign governments, respectively. M. Stock-Based Compensation As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost is 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. The Company follows the provisions of SFAS 123 and provides 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 SFAS 123, had been applied (see Note 11). 36 N. 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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. 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. O. Earnings per Share Basic earnings per share (EPS) is computed by dividing net earnings by the weighted average 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, when dilutive, the effect of the assumed conversion of the Company's outstanding 9% Debentures and 8 1/2% Convertible Subordinated Debentures (8 1/2% Debentures). The Company's 12% Notes were anti dilutive in fiscal 2000 and 1999. The following table provides the components of the per-share computations:
(in thousands, except per-share data) 2000 1999 1998 ----------------------------- BASIC EPS COMPUTATION EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 7,661 $ 3,865 $ 6,634 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (1,255) (879) (262) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (2,096) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (2,306) -- ----------------------------- NET EARNINGS ...................................................... $ 4,310 $ 680 $ 6,372 ----------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ............................. 9,268 6,618 5,626 ----------------------------- BASIC EARNINGS (LOSSES) PER SHARE EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 0.83 $ 0.58 $ 1.18 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (0.14) (0.13) (0.05) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (0.23) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (0.35) -- ----------------------------- NET EARNINGS ...................................................... $ 0.47 $ 0.10 $ 1.13 ----------------------------- DILUTED EPS COMPUTATION EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 7,661 $ 3,865 $ 6,634 INTEREST AND EXPENSES RELATED TO CONVERTIBLE DEBENTURES ........... 1,130 -- 2,071 ----------------------------- ADJUSTED EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..................................... 8,791 3,865 8,705 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (1,255) (879) (262) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (2,096) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (2,306) -- ----------------------------- ADJUSTED NET EARNINGS ............................................. $ 5,440 $ 680 $ 8,443 ----------------------------- DILUTED COMMON SHARES OUTSTANDING: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ........................ 9,268 6,618 5,626 STOCK OPTIONS ..................................................... 172 214 283 CONVERTIBLE DEBENTURES: 9% DEBENTURES ................................................. 2,162 -- 2,803 8 1/2% DEBENTURES ............................................. -- -- 333 ----------------------------- DILUTED COMMON SHARES OUTSTANDING ................................. 11,602 6,832 9,045 ----------------------------- DILUTED EARNINGS (LOSSES) PER SHARE: EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ 0.76 $ 0.57 $ 0.96 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX ..................... (0.11) (0.13) (0.03) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX ........... (0.18) -- -- EXTRAORDINARY ITEM, NET OF TAX .................................... -- (0.34) -- ----------------------------- NET EARNINGS ...................................................... $ 0.47 $ 0.10 $ 0.93 -----------------------------
P. Impairment of Long-Lived and Intangible Assets The Company assesses the recoverability of the carrying value of its long-lived assets, including goodwill and other related intangibles, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company's policy is to evaluate the realizability of such assets based upon the expectations of undiscounted cash flows or of operating income for each subsidiary or acquired business 37 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES 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. Q. Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities, and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values as of March 31, 2000 and 1999 of the Company's convertible debt and interest rate collars are disclosed herein (see Note 9). NOTE 2 Discontinued Operations - On May 18, 2000, the Company's Board of Directors approved an agreement to sell its magnetic tape head business units located in St. Croix Falls, Wisconsin, and Razlog, Bulgaria. The St. Croix Falls and Bulgarian operations produce primarily magnetic tape recording heads for transaction products that read data from magnetic cards, tapes and ink. Management anticipates that the sale will be completed at the beginning of the second quarter of fiscal 2001. The results of operations of these magnetic tape head business units are reported as discontinued operations for all periods presented. Their results of operations for fiscal 2000, 1999 and 1998 are summarized as follows: (in thousands) Years Ended March 31, 2000 1999 1998 ------------------------------- REVENUES .................................... $ 9,572 $ 7,579 $10,104 LOSS BEFORE INCOME TAXES .................... (1,788) (1,038) (42) INCOME TAX BENEFIT (EXPENSE) ................ 533 159 (220) ------------------------------- NET LOSS FROM DISCONTINUED OPERATIONS ....... $(1,255) $ (879) $ (262) ------------------------------- In connection with the agreement to sell the magnetic tape head business units, the Company recorded a $2.1 million loss, net of tax, on the disposal of these operations in the period ended March 31, 2000. Included in this amount is approximately $67,000, net of a $48,000 tax benefit, of estimated operating losses from these discontinued operations from the measurement date to the anticipated date of disposal. The net assets of the discontinued operations in the March 31, 2000 and 1999 consolidated balance sheets are comprised of: (in thousands) March 31, 2000 1999 ------------------- ACCOUNTS RECEIVABLE, NET ............................... $ 1,522 $ 1,462 INVENTORIES ............................................ 2,671 3,039 PROPERTY, PLANT AND EQUIPMENT, NET ..................... 1,568 2,039 GOODWILL, NET .......................................... 1,349 1,740 ACCOUNTS PAYABLE ....................................... (339) (499) ACCRUED EXPENSES ....................................... (106) (289) ACCRUED LOSS ON DISPOSAL, NET OF TAX BENEFIT OF $935 ... (2,096) -- OTHER NET .............................................. 740 448 ------------------- NET ASSETS OF DISCONTINUED OPERATIONS .................. $ 5,309 $ 7,940 ------------------- NOTE 3 Restructuring - In addition to the closure of the Longmont Colorado facility, as described in Note 4, during the third and fourth quarters of fiscal 2000, the Company announced plans to restructure its operations, which resulted in the Company recording restructuring charges totaling approximately $2.2 million. The Company's restructuring initiatives impacted the EOSG and FSCG operating segments and DRS Corporate. EOSG recorded a restructuring charge of approximately $831,000 primarily for costs relating to consolidating two facilities into one in Oakland, New Jersey, as of March 31, 2000. FSCG recorded a restructuring charge of approximately $669,000 and $143,000 at its DRS Hadland Ltd. ("DRS Hadland") and DRS Precision Echo, Inc. ("DRS Precision Echo") operating units, respectively, for severance and other employee related costs. The DRS Hadland restructuring charge was recorded in connection with the transition of the day-to-day management of DRS Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In addition, DRS Corporate recorded a restructuring charge of approximately $560,000 for severance and other employee related costs. Severance and other employee costs were recorded in connection with the termination of 13 employees. As of March 31, 2000, all terminations had occurred. A portion of the termination benefits will be paid in accordance with contractual terms over the next two years. The following table reconciles the restructuring charge to the related liability account balance as of March 31, 2000: 38
