-----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, VtjW3uDpD/ba+82AMiOuiItYzch2f8Wh96u8XZOKwlYAM6lbp8rrMLAEACCVTyb5 8TMUCL+eHlHyjIl8xtCmQA== 0000950110-97-001124.txt : 19970701 0000950110-97-001124.hdr.sgml : 19970701 ACCESSION NUMBER: 0000950110-97-001124 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08533 FILM NUMBER: 97633162 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 201-898-1500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 Commission file number 1-8533 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (D.B.A. 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 (201) 898-1500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, $.01 par value American Stock Exchange 8-1/2% Convertible Subordinated Debentures due August 1, 1998 American Stock Exchange 9% Senior Subordinated Convertible Debentures due October 1, 2003 American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| 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 23, 1997, was approximately $53,000,000. The number of shares of Common Stock outstanding as of June 23, 1997 was 5,588,349 (exclusive of 421,117 shares of Common Stock held in the treasury.) DOCUMENTS INCORPORATED BY REFERENCE 1. 1997 Annual Report (for the fiscal year ended March 31, 1997), incorporated in Part II. 2. Definitive Proxy Statement, dated June 27, 1997, for the Annual Meeting of Stockholders, incorporated in Part III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL The registrant, Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc. (hereinafter the "Company" or "DRS") was incorporated in 1968 and is a diversified, high-technology company serving government and commercial niche markets worldwide. Principally a developer and manufacturer of a variety of sophisticated, leading edge systems used for the processing, display and storage of data, the Company provides its customers with a broad range of products, including electronic sensor, electronic imaging and electro-optical systems, and offers a full complement of technical support services. The Company's defense electronics products serve all branches of the armed forces. Its commercial and industrial products are used mainly by the airline, banking, computer disk drive, security, transportation, retail sales and broadcast industries. The Company is organized into three groups: the Electronic Systems Group ("ESG"), which designs, manufactures and markets high-technology electronic signal processors, display workstations and trainer and combat emulation systems and provides field service, software engineering and systems support primarily to the military; the Electro-Optical Systems Group ("EOSG"), which produces electro-optical sighting, targeting and optical alignment systems primarily for military customers; and the Data Systems Group ("DSG"), which designs and manufactures data storage products for both military and commercial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "Commercial Off-The-Shelf" ("COTS") product designs, whereby commercial electronic components are integrated, adapted, upgraded and "ruggedized" for application in harsh military environments. Using COTS designs, the Company develops and delivers its products with significantly less development time and expense compared with traditional military product cycles, generally resulting in shorter lead times, lower costs and the employment of the latest information and computing technologies. STRATEGY The Company believes that the nature of modern warfare has changed, dictating increasing reliance on real-time, accurate battlefield information derived from increasingly sophisticated defense systems and electronics. Additionally, the nature of military procurement programs has changed, requiring suppliers to become more efficient and adaptable to current and future market needs. In recent years, the Company has implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the Cold War, military budget constraints and the COTS mandate. In addition to winning contracts for new programs and supporting existing military programs, the Company's strategies include: o designing new products and adapting existing products for use by all branches of the military; o transferring technologies developed in the defense sector to commercial and industrial markets; and o acquiring businesses that provide a strategic complement to the Company's existing products, services and technological capabilities in both the defense and commercial marketplaces. To effect these strategies, the Company has (i) made several acquisitions over the last four years, adding complementary military and commercial products and technologies; (ii) entered into strategic relationships with other defense suppliers such as Lockheed Martin Tactical Defense Systems and Northrop-Grumman, among others; (iii) emphasized the development of COTS-based products, as well as products and systems that easily are adapted to similar weapons platforms used by all branches of the military; and (iv) implemented cost reduction initiatives to reduce its fixed-cost base, to allow for growth and to maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last five fiscal years. -1- Acquisitions and Related Activities. In November 1994, the Company acquired Ahead Technology Corporation. Now located in San Jose, California, and operating as DRS Ahead Technology, Inc., the company designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. In July 1995, the Company acquired substantially all of the assets of Opto-Mechanik, Inc, now located in Palm Bay, Florida and operating as DRS Optronics, Inc. ("Optronics"). This acquisition enabled EOSG to expand its electro-optical targeting products and consolidate certain manufacturing activities in a lower cost facility, while adding backlog in complementary product areas. In February 1996, the Company acquired a 90% interest in DRS Medical Systems, a partnership formed to develop, manufacture and market medical ultrasound imaging equipment. The DRS Medical Systems partnership provides a means for the Company to apply its expertise in sonar and image processing technology to related commercial applications. As part of the Company's strategy to diversify into non-defense markets, the Company recently made three acquisitions which expanded its presence and existing capabilities in the magnetic head marketplace. In February 1996, the Company acquired substantially all of the assets of Mag-Head Engineering Company, Inc. ("MEC"), a manufacturer of audio and flight recorder heads. In addition, in June 1996, the Company acquired substantially all of the assets of Vikron, Inc. ("Vikron"). Located in St. Croix Falls, Wisconsin, Vikron manufactures data and recording heads. In October 1996, the Company acquired certain assets of Nortronics Company, Inc. ("Nortronics"), which also manufactures magnetic data recording head products. Nortronics is located in Dassel, Minnesota. Effective February 26, 1997, these operations were merged with and into DRS Ahead Technology, Inc. to form a single legal entity. The Company currently is integrating these operations to further streamline its manufacturing operations. In October 1996, Pacific Technologies, Inc. ("PTI") merged with and into a subsidiary of the Company. Based in San Diego, California, PTI provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. PTI was renamed DRS Technical Services, Inc. ("TSI") in March, 1997, and is the Company's primary West Coast support services unit. Adaptable Product Designs. The Company has focused on the design and development of new products and the redesign of existing products for use by all branches of the military. This has enabled the Company to increase revenues using its existing product and technology base, reduce overall product development costs and decrease reliance on U.S. Navy procurement programs. The Company's display systems, originally designed under a U.S. Navy development contract, are open-architecture information processing workstations that can be adapted for use in other branches of the military. Similarly, the Company's boresight products, originally designed for use with the U.S. Army's Apache attack helicopter, were designed to be adaptable to other air, sea or land-based weapons platforms. The boresight system has been applied successfully to the U.S. Marine Corps' Cobra helicopter and to the U.S. Air Force's AC-130 Spectre Gunship platforms. Cost-Reduction and Other Initiatives. The Company currently is integrating the administrative and support functions of its magnetic head manufacturing facilities, and continues to focus on streamlining its operations. During fiscal 1996, the Company consolidated several of its manufacturing facilities. Also, in fiscal 1997, two of the Company's primary manufacturing and assembly facilities received ISO-9000 certification. COTS PRODUCT DESIGNS The COTS concept was developed and mandated in response to both decreasing military budgets and the increasing pace of technology. The use of COTS designs entails the purchasing, refitting, upgrading and "ruggedization" (repackaging, remounting and stress testing to ensure readiness for use in harsh military environments) of available commercial components. The Company strives to apply COTS designs to most of its new products. Management believes that the adaptation of available commercial components to existing and newly developed military systems offers three primary advantages over traditional military systems development and procurement cycles: (i) it has the potential to save significant amounts of time and cost with respect to product research and development, (ii) as commercial product development and production cycles become shorter than their military equivalents, the adaptation of commercial technology to battlefield systems has the potential to shorten military product cycles; and (iii), use of COTS designs -2- should ensure that the latest information and computing technologies are employed in the design and manufacture of defense electronics systems. MARKET OVERVIEW The Company believes that the current market for defense electronics systems and related equipment has been influenced by two primary factors: Firstly, the nature of modern warfare dictates increasing reliance on timely and accurate battlefield information to ensure that increasingly costly assets are deployed efficiently and to minimize destruction of non-military targets. In general, military engagements have evolved from large-scale undertakings, where numerical superiority was the key to dominance, to "surgical strikes", where the ability to observe and strike accurately at will from afar has become a major means of both deterrence and loss minimization. Advancing technology has been a major factor in increasing the precision strike capability of the U.S. military and has increased the "per shot" cost of arms. These factors combine to produce a military, economic and political environment requiring increased weapons efficiency and accuracy. In addition, real-time data is needed for in-theater evaluation, damage assessment and training, as well as to reduce and minimize incidents of U.S. casualties due to friendly fire. Secondly, it is often more cost-effective to retrofit and upgrade existing weapons platforms than to replace them. With development and unit costs of new platforms increasing rapidly amid a political and economic environment demanding decreasing overall military expenditures, Congress and the military have delayed or canceled the implementation of many proposed new weapons systems, opting instead to improve the performance and extend the life of existing weapons through improved battlefield intelligence and equipment enhancements. This increasing focus on cost efficiencies has manifested itself in the military's COTS program. COMPANY ORGANIZATION AND PRODUCTS The Company is organized into three groups: ESG, EOSG and DSG. A description of the groups and their primary products follows below: ELECTRONIC SYSTEMS GROUP ESG consists of DRS Electronic Systems, Inc. ("ESI"), located in Gaithersburg, Maryland, DRS Laurel Technologies ("Laurel"), located in Johnstown, Pennsylvania, TSI, based in San Diego, California and the DRS Technical Services Division ("TSD"), now located in Chesapeake, Virginia. The group also includes DRS Medical Systems, located in Mahwah, New Jersey. ESI designs, manufactures and markets electronic signal processors and display workstations which are installed in mobile land-based units and used for underwater surveillance of harbors and coastal locations and on naval ships for antisubmarine warfare ("ASW") purposes, respectively. These workstations receive signals from a variety of sonar-type sensors, processing the information and arranging it in a display format enabling operators to quickly interpret the data and inform command personnel of potential threats. Major products and contracts include: o AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical workstation to be qualified by the U.S. Navy and was designed to comply with the stringent requirements of the Aegis (DDG-51) shipbuilding program. Replacing the sensor displays in the SQQ-89 ASW combat suite, it employs dual processors enabling simultaneous I/O and graphics processing. This new approach allows for required high bandwidth processing, while maintaining response times for operator/machine interfaces. The system architecture can be adapted to meet various interface, cooling, memory, storage and processing requirements. o AN/SQR-17A(V)3: The Mobile In-shore Undersea Warfare (MIUW) system is deployed in land-based vans, utilizing sonobuoys and anchored passive detectors for harbor defense, coastal defense and amphibious operations surveillance, as well as for the enhancement of drug interdiction efforts. -3- This system currently is being procured for utilization in 22 field installations. The Company is under contract to provide various upgrades to these field installations. ESI also produces tactical (e.g., combat/attack) information systems and training systems. Major products and contracts include: o AN/UYQ-70: The AN/UYQ-70 is an advanced, open-architecture display system designed for widespread application through software modification, and is to be deployed on Aegis and other surface ships, submarines and airborne platforms. This system was developed for the U.S. Navy under subcontract with Lockheed Martin Tactical Defense Systems. The AN/UYQ-70 is a self-contained, microprocessor-based unit complete with mainframe interface software offering advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a shipboard mainframe computer at approximately 25% of the cost of the older units. Based upon the size of the Naval surface fleet and the average number of workstations to be deployed on each ship, the Company believes that the potential market for this workstation product may be in excess of 5,000 units over the next decade. o Military Display Emulators: These workstations are functionally identical to existing U.S. Navy shipboard display consoles built to military specifications, but are manufactured using low-cost COTS components suitable for land-based laboratory environments. These Military Display Emulators are used in U.S. Navy development, test and training sites as plug-compatible replacements for the more expensive shipboard qualified units. The Company currently is delivering these Military Display Emulators for use at land-based training sites for the Aegis and other U.S. Navy programs. Laurel, which is 80% owned by DRS through a partnership formed in December 1993 with Sunburst Management, Inc., serves as a cost-efficient manufacturing operation for the Company. Laurel primarily manufactures and integrates electronic systems, providing turn-key production, and performs related electronic and electromechanical assembly and associated test services. In addition, Laurel specializes in cable and wire harness interconnect products, primarily for large industrial customers that are involved in the military and commercial aerospace industries. Laurel currently produces both the AN/UYQ-65 and AN/UYQ-70 workstations. TSI and TSD perform field service and depot level repairs for ESG products, as well as other manufacturers' systems, and also provide systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. TSI and TSD facilities are located in close proximity to U.S. Naval bases in Norfolk, Virginia and San Diego, California. Services, including equipment and field change installation, configuration audit, repair, testing and maintenance, are performed for the U.S. Navy and, to a lesser extent, commercial customers. TSD also has performed work for foreign navies, including those of Australia, Egypt, Greece, the Republic of China and Turkey. DRS Medical Systems is 90% owned by the Company through a partnership with Universal Sonics Corporation and was formed to develop, manufacture and market high-quality, low-cost medical ultrasound imaging equipment. DRS Medical Systems currently manufactures ultrasound and sonographic systems principally for original equipment manufacturers. ELECTRO-OPTICAL SYSTEMS GROUP EOSG consists of DRS Photronics, Inc. ("Photronics"), located in Hauppauge, New York and Optronics, located in Palm Bay, Florida. EOSG is currently headquartered in Oakland, New Jersey. Photronics produces boresighting equipment used to align and harmonize the navigation, targeting and weapons systems on rotary- and fixed-wing aircraft and armored vehicles. Multiple Platform Boresighting Equipment (MPBE) is Photronics' main product line. MPBE currently is used on the Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship. This technology is proprietary to the Company. -4- In fiscal 1996, the Company was selected as the prime contractor on a tri-service (Army, Navy and Air Force) program to develop the Airborne Separation Video System ("ASVS"), to be used for the test and evaluation of weapons separation events on board various fixed- and rotary-wing military aircraft. The systems include an electronically-shuttered, fast-frame, high-resolution, digital imaging camera and a high-density, digital data storage device. Upon completion of development, the ASVS will incorporate a color readiness capability and will include a miniaturized high-speed, electronic camera to assure compatibility with air platforms, such as the Air Force's F-16. Until the latter part of fiscal 1996, Photronics manufactured electro-optical components used in Sidewinder, Stinger and new generation air-to-air and surface-to-air missiles in its Hauppauge, New York facility. In order to reduce its production costs, Photronics consolidated its missile component manufacturing operations to Optronics' new facility in Palm Bay, Florida. The move allowed for the expansion of Photronics' MPBE programs in Hauppauge. Optronics designs and manufactures electro-optical targeting and sighting systems and various missile components. Major programs of Optronics include: o Night Vision Binoculars: Optronics is currently under contract to develop and manufacture these units for the Israeli military. The Night Vision Binocular is a hand-held viewing binocular that incorporates an image intensifier tube, laser range finder and digital compass in a compact lightweight system suited for infantry units, special forces and night operations involving forward observers and reconnaissance patrols. The Night Vision Binocular displays range and azimuth data in the soldier's eyepiece, allowing identification of targets and providing essential fire support data for nighttime engagement. These units have a range of 20 to 2,000 meters. o Gunners' Auxiliary Sight: This is an electro-optical device used as a primary or backup sighting system on M-1 Abrams battle tanks and contains a very sophisticated electro-optical train and a laser protective filter. Optronics has produced more than 2,000 of these instruments and continues to operate as a repair and retrofit facility for the M-1A2 upgrade program, which will continue through fiscal 1998, with options through fiscal 2000. o TOW Optical Sight: Optronics is currently the only U.S. qualified producer of two of the three critical assemblies in this device. This complex electro-optical system is the main component of the U.S.'s premier antitank weapons system. o TOW Traversing Unit: This unit provides target tracking accuracy for the TOW antitank weapon, acting as the mount for the TOW Optical Sight and the associated missile launch tube. Optronics currently is the only qualified manufacturer of this tightly toleranced assembly, and currently is working on modification and retrofit programs. Optronics also has been contracted to modify a version for use by an overseas customer. o Day/Night Thermal Sighting System: This system was developed jointly with the primary contractor. Optronics is a major subcontractor on the program, currently supplying three of the major assemblies. o Eye-Safe Laser Range Finder: Optronics competed against the U.S. Army's historical primary laser supplier for this contract and was awarded an initial contract for preproduction units. Optronics also is currently manufacturing a laser range finder/target designator for airborne use in the MILES AGES program. This effort includes redesigning the target designator unit to accomodate Optronics' laser components. o Missile Components: EOSG originally provided only the primary mirrors used in the nose-mounted infrared seeker of Sidewinder and Stinger missiles. Development efforts have resulted in the ability to provide increased content to include the secondary, tertiary and fold mirrors, housing and nose dome. The Company is currently under contract to produce infrared components and subassemblies on many of the next-generation infrared missile systems. -5- DATA SYSTEMS GROUP DSG consists of DRS Precision Echo, Inc. ("PE"), located in Santa Clara, California, and DRS Ahead Technology, Inc. ("Ahead Technology"), with locations in San Jose, California, Plymouth, Minnesota, St. Croix Falls, Wisconsin and Dassel, Minnesota. PE manufactures a variety of digital and analog recording systems utilized for military applications including reconnaissance, ASW and other information warfare data storage requirements and is a predominant U.S. manufacturer of Hi-8 millimeter military recorders supplied to the U.S. armed forces. PE's products include: o AN/USH-42: PE is currently under contract to manufacture these recording systems for use on the Navy's S-3B ASW aircraft. The AN/USH-42 will be used to record radar, infrared, bus, navigation and voice data. o WRR-818: This ruggedized video recorder uses certain components from commercial video recording equipment and has been selected for use on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10 aircraft. It also has been selected by the U.S. Army for use in its Kiowa warrior reconnaissance helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's light armored reconnaissance vehicles. Ahead Technology manufactures burnish, glide and test heads used in the production of computer disk drives. These consumable products are used by many U.S. disk drive manufacturers to hone the surface and ensure the quality of magnetic disks used in computer hard drives. In addition, Ahead Technology specializes in the manufacture and refurbishment of broadcast video and audio heads, heads used in commercial flight data recorders and heads used in a variety of industries for reading, writing and verifying data on magnetic cards, tapes and inks. CUSTOMERS A significant portion of the Company's products are sold to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or subcontractors thereof. Approximately 71%, 78% and 84% of total consolidated revenues for fiscal 1997, 1996 and 1995, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies, principally the U.S. Navy. See "Export Sales" below for information concerning sales to foreign governments. BACKLOG The following table sets forth the Company's backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated: March 31, March 31, March 31, 1997 1996 1995 -------- --------- --------- Government Products: U.S. Government ........ $ 85,900,000 $120,000,000 $115,200,000 Foreign Government ..... 23,000,000 21,200,000 8,600,000 ------------ ------------ ------------ 108,900,000 141,200,000 123,800,000 Commercial Products ....... 9,500,000 4,400,000 2,200,000 ------------ ------------ ------------ $118,400,000 $145,600,000 $126,000,000 ============ ============ ============ "Backlog" refers to the aggregate revenues remaining to be earned at a specified date under contracts held by the Company, including, for U.S. Government contracts, the extent of the funded amounts thereunder which have been appropriated by Congress and allotted to the contract by the procuring Government agency. Backlog also includes all -6- firm orders for commercial products. Fluctuations in backlog generally relate to the timing and amount of defense contract awards. At March 31, 1997, the Company's backlog of orders was approximately $118.4 million compared with $145.6 million at March 31, 1996. The decrease in backlog was due primarily to shipments of the Company's AN/UYQ-65 display workstations under a long-term production contract that had been carried in backlog for the past four years. In addition, there has been a recent shift in the Company's backlog to include a higher percentage of commercial product orders and defense contracts for COTS-based systems, both of which favor shorter lead times. New contract awards of approximately $113.2 million were booked during the fiscal year ended March 31, 1997. Approximately 80% of the backlog at March 31, 1997 is expected to result in revenues during fiscal 1998. RESEARCH AND DEVELOPMENT The defense electronics sector is subject to rapid technological changes, and the Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, the Company's technological expertise is an important factor affecting its growth. A portion of its research and development activities has taken place in connection with customer-sponsored research and development contracts. Revenues recorded by the Company for customer-sponsored research and development were approximately $13,000,000, $12,100,000 and $18,800,000 for fiscal 1997, 1996 and 1995, respectively. All such customer-sponsored activities are the result of contracts directly or indirectly with the U.S. Government. The Company also invests in internal research and development ("IR&D"). Such expenditures were approximately $3,900,000, $600,000 and $800,000 for fiscal 1997, 1996 and 1995, respectively. The increase in IR&D expenditures in fiscal 1997 reflects the Company's investment in new technology and the diversification of its products. CONTRACTS The Company's contracts are normally for production, service or development. Production and service contracts are typically of the fixed-price variety with development contracts currently of the cost-type variety. Because of their inherent uncertainties and consequent cost overruns, development contracts historically have been less profitable than production contracts. Fixed-price contracts may provide for a firm-fixed price or they may be fixed-price-incentive contracts. Under the firm-fixed-price contracts, the Company agrees to perform for an agreed-upon price and, accordingly, derives benefits from cost savings, but bears the entire risk of cost overruns. Under the fixed-price-incentive contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts, the savings are apportioned between the customer and the Company. However, if actual costs under such a contract exceed estimated costs, excess costs are apportioned between the customer and the Company up to a ceiling. The Company bears all costs that exceed the ceiling. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which the Company is committed to deliver without regard to performance cost, cost-type contracts normally obligate the Company to use its best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of the Company's reduced risk. Under cost-plus-incentive-fee contracts, the incentive may be based on cost or performance. When the incentive is based on cost, the contract specifies that the Company is reimbursed for allowable incurred costs plus a fee adjusted by a formula based on the ratio of total allowable costs to target cost. Target cost, target fee, minimum and maximum fee and adjustment formula are agreed upon when the contract is negotiated. In the case of performance-based incentives, the Company is reimbursed for allowable incurred costs plus an incentive, contingent upon meeting or surpassing stated performance targets. The contract provides for increases in the fee to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. In some instances, incentive contracts also may include a combination of both cost and performance incentives. Under cost-plus-fixed-fee contracts, the Company is reimbursed for costs and receives a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. -7- The percentages of revenues during fiscal 1997, 1996 and 1995 attributable to the Company's contracts by contract type were as follows: Fiscal Years Ended March 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- Firm-fixed-price............... 85% 87% 74% Cost-plus-incentive-fee........ 5% -- 6% Cost-plus-fixed-fee............ 10% 13% 20% The consistent percentage and continued predominance of firm-fixed-price contracts is reflective of the fact that production contracts comprise a significant portion of the Company's U.S. Government contract portfolio. The Company negotiates for, and generally receives, progress payments from its customers of between 75-100% of allowable costs incurred on the previously described contracts. Included in its reported revenues are certain amounts which the Company has not billed to customers. These amounts, approximately $3.8 million, $8.7 million and $7.9 million as of March 31, 1997, 1996 and 1995, respectively, consist of costs and related profits, if any, in excess of progress payments for contracts on which sales are recognized on a percentage-of-completion basis. Under generally accepted accounting principles, all U.S. Government contract costs, including applicable general and administrative expenses, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations ("FAR"), incorporated by reference in U.S. Government contracts, provide that internal research and development costs are allowable general and administrative expenses. To the extent that general and administrative expenses are included in inventory, research and development costs also are included. Unallowable costs, pursuant to the FAR, have been excluded from costs accumulated on U.S. Government contracts. Work-in-process inventory included general and administrative costs (which include internal research and development costs) of $9.4 million and $9.9 million at March 31, 1997 and 1996, respectively. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the foreign government. COMPETITION The defense electronics sector is characterized by rapid technological change. The Company's products are sold in markets containing a number of competitors which are substantially larger than the Company, devote substantially greater resources to research and development and generally have greater financial resources. Certain of such competitors also are customers of and suppliers to the Company. The extent of competition for any single project generally varies according to the complexity of the product and the dollar volume of the anticipated award. The Company believes that it competes on the basis of the performance of its products, its reputation for prompt and responsive contract performance, and its accumulated technical knowledge and expertise. The Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, the Company competes with many large and mid-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. As the size of the overall defense industry has decreased in recent years, there has been an increase in the number of consolidations and mergers of defense suppliers, and this trend is expected to continue. As the industry consolidates, the large defense contractors are narrowing their -8- supplier base and awarding increasing portions of projects to strategic mid- and lower-tier suppliers, and, in the process, are becoming oriented more toward system integration and assembly. Management believes that the Company has benefitted from this trend, as evidenced by the formation of strategic alliances with several large suppliers. PATENTS The Company has patents on certain of its commercial and data recording products. The Company does not believe patent protection to be significant to its current operations; however, future products and programs may generate the need for patent protection. Similarly, the Company and its subsidiaries have certain registered trademarks, none of which are considered significant to current operations. Further, the Company does not believe that the loss or impairment, or expiration of any existing patents would have a material effect on the Company's financial position or future results of operations. MANUFACTURING AND SUPPLIERS The Company's manufacturing process for its products, excluding optical products, consists primarily of the assembly of purchased components and testing of the product at various stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors, silicon wafers and other conductive materials, insulated wire and cables. In addition, many of the Company's products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components are fabricated to Company designs and specifications. The manufacturing process for the Company's optics products includes the grinding, polishing and coating of various optical materials and machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are the Company's sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. The Company has not experienced significant production delays attributable to supply shortages, but occasionally experiences quality and other related problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to the Company's optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. EXPORT SALES The Company currently sells several of its products and services in the international marketplace to countries such as Canada, Germany, Israel, Norway, the Republic of China and Spain. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. The Company's foreign contracts generally are payable in United States dollars. Export sales were less than 10% of total revenues in each of the fiscal years in the three-year period ended March 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The names of the executive officers of the Company, their positions and offices with the Company, and their ages are set forth below:
NAME POSITIONS WITH THE COMPANY AGE - ---- -------------------------- --- Mark S. Newman ................ Chairman of the Board, President, Chief Executive Officer 47 and Director Nancy R. Pitek ................ Vice President, Finance, Treasurer and Secretary 40 Paul G. Casner, Jr. ........... Vice President; President of DRS Electronic Systems Group 59
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NAME POSITIONS WITH THE COMPANY AGE - ---- -------------------------- --- Stuart F. Platt ............... Vice President and Director; President of DRS Data Systems Group 63 Richard Ross .................. Vice President; President of DRS Electro-Optical Systems Group 42
Mark S. Newman has been employed by the Company since 1973, was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of the Company in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of the Company and in August 1995 became Chairman of the Board. Nancy R. Pitek joined the Company in 1984 as Manager of Accounting. She became Assistant Controller in 1985 and Director of Internal Audit in 1988. Ms. Pitek became Director of Corporate Finance in 1990 and Controller in 1993. In May 1994, she was appointed to the position of Treasurer and in August 1995 became Secretary. Ms. Pitek was named Vice President, Finance in May 1996. Paul G. Casner, Jr. joined the Company in 1993 as President of Technology Applications and Service Company ("TAS", now DRS Electronic Systems, Inc.). In 1994, he also became President of the DRS Electronic Systems Group and a Vice President of the Company. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. He was the president of TAS prior to its acquisition by the Company. Stuart F. Platt has been a Director of the Company since 1991 and became the President of DRS Precision Echo, Inc. in July 1992. He was named Vice President of the Company in May 1994 and also serves as President of the DRS Data Systems Group. Rear Admiral Platt held various high level positions as a military officer in the Department of the Navy, retiring as Competition Advocate General of the Navy in 1987. Richard Ross was employed by the Company as Assistant Vice President and Director of Sales in 1986 and Assistant Vice President, Corporate Development in 1987. In 1988, he became a Vice President of the Company, and in 1990, he became President of DRS Photronics, Inc. Mr. Ross also serves as President of the DRS Electro-Optical Systems Group. EMPLOYEES As of March 31, 1997, the Company employed 1,107 employees. None of the Company's employees are represented by labor unions, and the Company has experienced no work stoppages. There is a continuing demand for qualified technical personnel, and the Company believes that its future growth and success will depend upon its ability to attract, train and retain such personnel. ITEM 2. PROPERTIES The Company leases the following properties: -10-
Subsidiary or Approximate Division Location Activities Square footage Expiration ------------ -------- ---------- -------------- ---------- Corporate - --------- DRS Technologies, Inc. Parsippany, New Jersey Corporate Headquarters 6,000 Fiscal 2001 DRS Technologies, Inc. Arlington, Virginia Administrative and 2,000 Fiscal 2000 Marketing ESG - ---- DRS Electronic Systems, Gaithersburg, Maryland Administrative, 40,000 Fiscal 2000 Inc. Engineering and Manufacturing DRS Laurel Technologies Johnstown, Pennsylvania Administrative and 38,000 Fiscal 1999 Manufacturing DRS Laurel Technologies North Davidsville, Manufacturing 28,000 Fiscal 1998 Pennsylvania DRS Technical Services, San Diego, California Engineering Support 5,000 Fiscal 2000 Inc. Services DRS Technical Services Chesapeake, Virginia Field Service and 15,000 Fiscal 2005 Division Engineering Support DRS Medical Systems Mahwah, New Jersey Administrative, 8,400 Fiscal 1998 Engineering and Manufacturing EOSG - ---- DRS Photronics, Inc. Oakland, New Jersey Administrative and 25,400 Fiscal 1999 Engineering DRS Optronics, Inc. Palm Bay, Florida Administrative, 54,000 Fiscal 2006 Engineering and Manufacturing DSG - --- DRS Precision Echo, Inc. Santa Clara, California Administrative, 55,000 Fiscal 2001 Engineering and Manufacturing DRS Ahead Technology, Inc. San Jose, California Administrative, 32,000 Fiscal 2001 Product Development and Manufacturing DRS Ahead Technology, Inc. Plymouth, Minnesota Administrative and 13,700 Fiscal 2003 Manufacturing DRS Ahead Technology, Inc. St. Croix Falls, Wisconsin Administrative and 24,000 Fiscal 2000 Manufacturing DRS Ahead Technology, Inc. Dassel, Minnesota Administrative and 23,100 Fiscal 2002 Manufacturing DRS Ahead Technology, Inc. Bloomington, Illinois Manufacturing 5,400 Fiscal 2000
The Company leases the Oakland, New Jersey building from LDR Realty Co., a partnership wholly-owned by Leonard Newman and David E. Gross, co-founders of the Company. The Company believes that this lease was consummated on terms no less favorable than those that could have been obtained by the Company from an unrelated third party in a transaction negotiated on an arms-length basis. The Company owns a 45,000 square foot building at 270 Motor Parkway, Hauppauge, New York, which currently houses a portion of Photronics' administrative, engineering and manufacturing operations. See Note 6 of Notes to Consolidated Financial Statements. -11- Management believes that all of the Company's facilities are in good condition, adequate for their intended use and sufficient for the Company's immediate needs. It is not certain as to whether the Company will negotiate new leases as existing leases expire. Determinations to that effect will be made as existing leases approach expiration and will be based on an assessment of the Company's capacity requirements at that time. Further, the Company believes that it can obtain additional space, if necessary, based on prior experience and current real estate market conditions. ENVIRONMENTAL PROTECTION The Company believes that its manufacturing operations and properties are in material compliance with existing federal, state and local provisions enacted or adopted to regulate the discharge of materials into the environment or otherwise protect the environment. Such compliance has been achieved without material effect on the Company's earnings or competitive position. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal actions and claims arising in the ordinary course of its business. In the Company's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has not paid any cash dividends since 1976. The Company intends to retain future earnings for use in its business and does not expect to declare cash dividends on its Common Stock in the foreseeable future. The indentures relating to the Company's 8 1/2% Convertible Subordinated Debentures and 9% Senior Subordinated Convertible Debentures and the Company's bank lines of credit restrict the Company's ability to pay dividends or make other distributions on its Common Stock. See Note 6 of Notes to Consolidated Financial Statements for information concerning restrictions on the declaration or payment of dividends. Any future declaration of dividends will be subject to the discretion of the Board of Directors of the Company. The timing, amount and form of any future dividends will depend, among other things, on the Company's results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by the Board of Directors. The information required by this item with respect to the market prices for the Company's common equity securities is incorporated herein by reference to page 38 of the DRS 1997 Annual Report (for the fiscal year ended March 31, 1997.) ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference herein to page 16 of the DRS 1997 Annual Report (for the fiscal year ended March 31, 1997). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference herein to pages 17 through 21 of the DRS 1997 Annual Report (for the fiscal year ended March 31, 1997). -12- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference herein to pages 22 through 38 of the DRS 1997 Annual Report (for the fiscal year ended March 31, 1997). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Items 10. thorough 13. of this Part is incorporated herein by reference to the Definitive Proxy Statement of the Company, dated June 27, 1997, for the 1997 Annual Meeting of Stockholders. Reference also is made to the information under "Executive Officers of the Registrant" in Part I of this report. -13- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. Financial Statements The following financial statements of Diagnostic/Retrieval Systems, Inc. and subsidiaries d.b.a. DRS Technologies, Inc. have been incorporated by reference to the DRS 1997 Annual Report (for the fiscal year ended March 31, 1997), pursuant to Item 8 of this report: 1997 Annual Report Page(s) -------------- Independent Auditors' Report ........................... 38 Consolidated Balance Sheets - March 31, 1997 and 1996 ................................ 22 Consolidated Statements of Earnings - Years Ended March 31, 1997, 1996 and 1995 ............. 23 Consolidated Statements of Stockholders' Equity - Years Ended March 31, 1997, 1996 and 1995 ............. 23 Consolidated Statements of Cash Flows - Years Ended March 31, 1997, 1996 and 1995 ............. 24 Notes to Consolidated Financial Statements.............. 25 2. Financial Statement Schedules See Appendix A hereto. 3. Exhibits Incorporated by reference to the Exhibit Index at the end of this report. (b) Reports on Form 8-K There were no Form 8-K's filed during the fourth quarter of the fiscal year ending March 31, 1997. -14- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (d.b.a. DRS Technologies, Inc.) Dated: June 27, 1997 /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 27, 1997 - ------------------------------------ Chief Executive Officer and Director Mark S. Newman /s/ NANCY R. PITEK Vice President, Finance, June 27, 1997 - ------------------------------------ Treasurer and Secretary Nancy R. Pitek /s/ STUART F. PLATT Vice President, President of DRS Data June 27, 1997 - ------------------------------------ Systems Group and Director Stuart F. Platt /s/ IRA ALBOM - ------------------------------------ Director June 27, 1997 Ira Albom /s/ THEODORE COHN - ------------------------------------ Director June 27, 1997 Theodore Cohn /s/ DONALD C. FRASER - ------------------------------------ Director June 27, 1997 Donald C. Fraser /s/ WILLIAM F. HEITMANN - ------------------------------------ Director June 27, 1997 William F. Heitmann /s/ MARK N. KAPLAN - ------------------------------------ Director June 27, 1997 Mark N. Kaplan /s/ JACK RACHLEFF - ------------------------------------ Director June 27, 1997 Jack Rachleff
-15- Appendix A DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES D.B.A. DRS TECHNOLOGIES, INC. 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. -16- INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc.: Under date of May 9, 1997, we reported on the consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries d.b.a. DRS Technologies, Inc. as of March 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 1997, as contained in the 1997 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 1997. In connection with our audits of the aforementioned consolidated financial statements we also have audited the related consolidated financial statement schedule as listed in the accompanying index. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Short Hills, New Jersey May 9, 1997 -17-
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES d.b.a. DRS Technologies, Inc. Schedule II. Valuation and Qualifying Accounts Years Ended March 31, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Col. A Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------------------------------ Description Balance at Additions (a) (f) Deductions (b) (f) Balance at Beginning of ------------------------------ ------------------------------- End of Period (1) (2) (1) (2) Period Charged to Charged to Credited to Credited to Costs and Other Costs and Other Expenses Accounts- Expenses Accounts- Describe Describe - ---------------------------------------------------------------------------------------------------------------------------------- INVENTORY RESERVE Year ended March 31, 1997 $1,069,000 $ 44,000 $2,166,000 (c) $ 400,000 $2,138,000 (e) $ 741,000 ---------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1996 $1,400,000 $ 670,000 $2,139,000 (c) $ 8,000 $3,132,000 (e) $1,069,000 ---------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1995 $2,409,000 $ 439,000 $ 536,000 (c) $ 83,000 $1,901,000 (e) $1,400,000 ---------- ---------- ---------- ---------- ---------- ---------- LOSSES & FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS Year ended March 31, 1997 $3,850,000 $1,564,000 $ 16,000 (c) $1,060,000 $2,166,000 (d) $2,204,000 ---------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1996 $4,555,000 $2,026,000 $ 353,000 (c) $ 945,000 $2,139,000 (d) $3,850,000 ---------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1995 $3,214,000 $2,168,000 $ -- $ 291,000 $ 536,000 (d) $4,555,000 ---------- ---------- --------- ---------- ---------- ---------- OTHER Year ended March 31, 1997 $ 0 $ -- $ -- $ -- $ -- $ 0 ---------- ---------- --------- ---------- ---------- ---------- Year ended March 31, 1996 $ 290,000 $ -- $ -- $ 290,000 $ -- $ 0 ---------- ---------- --------- ---------- ---------- ---------- Year ended March 31, 1995 $ 290,000 $ -- $ -- $ -- $ -- $ 290,000 ---------- ---------- --------- ---------- ---------- ---------- (a) Represents, on a full-year basis, net credits to reserve accounts. (b) Represents, on a full-year basis, net charges to reserve accounts. (c) Represents amounts reclassified from related reserve accounts. (d) Represents amounts reclassified to related reserve accounts. (e) Represents amounts utilized and credited to related asset accounts. (f) Certain items in fiscal 1996 and 1995 have been reclassified to conform to the fiscal 1997 presentation. -18-
EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*) are filed herewith. Certain of the following exhibits, designated with a "P", are being filed on paper, pursuant to a hardship exemption under Rule 202 of Regulation S-T. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits.