FISCAL 2000 UTILIZED LIABILITY AT (in thousands) CHARGE FISCAL 2000 MARCH 31, 2000 ----------------------------------------------- ASSET WRITE-OFFS ........................................... $ 503 $ 503 $ -- ESTIMATED LEASE COMMITMENTS AND RELATED FACILITY COSTS ..... 328 -- 328 SEVERANCE/EMPLOYEE COSTS ................................... 1,372 682 690 ----------------------------------------------- TOTAL ...................................................... $2,203 $1,185 $1,018 -----------------------------------------------
NOTE 4 Business Combinations and Disposals - On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems (a partnership formed in February 1996 in which the Company held a 90% interest) to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $0.1 million and the reversal of accrued obligations of $0.3 million. The results of operations of this partnership were not material to the consolidated operating results of the Company during the periods presented. On 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 Spar 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 Spar 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 identifiable 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 Spar Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Head quartered in Carleton Place, Ontario, Canada, and operating as DRS Flight Safety and Communications, the company is an international provider of aviation and defense systems. 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. and subsidiaries for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating as DRS Hadland, the company designs, manufactures and markets ultra high-speed digital imaging cameras and integrates 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 identifiable net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over thirty years. On October 20, 1998 the Company acquired, through certain of its subsidiaries, certain assets of the Second Gene ration Ground-Based Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the Company and Raytheon, as amended (the EOS Acquisition). The Company paid approximately $45 million in cash for the acquisition at closing; the purchase price is subject to a post-closing working capital adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment, if any, is the subject of arbitration between DRS and Raytheon. Although the Company cannot, at this time, predict the outcome of such arbitration, management does not expect that the final adjustment 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 identifiable net assets acquired and the appraised value of certain identified intangible assets were approximately $34.1 million and $30.8 million, respectively, and are being amortized on a straight-line basis over twenty years. DRS incurred professional fees and other costs related to the EOS Acquisition of approximately $2.0 million, which were also capitalized as part of the total purchase price. The Company has valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on the Company's effort to complete such contracts (see Note 8). The EOS Business, operating as DRS Sensor Systems, Inc. and DRS Infrared Technologies, LP, provides products used in the detection, identification and acquisition of targets based on infrared data. On February 19, 1999, a wholly-owned subsidiary of the Company merged with and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary of DRS, for stock and other consideration valued at 39 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES approximately $24.8 million (the NAI Merger). The excess of cost over the estimated fair value of identifiable net assets acquired was approximately $26.7 million and is being amortized on a straight-line basis over twenty years. Prior to the NAI Merger, the Company began to assess and formulate a plan to close NAI's Longmont, Colorado facility and transfer engineering and production to other DRS locations. In January 2000, the Company announced its plan which included relocating/terminating approximately 45 employees. A cost of approximately $1.5 million has been recorded as an adjustment to the acquisition cost during fiscal 2000. The Company expects to complete its exit plan during the first quarter of fiscal 2001. A summary of the costs incurred and the related liability as of March 31, 2000 is as follows:
COSTS INCURRED LIABILITY AT (in thousands) TOTAL COSTS IN FISCAL 2000 MARCH 31, 2000 --------------------------------------------- SERVERANCE/EMPLOYEE COSTS .................................. $1,332 $137 $1,195 ESTIMATED LEASE COMMITMENTS AND RELATED FACILITY COSTS ..... 215 -- 215 --------------------------------------------- TOTAL ...................................................... $1,547 $137 $1,410 ---------------------------------------------
No significant additional liabilities are expected to be incurred that would result in an adjustment of the acquisition cost. DRS also incurred professional fees and other costs related to the NAI Merger of approximately $2.8 million, which were capitalized as part of the total purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS Rugged Systems (Europe) Ltd., provides rugged computers, peripherials and integrated systems primarily for military and special government applications. On July 21, 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total purchase price of $10.2 million. Located in Chippenham, Wiltshire, the United Kingdom, and now operating as DRS Rugged Systems (Europe) Products Ltd. (RSEP), the company designs and develops rugged computers and peripherals primarily for applications. The excess of cost over the estimated fair value of identifiable net assets acquired was approximately $8.7 million and is being amortized on a straight-line basis over twenty years. Any additional consideration paid by the Company would be an adjustment to goodwill. The financial position and results of operations of RSEP were not significant to those of the Company as of the acquisition date. All of 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 consolidated operating results from their respective effective dates of acquisition. The following unaudited pro forma financial information shows the results of operations for the years ended March 31, 1999 and 1998 as though the Spar Acquisition, EOS Acquisition and NAI Merger had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the companies, the pro forma calculations include: amortization of the excess of cost over the estimated fair value of identifiable net assets acquired and other identified intangible assets; additional interest expense on the debt associated with the Spar and EOS Acquisitions; estimated costs associated with certain master service agreements between DRS and Raytheon, negotiated in connection with the EOS Acquisition; elimination of interest and related expenses associated with NAI's 12% Notes and other short-term borrowings, converted and liquidated, respectively, in connection with the NAI Merger; the disposal of NAI's Telecommunications segment (Wilcom, Inc.) immediately prior to the NAI Merger; an increase in the average shares outstanding used in earnings per share computations, based on equity issued in connection with the NAI Merger; adjustments to conform accounting practices, particularly with respect to revenue recognition (except with respect to the Spar Acquisition, as it was not practicable to conform the revenue recognition method); and the related tax effect of these adjustments for each pro forma period presented. For purposes of this pro forma financial information, an adjustment to conform the treatment of general and administrative expenses between DRS and the businesses acquired in the Spar Acquisition and NAI Merger was not made, as management believes that the effect of any such adjustment would be immaterial.