Page No. Exhibit No. Description Of Paper Filing - ---------- ----------- --------------- 3.1 -- Restated Certificate of Incorporation of the Company [Registration Statement No. 2-70062-NY, Amendment No. 1, Exhibit 2(a)] 3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation of the Company, as filed July 7, 1983 [Registration Statement on Form 8-A of the Company, dated July 13, 1983, Exhibit 2.2] 3.3 -- Composite copy of the Restated Certificate of Incorporation of the Company, as amended [Registration Statement No. 2-85238, Exhibit 3.3] 3.4 -- Amended and Restated Certificate of Incorporation of the Company, as filed April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.4] 3.5 -- By-laws of the Company, as amended to November 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 -- Certificate of Amendment of the Certificate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 -- Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] 3.8 -- Amended and Restated By-Laws of the Company, as of April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.8] 4.1 -- Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee, in respect of the Company's 9% Senior Subordinated Convertible Debentures Due 2003 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 4.1] 4.2 -- Form of 9% Senior Subordinated Convertible Debenture Due 2003 (included as part of Exhibit 4.1)[Registration Statement No.33-64641, Amendment No. 1, Exhibit 4.2] -19- 4.3 -- Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P.[Registration Statement No.33-64641, Amendment No. 1, Exhibit 4.3] 4.4 -- Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Company, as Trustee [Form 10-Q, quarter ended September 30, 1983, File No. 1-8533, Exhibit 4.2] 4.5 -- Indenture of Trust, dated December 1, 1991, among Suffolk County Industrial Development Agency, Manufacturers and Traders Trust Company, as Trustee and certain bondholders [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.2] 4.6 -- Reimbursement Agreement, dated December 1, 1991, among Photronics Corp., the Company and Morgan Guaranty Trust Company of New York [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.3] 4.7 -- Registration Rights Agreement, dated as of March 27, 1996, by and between the Company and Palisade Capital Management L.L.C., acting as investment adviser to the accounts named therein [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 4.7] 4.8 -- First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 4.8] 4.9 -- First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Company, as Trustee [Registration Statement No. 33-04929, Exhibit 4.9] 10.1 -- Stock Purchase Agreement, dated as of August 6, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(1)] 10.2 -- Waiver Letter, dated as of September 30, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(2)] 10.3 -- Joint Venture Agreement, dated as of November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] -20- 10.4 -- Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 -- Partnership Agreement, dated December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 10.6 -- Lease, dated June 28, 1979, between the Company and J.L. Williams & Co., Inc. ("Williams") [Registration Statement No. 2-70062-NY, Exhibit 9(b)(4)(i)] 10.7 -- Lease, dated as of June 1, 1983, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1984, File No. 1-8533, Exhibit 10.7] 10.8 -- Renegotiated Lease, dated June 1, 1988, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1989, File No. 1-8533, Exhibit 10.8] 10.9 -- Lease, dated July 20, 1988, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1991, File No. 1-8533, Exhibit 10.9] 10.10 -- Amendment to Lease, dated July 1, 1993, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.12] 10.11 -- Second Amendment to Lease, dated October 17, 1995 between Precision Echo, Inc. and Bay 511 Corporation [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.11] 10.12 -- Lease Modification Agreement, dated February 22, 1994, between Technology Applications and Service Company and Atlantic Real Estate Partners II [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.13] 10.13 -- Amendment to Lease Modification, dated June 1, 1994, between Technology Applications and Service Company and Atlantic Estate Partners II [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.11] 10.14 -- Triple Net Lease, dated October 22, 1991, between Technology Applications and Service Company and Marvin S. Friedberg [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.14] 10.15 -- Lease, dated November 10, 1993, between DRS Systems Management Corp. and Skateland Roller Rink, Inc. [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.17] 10.16 -- Lease, dated March 23, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.15] -21- 10.17 -- Amendment to Lease, dated May 21, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.16] 10.18 -- Revision to Lease Modification, dated August 25, 1992, between Ahead Technology Corporation and Vasona Business Park [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.17] 10.19 -- Lease, dated January 13, 1995, between the Company and Sammis New Jersey Associates [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.18] 10.20 -- Lease, dated April 3, 1996, by and between the Company and Los Alamos Economic Development Corporation [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.20] 10.21 -- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.22 -- Contract No. N00024-92-C-6102, dated September 28, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.45] 10.23 -- Modification No. P00005, dated August 24, 1994, to Contract No. N00024-92-C-6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.22] 10.24 -- Modification No. P00006, dated September 7, 1994, to Contract No. N00024-92-C6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.23] 10.25 -- Contract No. N00024-92-C-6308, dated April 1, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.46] 10.26 -- Modification No. P00001, dated July 30, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.47] 10.27 -- Modification No. P00002, dated September 25, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.48] 10.28 -- Modification No. P00003, dated October 22, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.49] 10.29 -- Modification No. P00004, dated February 24, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.50] 10.30 -- Modification No. P00005, dated June 11, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.26] -22- 10.31 -- Modification No. P00006, dated March 26, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.51] 10.32 -- Modification No. P00007, dated May 3, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.28] 10.33 -- Modification No. PZ0008, dated June 11, 1993, to Contract No. N00024-92-C-6302 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.29] 10.34 -- Contract No. N39998-94-C-2228, dated November 30, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.30] 10.35 -- Order No. 87KA-SG-51484, dated December 10, 1993, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.31] 10.36 -- Purchase Order Change Notice Order No. 87KA-SX-51484-P, dated April 21, 1994, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.35] 10.37 -- Letter Subcontract No. 483901(L), dated February 18, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Government Systems Group [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.32] 10.38 -- Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.37] 10.39 -- Contract No. N00019-90-G-0051, dated March 1, 1990, between Precision Echo, Inc. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.35] 10.40 -- Amendment 1A, dated February 26, 1992, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.36] 10.41 -- Amendment 1B, dated April 23, 1993, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.37] 10.42 -- Contract No. N00019-93-C-0041, dated January 29, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.54] 10.43 -- Modification No. P00001, dated March 29, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.39] -23- 10.44 -- Modification No. PZ0002, dated November 12, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.40] 10.45 -- Modification No. P00003, dated February 1, 1994, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.41] 10.46 -- Modification No. P00004, dated January 29, 1993, to Contract No. N00019-93-C-0041 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.46] 10.47 -- Modification No. P00005, dated January 29, 1993, to Contract No. N00019-93-C-0041 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.47] 10.48 -- Modification No. P00006, dated March 20, 1996, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.48] 10.49 -- Contract No. N00019-93-C-0202, dated August 30, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.42] 10.50 -- Modification No. P00001, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.43] 10.51 -- Modification No. P00002, dated April 29, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.44] 10.52 -- Modification No. P00003, dated August 9, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.55] 10.53 -- Modification No. P00004, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.56] 10.54 -- Modification No. P00005, dated August 30, 1993, to Contract No. N00019-93-C-0202 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.53] 10.55 -- Modification No. P00006, dated August 30, 1993, to Contract No. N00019-93-C-0202 [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.54] 10.56 -- Contract No. N00024-93-C-5204, dated November 18, 1992, between Technology Applications and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.53] 10.57 -- Modification No. P00001, dated May 6, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.54] -24- 10.58 -- Modification No. P00002, dated August 24, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.55] 10.59 -- Modification No. PZ0003, dated September 30, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.56] 10.60 -- Contract No. N00174-94-D-0006, dated February 17, 1994, between Technology Applications & Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.57] 10.61 -- Modification No. P00001, dated March 7, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.58] 10.62 -- Modification No. P00003, dated May 19, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.59] 10.63 -- Purchase Order No. 2285, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.73] 10.64 -- Amendment No. 1, dated January 30, 1996, to Purchase Order No. 2285 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.64] 10.65 -- Purchase Order No. 2286, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.75] 10.66 -- Purchaser Order No. CN74325, dated December 14, 1994, between Precision Echo and Lockheed Aeronautical Systems Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.76] 10.67 -- Amendment, dated February 14, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.67] 10.68 -- Amendment, dated April 4, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.68] 10.69 -- Amendment, dated June 20, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.69] -25- 10.70 -- Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.70] 10.71 -- Amendment, dated November 7, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.71] 10.72 -- Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.73 -- Contract No. N00019-95-C-0057, dated December 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.74 -- Employment, Non-Competition and Termination Agreement, dated July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 1] 10.75 -- Stock Purchase Agreement, dated as of July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 2] 10.76 -- Asset Purchase Agreement, dated October 28, 1994, Acquisition by PE Acquisition Corp., a subsidiary of Precision Echo, Inc. of all of the Assets of Ahead Technology Corporation [Form 10-Q, quarter ended December 31, 1994, File No. 1-8533, Exhibit 1] 10.77 -- Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] 10.78 -- Contract No. N00421-95-D-1067, dated September 30, 1995, between the Company and the Navy [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.78] 10.79 -- Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.79] 10.80 -- Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.80] 10.81 -- Modification No. PZ0001, dated January 24, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.81] 10.82 -- Modification No. P00002, dated February 24, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.82] -26- 10.83 -- Modification No. P00003, dated March 28, 1996, to Contract No. DAAH01-95-C-0308 [Form 10-K, fiscal year ended March 31, 1996, File No. 1-8533, Exhibit 10.83] 10.84 -- Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.81] 10.85 -- Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.82] 10.86 -- Amendment to Contract No. 2025, dated August 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.83] 10.87 -- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.84] 10.88 -- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.85] 10.89 -- Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.86] 10.90 -- Memorandum of Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.87] 10.91 -- Master Lease, dated August 31, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.88] 10.92 -- Schedule No. 001, dated September 1, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.89] 10.93 -- Schedule No. 002, dated October 20, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.90] -27- 10.94 -- Joint Venture Agreement, dated as of February 6, 1996, by and among DRS/MS, Inc., Universal Sonics Corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.91] 10.95 -- Partnership Agreement, dated as of February 6, 1996, by and between DRS/MS, Inc. and Universal Sonics Corporation [Registration Statement No.33-64641, Amendment No. 1, Exhibit 10.92] 10.96 -- Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head Engineering, Company, Inc. and Ahead Technology Acquisition Corporation, a subsidiary of Precision Echo, Inc. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.93] 10.97 -- Employment, Non-Competition and Termination Agreement, dated March 28, 1996, between the Company and Leonard Newman [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.94] 10.98 -- Contract No. N00024-95-G-5609, dated January 25, 1996, between Technology Applications and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1996, File No. 1- 8533, Exhibit 10.98] *10.99 -- Asset Purchase Agreement, dated June 17, 1996, by and among Vikron, Inc., Northland Aluminum, Inc., Ahead Wisconsin Acquisition Corporation, a third-tier subsidiary of the Company, and Ahead Technology, Inc., a second-tier subsidiary of the Company *10.100 -- Revolving Line of Credit Loan Agreement, dated May 31, 1996, between the Company and Mellon Bank, N.A. *10.101 -- 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 *10.102 -- 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 *10.103 -- First Amendment and Modification, dated December 6, 1996, by and among the Company, its Subsidiaries and Affiliates as Guarantors and Mellon Bank, N.A. *10.104 -- Equipment Line of Credit/Term Loan Agreement, dated December 6, 1996, by and between the Company and Mellon Bank, N.A. *11 -- Computation of earnings per share *13 -- Portions of the 1997 Annual Report to Stockholders of the Company *21 -- List of subsidiaries of the Company as of March 31, 1997 *23.1 -- Consent of KPMG Peat Marwick LLP *27 -- Financial Data Schedule
-28- EX-10.99 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as of June 17, 1996, by and among Vikron, Inc., a Wisconsin corporation ("Seller"), Northland Aluminum Products, Inc., a Minnesota corporation ("Northland"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), and Ahead Technology, Inc., a Delaware corporation ("Ahead"). Seller and Northland are sometimes collectively referred to in this Agreement as "Selling Parties." RECITALS A. Seller is in the business of manufacturing, selling and distributing magnetic data reading and recording heads and other types of magnetic heads (the "Business"). B. Northland and Donald A. Puls ("Puls") are the owners, of record and beneficially, of all of Seller's issued and outstanding capital stock. C. Seller desires to sell certain specified property and assets and to assign certain specified agreements to Purchaser, and Purchaser desires to acquire such property and assets, and assume such agreements, on the terms and conditions specified in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties contained in this Agreement, the parties hereto agree as follows: 1. Purchase and Sale of Assets; Assumption of Certain Liabilities. 1.1 Assets Purchased. Upon the terms and subject to the conditions of this Agreement, Purchaser shall purchase, and Seller shall sell, assign, transfer and convey to Purchaser at the Closing (as defined in Section 9 hereof), all of the following tangible and intangible assets, properties, licenses, and rights (collectively, the "Assets"), free and clear of all liens, claims, options, rights of third parties and encumbrances, whether contingent or otherwise: 1.1.1 All equipment, machinery, furniture, fixtures, tools, trade fixtures, and other tangible property of Seller (except real property and inventory), listed on Schedule 1.1.1 hereof (the "Fixed Assets"), and any and all assignable warranties of third parties covering the Fixed Assets. 1.1.2 All inventory, work in progress, stock in trade, finished goods and raw materials and supplies of Seller as of the Closing Date (the "Inventory"). 1.1.3 All rights of Seller under all customer sales/purchase orders for Seller's products, distributor agreements, supply and maintenance contracts, license agreements, personal property leases, purchase orders and barter arrangements, which are set forth on Schedule 1.1.3 attached hereto (the "Assumed Contracts"). 1.1.4 All service marks, copyrights, brand names, trade names, know-how, symbols, inventions, programs, trade secrets, logos and telephone numbers related to or connected with the Business, including, without limitation, the product catalogues used or distributed by Seller in connection with the Business and the names "Vikron" and "Vikron Magnetic Heads" and all derivations thereof, all lists of suppliers, customers and prospects, all Federal and state applications for protection or registration of any of the foregoing and all intangibles appurtenant thereto, which are listed on Schedule 1.1.4 (the "Proprietary Rights"). 1.1.5 All files and correspondence pertaining to customers, prospects and suppliers, and all other documents, materials and supplies related to the Business (the "Business Records"). 1.1.6 All vehicles listed on Schedule 1.1.6 (the "Vehicles"). 1.1.7 All accounts receivable, notes receivable, negotiable instruments and chattel paper of Seller outstanding on the Closing Date which are listed on Schedule 1.1.7 (the "Accounts Receivable"). 1.1.8 All cash on hand and in financial institutions, cash equivalents (including letters of credit issued by customers of Seller) and investments, including any such cash, cash equivalents or investments held in Northland's accounts but allocated to or otherwise held for the benefit of Seller (the "Cash"). 1.1.9 All prepaid advertising. 1.2 Excluded Assets. It is expressly agreed that Purchaser shall purchase only those Assets set forth in Section 1.1 above. In particular, and without otherwise limiting or reducing the scope of the preceding sentence, the parties specifically acknowledge that Purchaser shall not purchase any of the following (the "Excluded Assets"): (i) any real property of Seller, including the land, buildings and other improvements located at 520 and 525 Blanding Woods Road South, St. Croix Falls, Wisconsin, and more fully described on Schedule 3.16 hereof (the "Real Property"); and (ii) any other tangible or intangible assets listed on Schedule 1.2 hereof. 1.3 Assumption of Certain Liabilities. Purchaser shall assume no liabilities or obligations of Seller whatsoever, except for the following liabilities (the "Assumed Liabilities") which Purchaser shall assume, discharge, perform when due, and indemnify Seller against: -2- 1.3.1 Trade accounts payable as of the Closing Date to the extent incurred in the ordinary course of business and set forth on Schedule 1.3 hereof. 1.3.2 Liabilities accruing under the Assumed Contracts from and after the Closing Date, but not any liability for defaults thereunder by Seller. 1.3.3 Liabilities and obligations of Seller for warranty repairs, returns and replacements by former customers of Seller relating to products invoiced or shipped to such customers within one year prior to the Effective Date; provided, however, that Seller shall reimburse Purchaser for the costs of only those such claims for which work was done in accordance with any applicable warranty and which exceed in the aggregate $50,000. Purchaser shall provide Seller with quarterly reports regarding work done under warranty. 1.3.4 Liabilities and obligations of Seller incurred in the ordinary course of the Business from the Effective Date (as defined below) through Closing. 1.4 Liabilities Not Assumed. Notwithstanding anything in this Agreement to the contrary, Purchaser shall not assume, discharge or indemnify Seller against any debt, obligation or liability of any kind not expressly assumed pursuant to Section 1.3 hereof. In particular, and without otherwise limiting or reducing the scope of the preceding sentence, the parties specifically acknowledge that Purchaser shall not assume, discharge, or indemnify Seller against any of the following: 1.4.1 Debts, liabilities, obligations or commitments of Seller arising out of or related to or created by this Agreement or the transactions contemplated hereby (including, without limitation, any federal or state income or franchise tax liabilities or sales or use tax liabilities); provided, however, that Purchaser shall pay any taxes arising out of the transfer of the Vehicles to Purchaser. 1.4.2 Debts, liabilities, obligations or commitments of Seller arising out of, or relating to the ownership or operation of the Assets or the Business by Seller prior to the Effective Date (unless expressly assumed pursuant to this Agreement), including, without limitation, debts, liabilities, obligations or commitments arising out of or relating to Seller's payroll obligations (including, without limitation, vacation pay, severance pay, bonuses, etc.), utilities, leases of real property, retirement or profit sharing plans, medical plans, insurance policies, and worker's compensation obligations. 2. Purchase Price; Adjustments; Lease. 2.1 Purchase Price. Purchaser shall pay to Seller, as the full purchase price (the "Purchase Price") for the Assets, the amount of Three Million Seven Hundred Eighty-Five Thousand Dollars ($3,785,000). -3- 2.2 Payment. At Closing, Purchaser shall pay to Seller the cash portion of the Purchase Price by wire transfer in same day funds, subject to credits and adjustments under this Agreement, and any payments due under the Lease (as defined in Section 2.5). 2.3 Adjustment to Purchase Price. The Purchase Price shall be adjusted as follows: 2.3.1 Obsolete Inventory. Purchaser shall be entitled to a Purchase Price credit of up to $75,000 for obsolete Inventory, on the following terms and conditions: (a) Within 10 business days after the Closing, Seller shall deliver to Purchaser a schedule, certified by Seller's president, listing the Inventory of Seller (including the quantity and gross value of the constituent elements thereof) as of the Closing Date (the "Seller's Schedule"). Purchaser shall have 10 business days after receipt of the Seller's Schedule to verify the contents thereof. If Purchaser disputes the Seller's Schedule, then the parties shall expeditiously and in good faith resolve the dispute by any commercially reasonable means, including without limitation conducting a physical inventory. (b) After the Closing, Purchaser covenants to (i) install a computer system which is capable of accurately tracking the Inventory, and (ii) endeavor to operate in a commercially reasonable manner to sell the Inventory on a first-in-first-out basis. (c) On or about (but not before) the date which is 3 years after the Closing Date, Purchaser shall deliver to Seller a schedule, certified by Purchaser's president, listing those items of Inventory which were on the Seller's Schedule and which remain unsold (the "Purchaser's Schedule"). Seller shall have 10 business days after receipt of the Seller's Schedule to verify the contents thereof. If Seller disputes the Purchaser's Schedule, then the parties shall expeditiously and in good faith resolve the dispute by any commercially reasonable means, including without limitation conducting a physical inventory. (d) Any items of Inventory listed on the Purchaser's Schedule (as verified by Seller) shall be deemed to be obsolete. Seller shall pay Purchaser in cash, as a Purchase Price credit, one-half of that portion of the gross value of such obsolete Inventory which exceeds $50,000; provided, however, that in no event shall the maximum gross value attributable to obsolete Inventory for purposes of this Section 2.3.1 exceed $200,000. 2.3.2 Cash Credit. Purchaser shall be entitled to a credit against the Purchase Price equal to the amount of Cash on hand at Closing that is not surrendered to Purchaser at Closing. For purposes of ascertaining the amount of Cash on hand at Closing, Seller shall provide Purchaser with a final reconciliation of Cash, detailing inflows and outflows therefrom, from the Effective Date to the Closing (the "Reconciliation"), certified by Seller's chief financial officer, as soon as possible after the Closing, but in no event more than 15 days thereafter. Purchaser shall have 10 business days after receipt to audit the -4- Reconciliation. If Purchaser disagrees with the Reconciliation, then it shall notify Seller of that fact. If Purchaser and Seller are unable to reach a resolution in good faith within a reasonable period of time, not to exceed 30 days, then an independent auditor shall be retained, at the expense of Seller and Purchaser equally, to audit the Reconciliation. The determination of such independent auditor shall be final. Seller shall pay to Purchaser a cash credit of the amount of Cash not surrendered at Closing as determined by the Reconciliation. 2.4 Allocation. The Purchase Price and the Assumed Liabilities shall be allocated among the Assets in the manner set forth in Schedule 2.4 hereof, as may be required pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended. Purchaser and Seller shall report this transaction for federal and state income tax purposes in accordance with such allocation. 2.5 Lease of the Real Property. Purchaser shall lease the Real Property from Seller for a period of three (3) years from the Closing Date, pursuant to the terms of the lease between Purchaser, as tenant, and Seller, as landlord, attached hereto as Schedule 2.5 (the "Lease"). As payment in full for base rent due and owing under the Lease, Purchaser shall pay to Seller the sum of Two Hundred Thousand Dollars ($200,000) in cash funds at Closing. 3. Representations and Warranties of Selling Parties. Selling Parties, jointly and severally, represent and warrant to Purchaser as follows: 3.1 Organization; Qualification. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin. Seller has the requisite corporate power and authority to own, lease and operate its properties and assets, including without limitation the Assets, and to carry on its Business as now being conducted. Northland is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Northland has the requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its businesses as now being conducted. 3.2 Authority. Each of Seller and Northland has full corporate power and authority to execute and to deliver this Agreement and all other agreements executed and delivered or to be executed and delivered by Seller and Northland, respectively, in connection with the transactions contemplated hereby, including, without limitation the documents specified in Section 9 hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of each of Seller and Northland and, in the case of Seller, approved by the vote of Northland and Puls, and no other corporate proceedings on the part of either Seller or Northland and no approvals or consents of any other persons are necessary to -5- authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each Selling Party and constitutes a valid and binding agreement of each Selling Party, enforceable against each Selling Party in accordance with its terms. Seller has the number of shares of a single class of common stock (the "Shares") set forth on Schedule 3.2 hereto. Schedule 3.2 sets forth the total number of Shares issued and outstanding. Northland and Puls are the only beneficial and record owners of all such Shares. Neither Northland nor Puls has granted any proxies or otherwise granted to any other person or entity the right to vote or consent with regard to the Shares. 3.3 Financial Statements; Absence of Certain Changes. Seller has delivered to Purchaser true and complete copies of (a) the unaudited balance sheets of Seller at December 31, 1995 and the related statements of income, cash flow and changes in shareholders equity for the fiscal year then ended; and (b) unaudited balance sheets of Seller at March 31, 1996 (the "Effective Date") and related statements of income and cash flow of Seller for the periods then ended, all of which have been prepared in accordance with the accounting principles and practices consistently followed by Seller for prior periods, all of which are set forth on Schedule 3.3 attached hereto (collectively, the "Financial Statements"). Except as set forth on Schedule 3.3, such balance sheets, including the related notes, fairly present, in all material respects, the financial position, assets and liabilities (whether accrued, absolute, contingent or otherwise) of Seller at the dates indicated and such statements of income, cash flow and changes in shareholders equity fairly present the results of operations, cash flow and changes in shareholders equity of Seller for the periods indicated. Except as set forth on Schedule 3.3, the unaudited financial statements for the periods ending on the Effective Date contain all adjustments, which are solely of a normal recurring nature, necessary to present fairly the financial position for the periods then ended, except with respect to interim statements for year-end adjustments. The Financial Statements specifically identify the assets and liabilities which, if the Closing had been held on the Effective Date, would have been transferred to or assumed by Purchaser in accordance herewith. 3.4 Existing Condition. Since the Effective Date, except as provided on Schedule 3.4, neither Selling Party with respect to the Business has: 3.4.1 incurred any liabilities, other than liabilities incurred in the ordinary course of business consistent with past practice, or discharged or satisfied any lien or encumbrance, or paid any liabilities, other than in the ordinary course of business consistent with past practice, or failed to pay or discharge when due any liabilities of which the failure to pay or discharge has caused or will cause any material damage or risk of material loss to Seller or any of Seller's assets or properties; 3.4.2 sold, encumbered, assigned or transferred any assets or properties which would have been included in the Assets if the Closing had been held on the -6- Effective Date or on any date since then, except for the sale of Inventory in the ordinary course of business consistent with past practice; 3.4.3 created, incurred, assumed or guaranteed any indebtedness for money borrowed, or mortgaged, pledged or subjected any of its Assets to any mortgage, lien, pledge, security interest, conditional sales contract or other encumbrance of any nature whatsoever; 3.4.4 made or suffered any amendment or termination of any material agreement, contract, commitment, lease or plan to which it is a party or by which it is bound, or canceled, modified or waived any substantial debts or claims held by it or waived any rights of substantial value, whether or not in the ordinary course of business; 3.4.5 declared, set aside or paid any dividend or made or agreed to make any other distribution or payment in respect of its capital shares or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or acquire any of its capital shares; 3.4.6 suffered any damage, destruction or loss, whether or not covered by insurance, (i) materially and adversely affecting its business, operations, assets, properties or prospects or (ii) of any item or items carried on its books of account individually or in the aggregate at more than $10,000, or suffered any repeated, recurring or prolonged shortage, cessation or interruption of supplies or utility or other services required to conduct its business and operations; 3.4.7 suffered any material adverse change in its business, operations, assets, properties, prospects or condition (financial or otherwise); 3.4.8 received notice or had knowledge of any actual or threatened labor trouble, strike or other occurrence, event or condition of any similar character which has had or might have an adverse effect on its business, operations, assets, properties or prospects; 3.4.9 made commitments or agreements for capital expenditures or capital additions or betterments exceeding in the aggregate $10,000 except such as may be involved in ordinary repair, maintenance or replacement of its assets; 3.4.10 increased the salaries or other compensation of, or made any advance (excluding advances for ordinary and necessary business expenses) or loan to, any of its employees or made any increase in, or any addition to, other benefits to which any of its employees may be entitled; -7- 3.4.11 changed any of the accounting principles followed by it or the methods of applying such principles; 3.4.12 made any distribution or transfer whatsoever of cash or other assets to Northland other than in the ordinary course of business consistent with past practice which is not otherwise subject to the other provisions of this Section 3.4; or 3.4.13 entered into any transaction other than in the ordinary course of business consistent with past practice (except as otherwise disclosed in Schedule 3.4). 