(in thousands, except per-share data) Years Ended March 31, 1999 1998 -------------------- REVENUES ................................................................ $320,053 $274,124 LOSS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ............... $ (5,927) $ (2,665) LOSS PER SHARE FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM BASIC .............................................................. $ (0.65) $ (0.31) DILUTED ............................................................ $ (0.65) $ (0.31) --------------------
40 The pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisitions been made at the beginning of the period, or of the future results of operations of the combined companies. NOTE 5 Accounts Receivable - The component elements of accounts receivable, net of allowances for doubtful accounts of $1.4 million and $1.2 million, at March 31, 2000 and 1999, respectively, are as follows: (in thousands) March 31, 2000 1999 --------------------- U.S. GOVERNMENT: AMOUNTS BILLED ................................ $22,462 $14,829 RECOVERABLE COSTS AND ACCRUED PROFIT ON PROGRESS COMPLETED, NOT BILLED ......... 3,968 7,229 --------------------- 26,430 22,058 --------------------- OTHER DEFENSE CONTRACTS: AMOUNTS BILLED ................................ 37,489 42,963 RECOVERABLE COSTS AND ACCRUED PROFIT ON PROGRESS COMPLETED, NOT BILLED ......... 9,690 5,558 --------------------- 47,179 48,521 --------------------- OTHER TRADE RECEIVABLES ............................ 7,285 4,094 --------------------- TOTAL .............................................. $80,894 $74,673 --------------------- Included in accounts receivable are $391,000 and $848,000 at March 31, 2000 and 1999, respectively, arising from retainage provisions in certain contracts with the Canadian and British governments which may not be collected within one year. The Company receives progress payments on certain contracts 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 bills based upon units delivered. NOTE 6 Inventories - Inventories are summarized as follows: (in thousands) March 31, 2000 1999 -------------------------- WORK IN PROCESS .............................. $ 79,058 $ 94,355 RAW MATERIAL AND FINISHED GOODS .............. 10,917 12,307 -------------------------- 89,975 106,662 LESS PROGRESS PAYMENTS ....................... (27,649) (36,794) -------------------------- TOTAL ........................................ $ 62,326 $ 69,868 -------------------------- General and administrative costs included in work in process were $12.7 million and $13.6 million at March 31, 2000 and 1999, respectively. General and administrative costs included in costs and expenses amounted to $69.5 million, $49.0 million and $36.8 million in fiscal 2000, 1999 and 1998, respectively. Included in these amounts are expenditures for internal research and development, amounting to approximately $9.9 million, $5.2 million and $4.0 million in fiscal 2000, 1999 and 1998, respectively. NOTE 7 Property, Plant and Equipment - Property, plant and equipment are summarized as follows: (in thousands) March 31, 2000 1999 ------------------ LABORATORY AND PRODUCTION EQUIPMENT ...................... $32,540 $39,872 COMPUTER EQUIPMENT ....................................... 9,740 12,466 BUILDINGS AND IMPROVEMENTS AND LEASEHOLD IMPROVEMENTS .... 9,995 11,306 OFFICE FURNISHINGS, EQUIPMENT AND OTHER .................. 4,764 6,057 ------------------ TOTAL .................................................... $57,039 $69,701 ------------------ 41 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES In connection with the restructuring of EOSG described in Note 3, the Company wrote off $17.6 million of gross ($503,000, net) property, plant and equipment in the fourth quarter of fiscal 2000. Annual depreciation and amortization of property, plant and equipment amounted to $9.5 million, $7.1 million and $4.5 million in fiscal 2000, 1999 and 1998, respectively. NOTE 8 Accrued Expenses and Other Current Liabilities - The component elements of accrued expenses and other current liabilities are as follows: (in thousands) March 31, 2000 1999 ----------------- PAYROLLS, OTHER COMPENSATION AND RELATED EXPENSES .......... $11,063 $ 9,080 INCOME TAXES PAYABLE (NOTE 10) ............................. 2,484 3,666 CUSTOMER ADVANCES .......................................... 9,724 15,973 LOSSES AND FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS ... 4,971 8,119 UNEARNED INCOME AND ACCRUAL FOR FUTURE COSTS RELATED TO ACQUIRED CONTRACTS (NOTE 4) ........................ 42,027 38,167 OTHER ...................................................... 15,205 17,244 ----------------- TOTAL ...................................................... $85,474 $92,249 ----------------- NOTE 9 Debt - A summary of debt is as follows: (in thousands) March 31, 2000 1999 --------------------- 9% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES DUE OCTOBER 1, 2003 ............................. $ 19,134 $ 19,134 TERM NOTES ........................................... 75,750 80,000 REVOLVING LINE OF CREDIT ............................. 25,247 15,683 OTHER OBLIGATIONS .................................... 1,044 2,287 --------------------- 121,175 117,104 LESS: CURRENT INSTALLMENTS OF LONG TERM DEBT ............... 5,699 5,844 SHORT TERM DEBT ...................................... 17,781 9,169 --------------------- TOTAL ................................................ $ 97,695 $102,091 --------------------- The 9% Debentures were issued in fiscal 1996 for an aggregate principal amount of $25.0 million. These Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock, unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. In fiscal 1999 and 1998, $866,000 and $5.0 million aggregate principal amounts of these Debentures were converted into 97,830 and 564,971 shares of Common Stock, respectively, at the election of the bondholders. The 9% Debentures are currently 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 104% of face value, diminishing by one percent each year to 100% on or after October 1, 2003. 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. 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, 2000, the Company was in compliance with all covenants. The 9% Debentures are listed for trading on the American Stock Exchange. The aggregate market values, based on closing prices, of the outstanding principal amount was approximately $20.5 million and $19.5 million as of March 31, 2000 and 1999, respectively. On August 1, 1998, the Company redeemed its 8 1/2% Debentures at maturity in the amount of approximately $5.0 million. In connection with the acquisition of the EOS Business, on October 20, 1998, the Company and certain of its subsidiaries entered into a $150 million secured credit facility (Facility) with Mellon Bank, N.A. consisting of two term loans: the first in the principal amount of $30 million 42 (First Term Loan), and the second in the principal amount of $50 million (Second Term Loan); and a revolving line of credit (Line of Credit) for $70 million, subject to a borrowing base calculation. The maturity dates of the First Term Loan and the Second Term Loan are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments which began on June 30, 1999. The Line of Credit matures on October 20, 2003. The Facility is secured by substantially all of the assets of the Company. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The 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 credit agreements at March 31, 2000 and 1999. The Facility amended, restated and replaced the Company's existing $60 million secured credit facility, consisting of a $20 million term loan and a $40 million revolving line of credit obtained in fiscal 1998 in connection with the Spar Acquisition. For accounting purposes, the modification of the Facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extra ordinary charge in the amount of $2.3 million, net of tax of $1.3 million (see Note 10), during the year ended March 31, 1999. On February 4, 2000, the terms of the Company's Facility were modified, increasing the revolving line of credit limit from $70 million to $80 million. As of March 31, 2000, the Company had approximately $43.6 million of additional available credit after satisfaction of its borrowing base requirement. As of March 31, 2000, approximately $101.0 million was outstanding against the Facility, in addition to which $6.1 million was contingently payable under letters of credit, as compared with amounts outstanding and contingently payable at March 31, 1999 of $95.7 million and $5.9 million, respectively. Weighted average borrowings under revolving lines of credit for the fiscal years ended March 31, 2000 and 1999 were approximately $33.0 million and $23.0 million, respectively. The weighted average interest rate on outstanding revolving line of credit borrowings as of March 31, 2000 and 1999 was 8.1% for both years. As of March 31, 2000, the effective interest rates on the First and Second Term Loans were 7.6% and 10.4%, respectively. Cash payments for interest during fiscal 2000, 1999 and 1998 were $11.1 million, $8.0 million and $3.9 million, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2005 are as follows: 2001, $5.7 million; 2002, $7.7 million; 2003, $13.5 million; 2004, $27.7 million; and 2005, $24.4 million. Borrowings under the Facility are sensitive to changes in interest rates, as such borrowings bear interest at variable rates. In April 1998 and 1999, the Company entered into three interest rate collar agreements to limit the impact of interest rate fluctuations on cash flow and interest expense. A summary of the interest rate collar agreements in place as of March 31, 2000 and 1999 follows: (dollars in thousands)
NOTIONAL AMOUNT EXPIRATION -------------------------------- VARIABLE RATE CEILING FLOOR EFFECTIVE DATE DATE MARCH 31, 2000 MARCH 31, 1999 BASE RATE RATE ----------------------------------------------------------------------------------------------- APRIL 8, 1998 ....... JANUARY 8, 2001 $ 6,200 $ 6,200 CAD-BA* 6.35% 4.84% APRIL 26, 1999 ...... JANUARY 26, 2002 $20,000 $20,000 LIBOR 5.75% 4.80% APRIL 26, 1999 ...... JANUARY 26, 2000 $ -- $20,000 LIBOR 5.75% 4.77% -----------------------------------------------------------------------------------------------
*Canadian Bankers Acceptance Rate The weighted average interest rate on the Company's Libor and Canadian Bankers Acceptance Rate-based borrowings outstanding during fiscal 2000 was 5.71% and 4.94%, respectively. The fair market value of the collars outstanding as of March 31, 2000 and 1999 was approximately $0.5 million and $0.2 million, respectively. 43 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES NOTE 10 Income Taxes - Earnings from continuing operations before extraordinary item and income taxes consist of the following: (in thousands) Years Ended March 31, 2000 1999 1998 --------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES: DOMESTIC EARNINGS ...................... $ 9,594 $3,307 $8,582 FOREIGN EARNINGS ....................... 3,238 2,473 1,124 --------------------------- TOTAL ........................................... $12,832 $5,780 $9,706 --------------------------- Income tax expense from continuing operations before extraordinary item in fiscal 1999 consists of the following: (in thousands) Years Ended March 31, 2000 1999 1998 ----------------------------------- INCOME TAX EXPENSE (BENEFIT): CURRENT: FEDERAL ..................... $ 2,728 $ 2,418 $ 1,992 STATE ....................... 885 448 642 FOREIGN ..................... 2,108 2,413 529 ----------------------------------- 5,721 5,279 3,163 ----------------------------------- DEFERRED: FEDERAL ..................... 804 (1,946) 176 STATE ....................... (492) 58 5 FOREIGN ..................... (862) (1,476) (272) ----------------------------------- (550) (3,364) (91) ----------------------------------- TOTAL ................................ $ 5,171 $ 1,915 $ 3,072 ----------------------------------- 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, 2000 and 1999 are as follows:
(in thousands) March 31, 2000 1999 -------------------- DEFERRED TAX ASSETS: ACQUIRED FEDERAL NET OPERATING LOSS (NOL) CARRYFORWARDS ..... $ 5,062 $ 5,069 STATE NOL CARRYFORWARDS ..................................... 5,340 3,573 COSTS ACCRUED ON UNCOMPLETED CONTRACTS ...................... 2,974 1,789 DEFERRED FINANCING COSTS (NOTE 9) ........................... 874 1,066 INVENTORY CAPITALIZATION .................................... 2,577 3,166 OTHER ....................................................... 4,858 3,944 -------------------- TOTAL GROSS DEFERRED TAX ASSETS .................................. 21,685 18,607 LESS VALUATION ALLOWANCE ......................................... (8,008) (6,873) -------------------- NET DEFERRED TAX ASSETS .......................................... 13,677 11,734 -------------------- DEFERRED TAX LIABILITIES: DEPRECIATION AND AMORTIZATION ............................... 1,014 978 GENERAL AND ADMINISTRATIVE COSTS ............................ 6,554 5,795 FEDERAL IMPACT OF THE STATE BENEFITS ........................ 854 492 OTHER ....................................................... 746 638 -------------------- TOTAL GROSS DEFERRED TAX LIABILITIES ............................. 9,168 7,903 -------------------- NET DEFERRED TAX ASSETS .......................................... $ 4,509 $ 3,831 --------------------