3.5 Assumed Liabilities. Seller has delivered to Purchaser a true, complete, and correct copy of each written instrument or document governing the Assumed Liabilities. All of the Assumed Liabilities of Seller are set forth in Schedule 1.3, attached hereto, none of which have been amended or modified except as disclosed in Schedule 1.3. Seller is not in default under any of the Assumed Liabilities and is not aware of any actions or omissions which might result in such default upon notice or the passage of time, or both. 3.6 No Default; Consents and Approvals. Neither the execution and delivery of this Agreement, nor the consummation of any of the transactions contemplated herein will (i) violate any provision of the Articles of Incorporation or Bylaws of either Seller or Northland (true and complete copies of which have heretofore been delivered to Purchaser by Seller); (ii) violate, conflict with or result in the breach or termination of, or otherwise give any other contracting party the right to terminate, or constitute a default (by way of substitution, novation or otherwise) under the terms of, any agreement, lease, indenture or instrument to which the Seller is a party, including, without limitation the Assets or the Assumed Liabilities, or by which it or any of the Assets may be bound; (iii) result in the creation of any lien, charge or encumbrance upon the Assets; (iv) violate any judgment, order, injunction, decree or award against, or binding upon, Seller, the Assets or Assumed Liabilities; or (v) constitute a violation by either Selling Party of any law or regulation applicable to Selling Parties, the Assets or the Assumed Liabilities. Except as expressly set forth on Schedule 3.6 hereto, all consents, releases or waivers from third parties (including, without limitation), governmental and regulatory authorities which may be necessary to prevent the transactions provided for herein causing a breach, acceleration or default of the type specified in this Section 3.6 have been obtained. 3.7 Identification of Assets. The Schedules enumerated in Section 1 hereof constitute a materially complete and accurate description of the Assets required to be set forth in such schedules. Except for the Excluded Assets, the assets included in the Assets and the Lease are sufficient to carry on the Business in the manner in which Seller has conducted the Business immediately prior to the Effective Date and the Closing. -8- 3.8 Title to Assets. Seller has good and marketable title to all Assets, all of which, except as provided in Schedule 3.6, are free and clear of any restrictions on or conditions to transfer or assignment and free and clear of mortgages, liens, security interests, encumbrances, claims, charges or adverse interest of any kind or character (collectively, the "Encumbrances") of any other person or entity. There are no existing agreements, options, commitments or rights with, of or to any person to acquire any of the Assets or any interest therein, except for those contracts entered into in the normal course of business consistent with past practice for the sale of Inventory. Inventory, including all work-in-progress, has been fully paid for and is not subject to any conditional sales contract, consignment or other Encumbrances whatsoever, nor does any third party have any interest or claim therein. 3.9 Condition of Tangible Assets. All equipment and other material items of tangible property and assets which would be included in the Assets if the Closing took place on the date hereof are in good operating condition and repair, subject to normal wear and maintenance, are usable in the regular and ordinary course of business and conform in all material respects to all applicable laws, ordinances, codes, rules and regulations, and authorizations relating to their construction, use and operation. No person other than Seller owns any equipment or other tangible assets or properties situated on the premises of Seller or necessary to the operation of the Business, except for leased items disclosed on Schedule 3.9 hereto and for items of immaterial value. 3.10 Accounts Receivable. The Accounts Receivable of Seller arising from the Business as set forth on the Financial Statements or arising since the Effective Date thereof are valid and genuine, have arisen solely out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice, are not subject to valid defenses, set-offs or counterclaims, and are collectible within one hundred and twenty (120) days after billing at the full recorded amount thereof less, in the case of accounts receivable appearing on the Financial Statements, the recorded allowance for collection losses on the Financial Statements. The allowance for collection losses on the Financial Statements has been determined in accordance with generally accepted accounting principles consistent with past practice. 3.11 Inventory. Subject to the provisions of Section 2.3.1, all Inventory, including without limitation raw materials, work-in-process and finished goods, reflected on the Financial Statements or acquired since the date thereof was acquired and has been maintained in the ordinary course of the Business, is of good and merchantable quality. Seller is not under any liability or obligation with respect to the return of inventory in the possession of wholesalers, retailers or other customers, except for warranty returns in the ordinary course of business. 3.12 Absence of Undisclosed Liabilities. Except as provided in Schedule 3.12, to the best knowledge of the Selling Parties, Seller has no liabilities or -9- obligations with respect to the Business, either direct or indirect, matured or unmatured or absolute, contingent or otherwise except: 3.12.1 those liabilities or obligations set forth on the Financial Statements and not heretofore paid or discharged; 3.12.2 liabilities arising in the ordinary course of business under any agreement, contract, commitment, lease or plan specifically disclosed on Schedule 3.24 attached hereto; and 3.12.3 those liabilities or obligations incurred, consistently with past business practice, in or as a result of the normal and ordinary course of business since the Effective Date. For purposes of this Agreement, the term "liabilities" shall include, without limitation, any direct or indirect indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost, expense, obligation or responsibility, fixed or unfixed, known or unknown, asserted or unasserted, choate or inchoate, liquidated or unliquidated, secured or unsecured. 3.13 Tax and Other Returns and Reports. All federal state, local and foreign tax returns, reports, statement and other similar filings required to be filed by Selling Parties (the "Tax Returns") with respect to any federal, state, local or foreign taxes, assessments, interest, penalties, deficiencies, fees and other governmental charges or impositions, including without limitation all income tax, unemployment compensation, social security, payroll, sales and use, excise, privilege, property, ad valorem, franchise, license, school and any other tax or similar governmental charge or imposition under laws of the United States or any state or municipal or political subdivision thereof or any foreign country or political subdivision thereof) (the "Taxes") have been filed with the appropriate governmental agencies in all jurisdictions win which such Tax Returns are required to be filed, and all such Tax Returns properly reflect the liabilities of Seller for Taxes for the periods, property or events covered thereby. All Taxes, including without limitation those which are called for by the Tax Return, or heretofore or hereafter claimed to be due by any taxing authority for Seller, have been properly accrued or paid. The accruals for Taxes contained in the Financial Statements are adequate to cover the tax liabilities of Seller with respect to the Business as the Effective Date and include adequate provision for all deferred taxes, and nothing has occurred subsequent to the Effective Date to make any of such accruals inadequate. Neither Seller nor Northland has received any notice of assessment or proposed assessment in connection with any Tax Returns and there are not pending tax examinations of or tax claims asserted against Seller or any of its assets or properties. Seller has not extended, or waived the application of, any statute of limitations of any jurisdiction regarding the assessment or collection of any Taxes. There are no tax liens (other than any lien for current taxes not yet due and payable) on any of the assets or properties of Seller. Seller has no knowledge of any basis for any additional assessment of -10- any Taxes. Seller has made all deposits required by law to be made with respect to employees' withholding and other employment taxes, including without limitation the portion of such deposits relating to taxes imposed upon Seller. 3.14 Books of Account. Except as set forth in Scheduled 3.14, the books, records and accounts of Seller maintained with respect to the Business accurately and fairly reflect, in reasonable detail, the transactions and the assets and liabilities of Seller with respect to the Business. Except as set forth in Scheduled 3.14, Seller has not engaged in any transaction with respect to the Business, maintained any bank account for the Business or used any of the funds of Seller in the conduct of the Business except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Business. 3.15 Compliance With Laws. Except as set forth in Schedule 3.15, to the best knowledge of the Selling Parties, the conduct of the Business by Seller, the condition and Seller's occupancy of the Real Property, and the condition and use of the Assets are not in violation in any material respect of any applicable federal, state and local statutes, laws or regulations, including without limitation any applicable laws and regulations relating to building, zoning, environmental, health and safety, employee safety and the employment of labor (including those laws and regulations relating to wages, hours, collective bargaining, non-discrimination in employment and the withholding and payment of taxes and contributions). Neither Seller nor Northland has received any notice of any such violation which has not been remedied. 3.16 Real Property. Schedule 3.16 to this Agreement contains a complete and accurate legal description of the Real Property, together with a description of all buildings, fixtures and other improvements located on the Real Property. Seller has no knowledge that the zoning for the Real Property prohibits the existing improvements or continuation of the Business being conducted on such Real Property. Seller has not commenced, nor has Seller received notice of the commencement of, any proceeding that would affect the present zoning classification of such Real Property. To Seller's best knowledge, there are no unrecorded easements (including prescriptive easements), subleases, licenses or other rights of occupancy existing with respect to the Real Property. 3.17 Intentionally Omitted. 3.18 Employee Agreements. Except as set forth on Schedule 3.18, Seller is not a party to any collective bargaining agreement or other similar labor agreements, or any medical, life insurance, pension, retirement, deferred compensation, profit sharing or other incentive or fringe benefit plan, agreements or arrangements providing for employee remuneration or benefits. -11- 3.19 Customers. Seller has not received notification and has no reason to believe that any of the current customers or suppliers of the Business, including, without limitation, the suppliers designated in Schedule 3.19 attached hereto, will cease doing business, or will materially reduce the amount of business such suppliers and customers currently conduct with respect to the Business. 3.20 Intentionally Omitted. 3.21 Proprietary Rights. The Proprietary Rights listed or described in Schedule 1.1.4, hereto are the sole and exclusive property of Seller, and to Seller's best knowledge the name Vikron is available for use in jurisdictions in which Seller is currently doing business. No licenses, sublicenses, or other rights have been granted or entered into by Seller with respect to the Proprietary Rights. All registered Proprietary Rights listed in Schedule 1.1.4 are current, unexpired and in good standing, and all Proprietary Rights are free and clear of all security interests, liens, encumbrances, and other restrictions. Seller has not at any time knowingly taken, or permitted to be taken, any action, or permitted any use, nor is Seller aware of any such action or use that would impair the validity or enforceability of any of the Proprietary Rights, or Purchaser's exclusive ownership thereof. 3.22 Litigation. Except as set forth on Schedule 3.22 hereto, there is no suit or action (equitable, legal, administrative or otherwise), proceeding or, to the best knowledge of Seller, investigation of any kind pending or, to the best knowledge of Seller, threatened against Seller, or which relates to the Assets or Assumed Liabilities, nor is there any factual basis of which Seller is aware for any such suit, action, proceeding or investigation (including, without limitation, any relating to environmental, health, safety or Hazardous Substances matters) against Seller or which could affect the Assets, the Assumed Liabilities or the Real Property, or which could affect the ability of Seller to carry out the transactions contemplated hereunder in accordance with the terms hereof. Seller is not a party to or subject to the provisions of any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority which may adversely affect Seller, the Assets or the transactions contemplated hereby. 3.23 Insurance. The Assets and Business of Seller are insured under various policies of general liability and other forms of insurance, all of which are described on Schedule 3.23 attached hereto, which discloses for each policy the risks insured against, coverage limits, deductible amounts, all outstanding claims thereunder, and whether the terms of such policy provide for retrospective premium adjustments. All such policies are in full force and effect in accordance with their terms, no notice of cancellation has been received, and there is no existing default or event which, with the giving of notice or lapse of time or both, would constitute a default thereunder. All premiums to date have been paid in full. Seller has not been refused any insurance, nor has its coverage been limited, by any insurance carrier to which it has applied for insurance or with which it has carried insurance during the past five (5) years. -12- 3.24 Contracts and Commitments. Except as listed on Schedule 3.24 attached hereto, Seller is not a party to any written or oral: 3.24.1 agreement, contract or commitment with any present or former employee or consultant or for the employment of any person, including any consultant, who is engaged in the conduct of the Business; 3.24.2 agreement, contract or commitment for the future purchase of, or payment for, supplies or products, or for the performance of services by a third party which supplies, products or services are used in the conduct of the Business involving in any one case $5,000 or more; 3.24.3 agreement, contract or commitment to sell or supply products ("Goods Contracts") or to perform services ("Services Contracts") in connection with the Business involving in any one case $10,000 or more; 3.24.4 agreement, contract or commitment relating to the Business continuing over a period of more than six (6) months from the date hereof or exceeding $5,000 in value; 3.24.5 distribution, dealer, representative or sales agency agreement, contract or commitment relating to the Business; 3.24.6 lease under which Seller is either lessor or lessee relating to the Assets or any property at which the Assets are located, including the Real Property; 3.24.7 note, debenture, bond, equipment trust agreement, letter of credit agreement, loan agreement or other contract or commitment for the borrowing or lending of money relating to the Business or agreement or arrangement for a line of credit or guarantee, pledge or undertaking of the indebtedness of any other person relating to the Business; 3.24.8 agreement, contract or commitment for any charitable or political contribution relating to the Business; 3.24.9 commitment or agreement for any capital expenditure in excess of $10,000 relating to the Business; 3.24.10 agreement, contract or commitment limiting or restraining Seller, the Business or any successor thereto from engaging or competing in any manner or in any business, nor, to Seller's knowledge, is any employee of Seller engaged in the conduct of the Business subject to any such agreement, contract or commitment; -13- 3.24.11 license, franchise, distributorship or other agreement which relates in whole or in part to any software, patent, trademark, trade name, service mark or copyright or to any ideas, technical assistance or other know-how of or used by Seller in the conduct of the Business; or 3.24.12 material agreement, contract or commitment relating to the Business not made in the ordinary course of business. Each of the agreements, contracts, commitments, leases, plans and other instruments, documents and undertakings listed on Schedule 3.24 or not required to be listed therein because of the amount thereof, under which Purchaser is to acquire rights or obligations hereunder is valid and enforceable in accordance with its terms, Seller is, and to Seller's knowledge all other parties thereto are, in compliance with the provisions thereof, Seller is not, and to Seller's knowledge no other party thereto is, in default in the performance, observance or fulfillment of any material obligation, covenant or condition contained therein, and no event has occurred which with or without the giving of notice or lapse of time, or both, would constitute a default thereunder. Furthermore, to the best knowledge of Puls, Roger Bares, David Dalquist, Joel Mitchell and Jim Campeau (collectively, "Seller's Executive Officers"), no such agreement, contract, commitment, lease, plan or other instrument, document or undertaking, in the reasonable opinion of Seller's Executive Officers, contains any contractual requirement with which there is a reasonable likelihood Seller or any other party thereto will be unable to comply. No written or oral agreement, contract or commitment described therein requires the consent of any party to its assignment in connection with the transactions contemplated hereby. 