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 U.S. Federal and state net operating loss (NOL) carryforwards, due to the uncertainty of future Company earnings and the status of applicable statutory regulation that could limit or preclude utilization of these benefits in future periods. Based upon the level of historical taxable income and projections for future taxable income over the period in which the Company's deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2000 and 1999. During the years ended March 31, 2000 and 1999, the valuation allowance increased by approximately $1.1 million and $5.4 million, 44 respectively, primarily as a result of the NOLs acquired in the NAI Merger to the extent not expected to be realized. The Company provides for the potential repatriation of certain undistributed earnings of its foreign subsidiaries and considers earnings above the amounts on which tax has been provided to be permanently reinvested. While these earnings would be subject to additional tax if repatriated, such repatriation is not anticipated. Any additional amount of tax is not practical to estimate. Current and noncurrent deferred tax assets of $3.6 million and $0.9 million, and $0.8 million and $3.0 million respectively, are included in the Consolidated Balance Sheets as of March 31, 2000 and 1999, respectively. At March 31, 2000, approximately $16.9 million of U.S. Federal and $39.8 million of state NOL carryforwards, which will expire between fiscal years 2001 and 2019, were available in various tax jurisdictions. All of the Company's U.S. Federal and $11.4 million of its state NOL carryforwards were acquired in connection with the NAI Merger (see Note 4). The annual utilization of the NOL carryforwards is limited under certain provisions of the Internal Revenue Code. Any future utilization of these net operating loss carryforwards will result in an adjustment to goodwill to the extent it reduces the valuation allowance. A reconciliation of the expected U.S. Federal income tax expense to the actual (effective) income tax expense from continuing operations is as follows:
(in thousands) Years Ended March 31, 2000 1999 1998 ----------------------------- EXPECTED U.S. FEDERAL INCOME TAX EXPENSE ................ $ 4,491 $ 1,965 $ 3,300 DIFFERENCE BETWEEN U.S. AND FOREIGN TAX RATES ........... 185 (290) (294) STATE INCOME TAX, NET OF FEDERAL INCOME TAX BENEFIT ..... 256 334 427 NONDEDUCTIBLE EXPENSES .................................. 820 486 256 UTILIZATION OF CAPITAL LOSS CARRYFORWARD ................ -- -- (193) U.S. TAX (BENEFIT) EXPENSE ON FOREIGN UNDISTRIBUTED EARNINGS ..................... (196) 196 -- U.S. TAX BENEFITS NOT PREVIOUSLY RECOGNIZED ............. -- (629) -- OTHER ................................................... (385) (147) (424) ----------------------------- TOTAL ................................................... $ 5,171 $ 1,915 $ 3,072 -----------------------------
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 2000, 1999 and 1998 amounted to $6.4 million, $3.6 million and $4.4 million, respectively. NOTE 11 Common Stock, Stock Option Plans and Employee Benefit Plans - On February 19, 1999, DRS Merger Sub., Inc., a New York corporation and wholly-owned subsidiary of DRS Technologies, Inc., a Delaware Corporation ("DRS"), merged with and into NAI Technologies, Inc., a New York corporation ("NAI"), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary of DRS (the "Merger") (see Note 4). As a result of the Merger, holders of NAI common stock received 0.25 of a share of DRS Common Stock for each share of NAI common stock; each NAI 12% Convertible Subordinated Promissory Note due January 15, 2001 was convertible into 0.25 of a share of DRS Common Stock; each issued and outstanding NAI warrant to purchase NAI common stock at an exercise price of $2.50 per share was converted into DRS warrants at a conversion ratio of 0.25 of a share of DRS Common Stock to one share of NAI common stock; each NAI stock option, whether vested or unvested, was assumed by DRS and now constitutes an option to acquire, on the same terms and conditions as were applicable under such option prior to the Merger, the number of DRS Common Stock equal to the product (rounded down to the nearest whole number) of 0.25 of a share and the number of shares of NAI common stock, subject to such option prior to the merger at a per-share exercise price equal to four times the exercise price of such option prior to the Merger. In connection with the Merger, the Company issued 2,858,266 shares of Common Stock, including 546,187 shares issued upon conversion of approximately $4.4 million of then outstanding 12% Notes. In addition, the Company issued stock options and warrants to purchase a total of 161,230 and 603,175 shares, respectively, of DRS Common Stock (as adjusted for the exchange ratio). The terms of the NAI stock options assumed, except for the exercise price and number of shares, were not amended. As of March 31, 2000, the warrants assumed in the Merger remained outstanding. These warrants are exercisable at $10.00 per share and expire February 15, 2002. On February 7, 1991, the Company's Board of Directors (Board) adopted the 1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000 shares of Common Stock. The Company's stockholders approved the Stock Option Plan 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 (Executive Compensation 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 45 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES price is determined by the Executive Compensation 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 Executive Compensation 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, 2000, 161,550 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). On November 20, 1998, the Board adopted, and on February 11, 1999, the stockholders approved, an amendment to the Omnibus Plan, increasing the number of shares of Common Stock reserved for issuance under the Omnibus Plan from 500,000 to 1,400,000 shares, subject to adjustment under certain circumstances. On May 18, 2000, the Board adopted a resolution proposing a second plan amendment. The purpose of the second plan amendment, which is subject to stockholder approval, is to increase the number of shares of DRS Common Stock reserved for issuance under the Plan by 975,000 to an aggregate 2,375,000. Awards under the Omnibus Plan are at the discretion of the Executive Compensation 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 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 Executive Compensation 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 Executive Compensation 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 Executive Compensation 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, 2000, 256,872 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 net earnings as the options become exercisable, in accordance with the terms of the grant. The amount of compensation charged to earnings in fiscal 2000, 1999 and 1998 was $155,000, $67,000 and $98,000, respectively, and related solely to options granted under the Stock Option Plan. The Board may, at its discretion, grant equity-based compensation awards, subject to certain regulatory restrictions. In fiscal 1999, the Board issued options to purchase up to 250,000 shares of DRS Common Stock with vesting terms similar to awards issued in fiscal 1999 under the Omnibus Plan at exercise prices in excess of the market price on the date of grant. The per-share weighted-average fair value and exercise price of these options were $1.89 and $10.44, respectively. When stock is issued on exercise of options, the par value of each share ($.01) is credited to Common Stock and the remainder of the option price is credited to paid-in capital. No charge is made to operations. A summary of stock option activity is as follows:
NUMBER OF SHARES WEIGHTED AVERAGE OF COMMON STOCK EXERCISE PRICE ---------------------------------- OUTSTANDING AT MARCH 31, 1997 (OF WHICH 218,280 SHARES WERE EXERCISABLE) ..... 540,780 $ 6.33 GRANTED .................................... 204,800 $ 9.72 EXERCISED .................................. (23,480) $ 3.70 EXPIRED OR CANCELLED ....................... (16,000) $ 9.41 ---------------------------------- OUTSTANDING AT MARCH 31, 1998 (OF WHICH 303,100 SHARES WERE EXERCISABLE) ..... 706,100 $ 7.33 GRANTED .................................... 893,930 $ 9.34 EXERCISED .................................. (63,600) $ 2.24 EXPIRED OR CANCELLED ....................... (45,200) $10.27 ---------------------------------- OUTSTANDING AT MARCH 31, 1999 (OF WHICH 461,579 SHARES WERE EXERCISABLE) ..... 1,491,230 $ 8.66 GRANTED .................................... 436,050 $ 7.25 EXERCISED .................................. (151,087) $ 3.33 EXPIRED OR CANCELLED ....................... (92,122) $ 8.91 ---------------------------------- OUTSTANDING AT MARCH 31, 2000 (OF WHICH 611,446 SHARES WERE EXERCISABLE) ..... 1,684,071 $ 8.76 ----------------------------------
46 The stock options exercised during fiscal 2000 include 50,000 shares, which are being held by the Company in "book entry" form, and 100,000 shares, which were exercised via a stock-for-stock transaction. Book entry shares are not considered issued or outstanding as of March 31, 2000. However, these shares are included in the Company's diluted earnings per share calculation. In connection with the stock-for-stock transaction, 55,755 "mature shares" (i.e., common shares held by the option holder for at least six months), with a fair value equal to aggregate exercise price of the stock options exercised, were tendered by the option holder to the Company to satisfy the total exercise price of the options. Information regarding all options outstanding at March 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ----------------------------- WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE REMAINING NUMBER OF WEIGHTED AVERAGE 0PTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE ------------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES $7.50 OR LESS............ 409,000 $ 6.72 9.3 YEARS 18,250 $ 2.58 $7.51 - $9.81............ 784,100 $ 8.47 7.8 YEARS 352,025 $ 8.60 GREATER THAN $9.81....... 490,971 $10.92 6.3 YEARS 241,171 $10.81 ------------------------------------------------------------------------------------- TOTAL.................... 1,684,071 $ 8.76 7.8 YEARS 611,446 $ 9.29 -------------------------------------------------------------------------------------
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%, 5.0% and 6.0% in fiscal 2000, 1999 and 1998, respectively; dividend yield of 0%; volatility factor related to the expected market price of the Company's Common Stock of .2953 in fiscal 2000, .2974 in fiscal 1999, and .2824 in fiscal 1998; and weighted-average expected option life of five years. The weighted-average fair values of options granted at market during fiscal 2000, 1999 and 1998 were $2.71, $2.95 and $3.94 per share, respectively. The per-share weighted-average fair value and exercise price of options granted with an exercise price less than market during 1999 and 1998 were $3.96 and $8.20, and $9.99 and $.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 2000, 1999 and 1998 presented below include 107%, 49% and 67%, respectively, of the total pro 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 is as follows: (in thousands, except per-share data) Years Ended March 31, 2000 1999 1998 ------------------------------ PRO FORMA NET EARNINGS ................... $3,579 $ 7 $5,869 PRO FORMA EARNINGS PER SHARE BASIC ............................... $ 0.39 $-- $ 1.04 DILUTED ............................. $ 0.41 $-- $ 0.88 ------------------------------ The Company maintains defined contribution plans covering substantially all domestic full-time eligible employees. The Company's contributions to these plans for fiscal 2000, 1999 and 1998 amounted to $1.9 million, $1.2 million and $0.7 million, respectively. Certain employees of the Company's foreign operating units 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. DRS funds these plans based on independent actuarial valuations. 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, 2000 and 1999, the Company's liability for benefits accrued under the SERP was approximately $1.7 million and $1.5 million, respectively, and is included in Other Liabilities in the Consolidated Balance Sheets. Charges of $583,000, $463,000 and $436,000, relating to the SERP were included in the consolidated results of operations for fiscal 2000, 1999 and 1998, respectively. 47 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES NOTE 12 Commitments, Contingencies and Related Party Transactions - At March 31, 2000, the Company was party to various noncancellable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: (dollars in thousands) Years Ending March 31, ------- 2001 ................................................................. $ 9,310 2002 ................................................................. 8,948 2003 ................................................................. 6,424 2004 ................................................................. 5,155 2005 ................................................................. 4,738 THEREAFTER ........................................................... 15,339 ------- TOTAL ................................................................ $49,914 ------- 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 $8.7 million, $4.5 million and $3.4 million in fiscal 2000, 1999 and 1998, respectively. 