3.25 Availability of Documents. Seller has made available to Purchaser copies of all documents, including without limitation all agreements, contracts, commitments, insurance policies, leases, plans, instruments, undertakings authorizations, permits, licenses, patents, trademarks, tradenames, service marks, copyrights and applications therefor listed on the schedules attached hereto or referred to herein. Such copies are true and complete and modifications thereto or waivers currently in effect thereunder. 3.26 Conditions Affecting Seller. There is no fact, development or threatened development with respect to the markets, products, services, clients, customers, facilities, computer software, data bases, personnel, vendors, suppliers, operations, assets or prospects of the Business which are known to Seller's Executive Officers which would materially adversely affect the business, operations or prospects of Seller considered as a whole, other than such conditions as may affect as a whole the economy generally. Seller does not have any reason to believe that any loss of any employee, agent, customer or supplier or other advantageous arrangement will result because of the consummation of the transactions contemplated hereby. -14- 3.27 Full Disclosure. None of the representations and warranties made by Selling Parties in this Agreement or the schedules hereto, or in any certificate or document furnished or to be furnished by Selling Parties in connection with the Closing, or any of them, or on their behalf, contains or will contain any untrue statement of a material fact, or omit or state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Any information contained on any schedule hereto shall be deemed to have been disclosed for purposes of this Agreement, but only if such information has relevance to the schedule on which it appears. 4. Representations and Warranties of Purchaser and Ahead. Purchaser and Ahead represents and warrants to Seller as follows: 4.1 Corporate Existence and Organization. Each of Purchaser and Ahead is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and otherwise operate its properties and assets. 4.2 Authority. Each of Purchaser and Ahead has full corporate power and authority to execute and to deliver this Agreement and all other agreements executed and delivered or to be executed and delivered by Purchaser and Ahead in connection with the transactions contemplated hereby, including without limitation the documents specified in Section 9 hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Purchaser and Ahead, and no other corporate proceedings on the part of Purchaser and Ahead and no approvals or consents of any other persons are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and Ahead and constitutes a valid and binding agreement of Purchaser and Ahead, enforceable against Purchaser and Ahead in accordance with its terms. 4.3. Net Worth of Ahead. The net worth of Ahead as of March 31, 1996 was $5,500,000. 4.4 No Additional Representations. None of the Selling Parties has made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the Selling Parties, the Assets or the Business, except as expressly set forth in this Agreement or the schedules hereto (the "Information"). None of the Selling Parties will have or be subject to any liability to Purchaser or any other person resulting from the distribution, to Purchaser, or Purchaser's use of, any information other than the Information. -15- 4.5 No Knowledge of Misrepresentations or Omissions. Purchaser has not in bad faith failed to inform the Selling Parties that either Steve Conlisk, Stuart Platt or Arthur Honegger has actual knowledge that (i) the representations and warranties of the Selling Parties in this Agreement or any Schedule hereto are not true and correct in all material respects, (ii) the schedules to this Agreement contain material errors or (iii) there are material omissions from the schedules. 5. Intentionally Omitted. . 6. Purchaser's Conditions to Closing. The obligation of Purchaser to purchase the Assets and lease the Real Property and consummate the related transactions provided for under this Agreement are subject to the fulfillment or waiver by Purchaser in writing, at or prior to Closing, of each and all of the conditions precedent listed below. 6.1 Execution and Delivery of Documents. Selling Parties shall have executed and delivered to Purchaser all of the documents and agreements specified in Section 9 below. 6.2 Performance. Selling Parties shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by Selling Parties on or before the Closing Date. 6.3 Consents. All necessary agreements and consents of any third parties (including, without limitation, all parties set forth in Schedule 3.6 hereto) to the consummation of the transactions contemplated by this Agreement shall have been obtained by Seller and delivered to Purchaser. 6.4 Proceedings. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance satisfactory to Purchaser and its counsel, and Purchaser shall have received counterpart originals or certified copies of such documents as it may reasonably request. 6.5 Auditor's Letter. Purchaser shall have received from Selling Parties' auditor a reliance letter with respect to the Financial Statements, in form and substance reasonably satisfactory to Purchaser. 6.6 No Material Adverse Change. During the period from the date of balance sheet included in the Financial Statements to the Closing Date, none of the Assets shall have sustained any material loss or damage (whether or not such damage or loss is insured) -16- nor shall there have been any material adverse change in the financial condition or prospects of the Seller. 6.7 Accuracy of Representations and Warranties. All warranties and representations by the Selling Parties in this Agreement, or in any schedule, exhibit, document or certificate furnished to Purchaser in connection with the transactions contemplated by this Agreement, shall be true in all material respects on and as of the Closing Date. 7. Selling Parties' Conditions to Closing. The obligations of Selling Parties to sell the Assets and consummate the related transactions provided for under this Agreement are subject to the fulfillment or waiver by Selling Parties in writing, at or prior to Closing, of each and all of the conditions precedent listed below. 7.1 Execution and Delivery of Documents; Performance. Purchaser shall have executed and delivered to Selling Parties all of the documents and agreements specified in Section 9 below, and performed and complied with all covenants and agreements of Purchaser required to be performed or complied with prior to Closing. 7.2 Accuracy of Representations and Warranties. All representations and warranties of Purchaser and Ahead in this Agreement, or in any schedule, exhibit, document or certificate furnished to Seller in connection with the transactions contemplated by this Agreement, shall be true on and as of the Closing Date as though such representations and warranties were made on and as of that date. 8. Other Covenants; Post-Closing Obligations. 8.1 Additional Agreements with Selling Parties. 8.1.1 Non-Competition Agreement. Seller and Puls shall enter into a covenant not to compete (the "Non-Competition Agreement") substantially in the form set forth at Schedule 8.1.1 hereto and providing that during the period of 36 months beginning on the Closing Date neither Seller nor Puls shall directly or indirectly, within any areas identified in the Non-Competition Agreement, compete in the business of the manufacturing, marketing, or sale of products or goods sold by, or substantially similar in style to the products or goods sold by, Seller as of the Closing Date, all as more fully set forth in the Non-Competition Agreement. 8.2 Use of Name. On the Closing Date, Seller shall take all actions necessary to cause its name to be changed to a name which bears no resemblance to its current name, including, without limitation, deletion of the words "Vikron" from its name, and shall file with the Office of the Wisconsin Secretary of State a certificate of amendment to Seller's -17- Articles of Incorporation reflecting such change of name, and an appropriate name change notice in each state where Seller is qualified to do business. Neither Seller nor Northland shall use the name "Vikron" in connection with any business operated by Seller or Northland after the Closing. Seller shall cooperate with any application by Purchaser to use the name "Vikron" or any similar name in connection with Purchaser's operation of the Business acquired by Purchaser. 8.3 Receipt of Mail. From and after the Closing Date, Purchaser shall have the sole and exclusive right to receipt of all mail addressed to Seller. Purchaser shall deliver to Seller any such mail not applicable to the Assets or the Business within three (3) business days of Purchaser's receipt thereof. 8.4 Certain Discounts. Schedule 8.4 hereto contains a list of Seller's suppliers who have agreed to provide price or other discounts or concessions to Seller with respect to merchandise or services purchased from such suppliers and a description of each such arrangement, including the amounts involved and the terms thereof. Seller and Purchaser agree that the benefit of all such discounts and concessions to the extent transferable shall inure to the benefit of Purchaser and the parties hereto agree to take such steps as are necessary to effect such agreement. 8.5 Receipt of Accounts Receivable. From and after the Closing Date, Selling Parties shall immediately forward to Purchaser any payments from creditors or other amounts received, including without limitation accounts receivable for goods invoiced or shipped after the Effective Date, to which Purchaser is entitled in accordance with the terms of this Agreement. Seller shall be permitted to collect for its own account any Accounts Receivable for which it has paid to Purchaser under Section 11. 8.6 Employees. Purchaser shall have no obligation whatsoever to employ any person currently employed by Seller with respect to the Business. Any such persons employed by Purchaser, if any, will be treated and deemed as "new hires" by Purchaser. Purchaser shall have the right, but not the obligation, to interview and to employ any one or more of Seller's employees, and Seller will not make any change in compensation payable or to become payable to any employee (including severance or vacation pay and compensation payable pursuant to bonus or pension plans or other employee plans or other benefits to such employees) prior to the Closing without having first obtained the written consent of Purchaser. 8.7 Manufacturer's Warranties. Seller covenants and warrants that it shall use its best efforts to obtain a transfer to Purchaser of all manufacturer's warranties relating to the Assets, to the extent such warranties are transferable. 8.8 Sales Tax. Seller shall be responsible for and bear the cost of all sales, excise, transfer and use taxes arising by virtue of the purchase and sale of the Assets hereunder. -18- 8.9 Payment of Creditors. Seller shall pay all amounts owing its creditors when due, excluding Assumed Liabilities and amounts withheld pending the resolution of any good faith disputes. 8.10 Further Assurances. Purchaser and Selling Parties each represents, warrants and covenants to the other that if at any time after the execution of this Agreement the other party shall reasonably consider or be advised that any further assignments or assurances in law are necessary or desirable to carry out the intent and accomplish the purposes of this Agreement according to its terms, such party shall furnish any additional information, execute and deliver such documents and make all such proper assignments and assurances and do all things necessary or appropriate to carry out the intent and accomplish the purposes of this Agreement and to consummate the transactions contemplated by this Agreement according to its terms. 9. Closing. 9.1 Time of Closing. The closing of the transactions contemplated herein (the "Closing") shall be held on June 17, 1996, or at such other time as the parties hereto shall mutually agree to (the "Closing Date"). The parties mutually acknowledge and agree for the purposes of this Agreement that time is of the essence. 9.2 Delivery of Cash and Documents. On the Closing Date, the parties shall deliver to each other the following: 9.2.1 Two original, fully executed copies of a Warranty Bill of Sale in the form of Schedule 9.2.1 hereto together with such other instruments and documents as Purchaser shall reasonably require to vest Purchaser with marketable title to the Assets, free and clear of all liens, charges, and encumbrances. 9.2.2 Two original fully executed copies of an Assignment of Intangibles in the form of Schedule 9.2.2 hereto. 9.2.3 Two original fully executed copies of an Assignment and Assumption of Contracts in the form of Schedule 9.2.3 hereto. 9.2.4 Two original fully executed copies of the Lease. 9.2.5 Two original copies of all written consents of parties whose consents are required to assign the Assumed Liabilities as required pursuant to Section 6.3 and Schedule 3.6. 9.2.6 Two original copies of an affidavit to the effect that Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate within the meaning -19- of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. 9.2.7 The Purchase Price, to be paid by Purchaser by cashier's check or wire transfer in accordance with Section 2.2, subject to applicable adjustments and credits hereunder, and the rent due at Closing under the Lease. 9.2.8 Original certificates of title conveying the Vehicles listed on Schedule 1.1.6 to Purchaser. 9.2.9 Original executed certificates of the officers of Seller, Northland, Purchaser and Ahead in the form of Schedule 9.2.9(a), Schedule 9.2.9(b), Schedule 9.2.9(c) and Schedule 9.2.9 (d), respectively. 9.2.10 Two original fully executed copies of the Non-Competition Agreement on the form of Schedule 8.1.1 hereto. 9.2.11 An original opinion of legal counsel for Selling Parties, in the form set forth in Schedule 9.2.11 hereto. 9.3 Action at Closing. All requirements with respect to Closing shall be considered as having taken place simultaneously, and no delivery shall be considered as having been made until all deliveries and closing transactions have been accomplished. 10. Indemnity. 10.1 Selling Parties' Indemnity. Selling Parties, and each of them, hereby jointly and severally indemnify, defend and hold harmless Purchaser, Ahead, their respective officers, directors, shareholders, employees, agents, successors and permitted assigns, and each of them (the "Purchaser Indemnitees"), against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including without limitation interest, penalties and reasonable attorneys' fees and court costs (collectively "Claim(s)"), that any of Purchaser Indemnitees shall incur or suffer, which arise, result from, or relate to: (i) any misrepresentation with respect to, breach of, or failure by Selling Parties to perform, any of their respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, document, exhibit or other instrument furnished or to be furnished by Selling Parties, or any of them, under this Agreement; or (ii) except as otherwise expressly assumed by any of Purchaser Indemnitees hereunder, any alleged tort, breach of contract or other wrongdoing or cause of -20- action or Claim incurred relating to the conduct of the Business or ownership of the Assets by Seller prior to the Closing Date or which result from or arise out of any action or inaction prior to the Closing Date of Seller or any director, officer, employee, agent, representative or subcontractor of Seller. 10.2 Purchaser's and Ahead's Indemnity. Purchaser and Ahead, and each of them, hereby jointly and severally indemnify, defend and hold harmless Selling Parties, their respective officers, directors, shareholders, employees, agents, successors and assigns, and each of them (the "Seller Indemnitees"), against and in respect of any and all Claims that any of Seller Indemnitees shall incur or suffer, which arise, result from or relate to: (i) any misrepresentation with respect to, breach of, or failure by Purchaser or Ahead to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, document, exhibit or other instrument furnished or to be furnished by Purchaser or Ahead, or any of them, under this Agreement; (ii) the Assumed Liabilities; or (iii) any alleged tort, breach of contract or other wrongdoing or cause of action or Claim incurred relating to the conduct of the Business or ownership of the Assets following the Closing Date or which result from or arise out of any action or inaction after the Closing Date of Purchaser or any director, officer, employee, agent, representative or subcontractor of Purchaser. 10.3 Notice; Defense of Third-Party Claims. 10.3.1 If any indemnified party intends to seek indemnification under this Section 10, that party shall promptly deliver a written notice to the indemnifying party; provided that failure to give notice shall not relieve the indemnifying party of its obligations hereunder, except to the extent it has been prejudiced by that failure. 