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 has received 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 were charged to expense over the five-year term as services were performed and obligations were 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 $1.6 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 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 a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or DRS Photronics. During the government's investigation, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of the investigation. At this time, however, the Company is unable to quantify the effect of the delayed shipments on its future operations or financial position, or to predict when regular shipments ultimately will resume, although the delays are expected to continue to impact the Company's fiscal year 2001 results. 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 13 Operating Segments - DRS operates in three principal business segments on the basis of products and services offered. Each operating unit is comprised of separate and distinct businesses: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG). All other operations are grouped in "Other." During fiscal 2000, DRS's ultra-high speed digital imaging subsidiary, DRS Hadland, was combined with FSCG for management purposes, based on business and product synergies and location. DRS Hadland previously had been managed as part of EOSG. Prior-year balances and results of operations for both EOSG and FSCG have been restated to give effect to this management reporting change. ESG is a supplier of computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustic signal processing and display equipment, and combat control systems. The Group's products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and 48 surveillance aircraft. ESG's products also are used in U.S. Army and international battlefield digitization programs. EOSG produces systems and subsystems for infrared night vision and targeting systems used in the U.S. Army's Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV) scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures, regardless of the ambient light level. This Group also designs and manufactures eye-safe laser range finders and multi-platform weapons calibration systems for the AH-64 Apache attack helicopter and AC-130U gunship. FSCG is a manufacturer of deployable flight emergency or "black box" recording equipment used by military and search and rescue aircraft. FSCG also manufactures shipboard communications and infrared surveillance systems for the U.S., Canadian and other navies. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. FSCG also provides advanced manufacturing services of international military and space customers. FSCG products are used on such platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target verification and battle damage assessment. FSCG is also a producer of ultra high-speed digital imaging systems. Other includes the activities of the parent company, DRS Corporate Headquarters, DRS Ahead Technology, Inc. (DRS Ahead) and certain non-operating subsidiaries of the Company. DRS Ahead produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead also services and manufactures magnetic heads used in broadcast television equipment. Also included in this segment are the results of operations from the Company's DRS Medical Systems partnership. This partnership was formed in February 1996; the net assets of the partnership were subsequently sold in fiscal 1998. 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. Information about the Company's continuing operations in these segments for each of the three years ended March 31, 2000 is as follows:
(in thousands) ESG EOSG FSCG OTHER TOTAL ---------------------------------------------------- FISCAL 2000: REVENUES ........................................... $187,794 $141,108 $54,209 $ 8,356 $391,467 OPERATING INCOME (LOSS) BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES ............... $ 16,370 $ 14,804 $ 3,799 $ (2,391) $ 32,582 OPERATING INCOME (LOSS) ............................ $ 14,593 $ 11,404 $ 2,762 $ (2,581) $ 26,178 IDENTIFIABLE ASSETS ................................ $ 94,719 $137,075 $62,517 $ 20,478 $314,789 DEPRECIATION AND AMORTIZATION ...................... $ 3,813 $ 8,136 $ 2,832 $ 2,289 $ 17,070 CAPITAL EXPENDITURES ............................... $ 1,722 $ 1,973 $ 525 $ 1,990 $ 6,210 ---------------------------------------------------- FISCAL 1999: REVENUES ........................................... $123,558 $ 69,972 $60,438 $ 11,881 $265,849 OPERATING INCOME (LOSS) BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES ............... $ 9,497 $ 5,077 $ 5,672 $ (2,022) $ 18,224 OPERATING INCOME (LOSS) ............................ $ 9,292 $ 3,581 $ 4,684 $ (2,256) $ 15,301 IDENTIFIABLE ASSETS ................................ $ 84,475 $151,313 $66,273 $ 19,638 $321,699 DEPRECIATION AND AMORTIZATION ...................... $ 1,356 $ 5,001 $ 3,003 $ 2,241 $ 11,601 CAPITAL EXPENDITURES ............................... $ 1,916 $ 1,820 $ 2,177 $ 641 $ 6,554 ---------------------------------------------------- FISCAL 1998: REVENUES ........................................... $ 95,054 $ 30,320 $38,463 $ 16,913 $180,750 OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES ............... $ 9,481 $ 937 $ 2,621 $ 2,302 $ 15,341 OPERATING INCOME ................................... $ 9,454 $ 801 $ 2,124 $ 2,040 $ 14,419 IDENTIFIABLE ASSETS ................................ $ 35,706 $ 33,375 $66,026 $ 19,649 $154,756 DEPRECIATION AND AMORTIZATION ...................... $ 923 $ 2,030 $ 1,224 $ 2,011 $ 6,188 CAPITAL EXPENDITURES ............................... $ 1,091 $ 2,431 $ 413 $ 2,324 $ 6,259 ----------------------------------------------------
During fiscal 2000, ESG, EOSG and FSCG recorded inter-segment revenues of approximately $177,000, $1.8 million and $387,000, respectively. During fiscal 1999, EOSG recorded inter-segment revenues of approximately $466,000. No inter-segment sales were recorded in fiscal 1998. Revenues, total assets and property, plant and equipment by geographic location are presented in the table below. Revenues are attributed to countries based on the physical location of the operating unit generating the revenues. Information about the Company's operations in these geographic locations for each of the three years ended March 31, 2000 is as follows: 49 Notes to Consolidated Financial Statements (continued) DRS TECHNOLOGIES INC. AND SUBSIDIARIES
UNITED (in thousands) TOTAL UNITED STATES CANADA KINGDOM -------------------------------------------------------- FISCAL 2000: REVENUES ......................... $391,467 $319,331 $32,437 $39,699 TOTAL ASSETS ..................... $314,789 $245,450 $32,765 $36,574 PROPERTY, PLANT AND EQUIPMENT .... $ 29,006 $ 25,465 $ 1,958 $ 1,583 -------------------------------------------------------- FISCAL 1999: REVENUES ......................... $265,849 $221,812 $29,554 $14,483 TOTAL ASSETS ..................... $321,699 $264,926 $30,679 $26,094 PROPERTY, PLANT AND EQUIPMENT .... $ 32,124 $ 28,415 $ 2,240 $ 1,469 -------------------------------------------------------- FISCAL 1998: REVENUES ......................... $180,750 $166,290 $12,216 $ 2,244 TOTAL ASSETS ..................... $154,756 $106,494 $33,694 $14,568 PROPERTY, PLANT AND EQUIPMENT .... $ 20,783 $ 17,605 $ 1,754 $ 1,424 --------------------------------------------------------
NOTE 14 Quarterly Financial Information (Unaudited) - The following table sets forth unaudited quarterly financial information for fiscal 2000 and 1999:
FIRST SECOND THIRD FOURTH (in thousands, except per-share data) QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------- FISCAL YEAR ENDED MARCH 31, 2000 REVENUES ..................................... $85,646 $88,253 $103,570 $113,998 OPERATING INCOME ............................. $ 5,274 $ 5,119 $ 7,120 $ 8,665 NET EARNINGS ................................. $ 968 $ 1,060 $ 1,773 $ 509 BASIC EARNINGS PER SHARE ..................... $ 0.10 $ 0.11 $ 0.19 $ 0.05 DILUTED EARNINGS PER SHARE ................... $ 0.10 $ 0.11 $ 0.18 $ 0.07 ---------------------------------------------------- FISCAL YEAR ENDED MARCH 31, 1999 REVENUES ..................................... $44,110 $44,128 $ 75,193 $102,418 OPERATING INCOME ............................. $ 2,233 $ 2,082 $ 4,320 $ 6,666 EARNINGS BEFORE EXTRAORDINARY ITEM ........... $ 324 $ 57 $ 664 $ 1,941 NET EARNINGS (LOSSES) ........................ $ 324 $ 57 $ (1,642) $ 1,941 BASIC EARNINGS PER SHARE: EARNINGS BEFORE EXTRAORDINARY ITEM ....... $ 0.05 $ 0.01 $ 0.10 $ 0.25 NET EARNINGS (LOSSES) .................... $ 0.05 $ 0.01 $ (0.26) $ 0.25 DILUTED EARNINGS PER SHARE: EARNINGS BEFORE EXTRAORDINARY ITEM ....... $ 0.05 $ 0.01 $ 0.10 $ 0.22 NET EARNINGS (LOSSES) .................... $ 0.05 $ 0.01 $ (0.25) $ 0.22 ----------------------------------------------------
The reported revenues and operating income above have been restated to present the operating results of the Company's continuing operations only. In connection with the pending sale of the magnetic tape head business units (see Note 2), the Company recorded a loss on the sale of discontinued operations of approximately $2.1 million, net of tax, in the fiscal 2000 fourth quarter results of operations. Also in the fourth quarter of fiscal 2000, the Company recorded restructuring charges of approximately $1.8 million. NOTE 15 Subsequent Event (Unaudited) - On June 14, 2000, a newly formed subsidiary of the Company acquired the assets of General Atronics Corporation for approximately $7.0 million in cash and $4.0 million in stock (approximately 355,000 shares of DRS Common Stock). Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC, the company designs, develops and manufactures military data link components and systems, high-frequency communication modems, tactical and secure digital telephone components, and radar surveillance systems for U.S. and international militaries. The acquisition will be accounted for using the purchase method of accounting. 50 DRS TECHNOLOGIES INC. AND SUBSIDIARIES Common Stock
FISCAL 2000 FISCAL 1999 ------------------------ ----------------------- AS TRADED ON THE AMERICAN STOCK EXCHANGE HIGH LOW HIGH LOW ------------------------------------------------------------ FIRST QUARTER ......................................... 10 15/16 7 15 3/8 11 5/8 SECOND QUARTER ........................................ 10 5/8 8 15/16 12 1/16 9 1/16 THIRD QUARTER ......................................... 10 7 11 7 FOURTH QUARTER ........................................ 10 3/8 8 1/4 11 7 5/8 ------------------------------------------------------------
As of May 31, 2000, the Common Stock of the Company was held by 794 and 3,201 stockholders of record and beneficial owners, respectively. ================================================================================ Independent Auditors' Report [LOGO] KPMG 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, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended March 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Short Hills, New Jersey May 18, 2000 51 EX-21 5 0005.txt LIST OF SUBSIDIARIES EXHIBIT 21 DRS TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 2000
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 LP 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 Technologies Canada Company Canada (Nova Scotia) 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 Netherlands Parsippany B.V. DRS Ahead Technology, Inc. Republic of Bulgaria (Bulgaria) AD NAI Technologies, Inc. United States of America (New York) DRS Rugged Systems (Europe) Ltd. United Kingdom DRS Rugged Systems (Australia) Pty. Ltd. Australia DRS Data Systems (Europe) Ltd. United Kingdom DRS Rugged Systems (Europe) Products Ltd. United Kingdom DRS Rugged Systems, Inc. United States of America (Colorado) DRS Advanced Programs, Inc. United States of America (New York) DRS FPA, Inc. United States of America (Delaware) DRS Infrared Technologies, LP United States of America (Delaware) DRS Sensor Systems, Inc. United States of America (Delaware)
EX-23.1 6 0006.txt CONSENT OF KPMG 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, No. 333-14487, No. 33-33125, No. 33-42886 and No. 333-69751) on Form S-8 and (No. 33-64641, and No. 333-04929) on Form S-3 of DRS Technologies, Inc. of our reports dated May 18, 2000, relating to the consolidated balance sheets of DRS Technologies, Inc. as of March 31, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended March 31, 2000, which reports appear or are incorporated by reference in the March 31, 2000 Annual Report on Form 10-K of DRS Technologies, Inc. /s/ KPMG LLP Short Hills, New Jersey June 28, 2000 EX-27 7 0007.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DRS TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL PERIOD ENDED MARCH 31, 2000, AND RESTATED INFORMATION FOR THE FISCAL PERIODS ENDED MARCH 31, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 U.S. DOLLARS MAR-31-2000 MAR-31-1999 MAR-31-1998 APR-01-1999 APR-01-1998 APR-01-1997 MAR-31-2000 MAR-31-1999 MAR-31-1998 YEAR YEAR YEAR 1 1 1 3,778 10,031 9,694 0 0 0 82,304 75,855 46,162 (1,410) (1,182) (536) 62,326 69,868 35,937 158,633 162,724 96,810 57,039 69,701 52,505 28,033 37,577 (31,722) 320,098 329,639 162,813 137,249 149,233 54,684 97,695 102,091 56,532 0 0 0 0 0 0 97 96 66 78,087 73,346 44,269 320,098 329,639 162,813 391,467 265,849 180,750 391,467 265,849 180,750 363,086 250,548 166,331 365,289 250,548 166,331 (572) (857) (1,342) 0 0 0 12,600 9,357 5,098 12,832 5,780 9,706 5,171 1,915 3,072 7,661 3,865 6,634 (1,255) (879) (262) 0 (2,306) 0 0 0 0 4,310 680 6,372 0.47 0.10 1.13 0.47 0.10 0.93
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