10.3.2 The indemnifying party shall have the right to settle or assume the defense of such claim, including the employment of counsel reasonably satisfactory to the indemnified party. If the indemnifying party elects to settle or defend such claim, it shall promptly notify the indemnified party of its intent to do so. If the indemnifying party elects not to settle or defend such claim, the indemnified party shall have the right to contest, settle or compromise the claim without prejudice to any rights to indemnification under this Section 10. Regardless of which party is controlling the settlement or defense of any claim, (i) both the indemnified party and the indemnifying party shall act in good faith, (ii) the indemnifying party shall permit the indemnified party to participate in such settlement or defense through counsel chosen by the indemnified party, provided that all fees, costs and expenses of such counsel shall be borne by the indemnified party, unless the indemnifying party and -21- indemnified party have different available defenses to such third-party claim, in which case all such fees, costs and expenses shall be borne by the indemnifying party, and (iii) no entry of judgment or settlement of a claim may be agreed to without the written consent of both the indemnified party and the indemnifying party, which consent shall not be unreasonably withheld. So long as the indemnifying party is contesting any claim, the indemnified party shall not pay or settle any such claim. 10.3.3 The controlling party shall deliver, or cause to be delivered, to the other party copies of all correspondence, pleadings, motions, briefs, appeals or other written statements relating to or submitted in connection with the settlement or defense of any such claim, and timely notices of, and the right to participate pursuant to subsection (ii) above in any hearing or other court proceeding relating to such claim. 10.4 Survival. The representations, warranties and indemnification provisions contained in this Agreement shall survive the Closing for a period of two years thereafter (the "Survival Period"). If notice of one or more claims subject to indemnification is given as provided in Section 10.3 on or before the end of the Survival Period, the indemnification right hereunder shall survive until all such claims have been finally resolved and all other indemnification rights have been satisfied. 10.5 Exceptions for Indemnified Losses. 10.5.1 Notwithstanding the provisions of Section 10.1, Claims for which the Purchaser Indemnitees are entitled to indemnification shall not include the first $50,000 of Claims sustained or incurred by the Purchaser Indemnitees as a result of or arising out of the matters described in Section 10.1 (the "Basket Amount"); provided, however, that any Claims arising out of or relating to any breach by Selling Parties of any of the representations and warranties set forth in Sections 3.1 and 3.2 shall not be subject to the Basket Amount, nor shall the amount of any such Claims be included with other Claims by Purchaser in determining whether such Basket Amount has been reached; provided further, that for the sole purpose of determining the satisfaction of the Basket Amount, all representations, warranties, covenants, agreements or understandings referred to in Sections 3.3, 3.7, 3.9, 3.12, 3.15, 3.16, 3.19, 3.22 and 3.24 of this Agreement shall be read so as to exclude therefrom the terms "material" and "to the best knowledge of" (or words of similar import) and the effect thereof on this Agreement. 10.5.2 Notwithstanding the provisions of Section 10.1, Claims for which the Purchaser Indemnitees are entitled to indemnification pursuant to Section 10.1 shall not exceed $3,785,000. 10.5.3 Any proceeds from insurance paid to or on account of the Purchaser as a direct result of any fact, event or circumstance requiring indemnity pursuant to -22- Section 10.1 shall constitute a credit which shall be offset against the total Claim (before the application of Section 10.5.1). 10.5.4 Any Claim calculated for purposes of Section 10.1 shall be calculated taking into account any offsetting federal, state, local or foreign tax benefits that may accrue because of such Claim to Purchaser. 10.6 Termination of Indemnification Obligations. After the Survival Period, the parties shall be released from the agreements of indemnification contained in this Section 10 in respect of any claims that shall not have been made prior to such date. Such agreements of indemnification shall remain effective in respect of claims made in writing by giving notice as provided in Section 10.3 prior to the end of the Survival Period until such claims are finally determined and satisfied in full. 10.7 Exclusive Remedy. The enforcement of the agreement of indemnification contained in this Section 10 shall be, after the Closing Date, the exclusive remedy of the parties hereto for any claims with respect to matters covered in Section 10.1 and 10.2 hereof whether sounding in tort, contract or otherwise, and the parties hereto waive all remedies otherwise available to such parties save only remedies which by law may not be waived. 10.8 Hazardous Substances. Notwithstanding anything contained in this Section 10 to the contrary, the provisions of this Section 10 shall not in any way be applicable to any liabilities incurred with respect to Hazardous Substances by any party hereto, and the sole recourse of the parties hereto with respect to any such liability extending from Hazardous Substances shall be as provided in Section 11. 11. Hazardous Substances. 11.1 Representations of Selling Parties. Selling Parties, jointly and severally, represent and warrant to Purchaser and Ahead that, except as set forth in Schedule 11 and to the best knowledge of Seller, neither the Assets nor the Real Property contain any Hazardous Substances (as defined below), whether located upon or beneath Real Property, and to Seller's best knowledge no debris has been buried beneath the surface of the Real Property. Seller has not discharged, and has no knowledge that any other person has discharged, any Hazardous Substances on the Real Property. Except as set forth in Schedule 11 and to the best knowledge of Seller, Seller is in substantial compliance with the terms and conditions of all statutes, use ordinances and regulations, federal, state and local, pertaining to the Assets and the sanitization or cleanup of the Real Property with respect to Hazardous Substances. Without limiting the other provisions of this Agreement, Seller shall cooperate with Purchaser's investigation of matters relating to the foregoing provisions of this paragraph and shall provide access to and copies of any data and/or documents dealing with potentially Hazardous Substances used at the Real Property and any disposal practices followed. Purchaser shall -23- have the right to make inquiries of governmental agencies regarding such matters, without liability for the outcome of such discussions. "Hazardous Substances" means any material or substance that is (a) a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601(14), Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. ss. 1321; (b) a "hazardous waste" pursuant to Section 1004 or Section 1001 of the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6903, 6921; (c) a toxic pollutant under Section 307(a)(1) of the Federal Water Pollution Act, 33 U.S.C. ss. 1317(a)(1); (d) a "hazardous air pollutant" under Section 112 of the Clean Air Act, 42 U.S.C. ss. 7412; (e) a "hazardous material" under the Hazardous under the Hazardous Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. ss. 1802(4); (f) toxic or hazardous pursuant to regulations promulgated under the aforementioned laws; (g) a risk to the environment under any other applicable federal, state or local laws, ordinances or regulations, in each case as currently in effect. "Hazardous Substances" specifically includes asbestos, polychlorinated biphenyls ("PCBs"), petroleum and petroleum-based derivatives, and urea formaldehyde. 11.2. Base Line Audit; Remediation. 11.2.1 As soon as possible after Closing, Seller will cause a base line environmental sampling (the "Base Line Audit") to be conducted on the Real Property. The Base Line Audit shall be performed by an environmental consultant and in accordance with a scope and procedure mutually agreeable to Seller and Purchaser, each of whom shall pay one-half of the cost of the Base Line Audit. 11.2.2 If the Base Line Audit indicates the presence of Hazardous Substances in, on or under the Real Property, Seller shall remediate such Hazardous Substances as soon as reasonably possible, at Seller's sole expense, in which case the Lease shall continue in full force and effect; provided, however, if the estimated cost to remediate such condition exceeds $100,000, Seller may give written notice to Purchaser within six (6) months after receipt by Seller of the Base Line Audit of Seller's desire to terminate the Lease as of the date six (6) months following the giving of such notice. If Seller elects to give such notice of Seller's intention to terminate the Lease, Purchaser shall have the right within ten (10) days after the receipt of such notice to give written notice to Seller of Purchaser's commitment to pay for the remediation of such Hazardous Substances totally at Purchaser's expense and without reimbursement from Seller except to the extent of an amount equal to $100,000. Purchaser shall provide Seller with the funds required of Purchaser or satisfactory assurance thereof within thirty (30) days following Purchaser's commitment. In such event the Lease shall continue in full force and effect, and Seller shall proceed to remediate as soon as reasonably possible and the required funds are available. If Purchaser does not give such notice and provide the required funds or assurance thereof within the times specified above, the Lease shall terminate as of the date specified in Seller's notice of termination. If the Base -24- Line Audit indicates that Hazardous Substances are present in, on or under the Real Property, then Purchaser's obligations under the Lease shall be abated to the same extent as provided in Section 8.1 of the Lease. 11.3 Post Term Audit; Remediation. 11.3.1 Upon the termination of the Lease, Purchaser shall cause a second environmental sampling (the "Post Term Audit") to be performed on the Real Property. The Post Term Audit shall be performed, if possible, by the same consultant which performed the Base Line Audit, and shall be conducted in accordance with the identical scope and procedure as with the Base Line Audit. Seller and Purchaser shall each pay one-half of the cost of the Post Term Audit. 11.3.2 If the Post Term Audit indicates the presence of Hazardous Substances in, on or under the Real Property which were not detected by the Base Line Audit, and which are identified as resulting from one or more releases from Purchaser's operations on the Real Property, then Purchaser shall remediate such Hazardous Substances as soon as reasonably possible, at Purchaser's sole expense. Seller shall grant Purchaser reasonable access to the Real Property following the termination of the Lease to the extent required to allow Purchaser to remediate any Hazardous Substance as indicated by the Post Term Audit. If the Post-Term Audit indicates the presence of Hazardous Substances, and the cause of the release of such Hazardous Substances cannot be determined from the Post Term Audit, then Purchaser and Seller shall jointly undertake further analysis to determine the cause. Purchaser and Seller shall act in good faith to determine the responsible party, and shall apportion liability accordingly. Notwithstanding Purchaser's remediation obligations under this Section 11.3.2 and Purchaser's and Ahead's indemnification obligations under Section 11.4, Selling Parties hereby waive any claim for damages for diminution of property value or other loss, or both, arising from the completion of a government-approved remediation on the Real Property resulting from the release of any Hazardous Substances as a result of Purchaser's use of the Real Property. 11.4 Covenants of Purchaser. 11.4.1 Purchaser shall not engage in any activity in, on or about the Real Property which constitutes a Reportable Use (as defined below) of Hazardous Substances without the express prior written consent of Seller and compliance in a timely manner (at Purchaser's sole cost and expense) with all applicable law. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, or (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Purchaser's being responsible for the presence in, on or about the Real Property of a Hazardous Substance with respect to which any applicable law requires that a notice be given to persons entering or -25- occupying the Real Property or neighboring properties. Notwithstanding the foregoing, Purchaser may, without Seller's prior consent, but in compliance with all applicable law, use any ordinary and customary materials reasonably required to be used by Purchaser in the normal course of Purchaser's business permitted on the Real Property, so long as such use is not a Reportable Use and does not expose the Real Property or neighboring properties to any meaningful risk of release, contamination or damage or expose Seller to any liability therefor. In addition, Seller may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Purchaser upon Purchaser's giving Seller such additional assurances as Seller, in its reasonable discretion, deems necessary to protect itself, the public, the Real Property and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Real Property (such as concrete encasements). Purchaser has listed on Schedule 11.4.1 those chemicals which it anticipates using on the Real Property after the Commencement Date (as defined in the Lease), and Seller hereby consents to the use of such chemicals by Purchaser on the Real Property. 11.4.2 If Purchaser knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Real Property, other than as previously consented to by Seller, Purchaser shall immediately give written notice of such fact to Seller. Purchaser shall also immediately give Seller a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Real Property, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Real Property, including but not limited to all such documents as may be involved in any Reportable Uses involving the Real Property. 11.5 Indemnification. 11.5.1 Subject to Section 11.5.3, Selling Parties shall jointly and severally indemnify, protect, defend and hold Purchaser, Ahead, their respective agents, employees, lenders and ground lessor, if any, and the Real Property, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance or storage tank brought onto the Real Property prior to the Commencement Date by or for Seller or under Seller's control. Seller's obligations under this Section 11.5.1 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Seller, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of the Lease. Except as provided in Section 11.5.3, no termination, cancellation or release agreement entered into among Selling Parties, -26- Purchaser and Ahead shall release Selling Parties from their respective obligations hereunder with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Purchaser and Ahead in writing at the time of such agreement. 11.5.2 Subject to Section 11.5.3, Purchaser and Ahead shall jointly and severally indemnify, protect, defend and hold Selling Parties, their respective agents, employees, lenders and ground lessor, if any, and the Real Property, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance or storage tank brought onto the Real Property on or after the Commencement Date by or for Purchaser or under Purchaser's control. Purchaser's obligations under this Section 11.5.2 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Purchaser, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of the Lease. Except as provided in Section 11.5.3, no termination. cancellation or release agreement entered into among Selling Parties, Purchaser and Ahead shall release Purchaser or Ahead from their respective obligations hereunder with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Selling Parties in writing at the time of such agreement. 11.5.3 The representations, warranties and indemnification provisions contained in this Section 11 with respect to Seller and Purchaser shall survive the Closing indefinitely. If the Base Line Audit indicates no Hazardous Substances in, on or under the Real Property, or any such Hazardous Substances are fully remediated, then the representations, warranties and indemnification provisions contained in this Section 11 with respect to Northland shall survive the Closing until the completion of the Post Term Audit. The representations, warranties and indemnification provisions contained in this Section 11 with respect to Ahead shall survive the Closing until the later of (i) the completion of the Post Term Audit, if the Post Term Audit indicates no Hazardous Substances in, on or under the Real Property, or (ii) the completion of Purchaser's remediation obligations under Section 11.3.2, if the Post Term Audit finds any such Hazardous Substances present in, on or under the Real Property. 11.5.4 The provisions of Section 10.3 shall apply to the indemnification obligations set forth in this Section 11.5. 12. Compliance with Bulk Sales Laws. Purchaser and Seller hereby waive compliance by Purchaser and Seller with the bulk sales law and any other similar laws in any applicable jurisdiction in respect of the transactions contemplated by this Agreement. Seller shall indemnify Purchaser from, and hold it harmless against, any liabilities, damages, costs and expenses resulting from or arising out -27- of (i) the parties' failure to comply with any such laws in respect of the transactions contemplated by this Agreement, or (ii) any action brought or levy made as a result thereof, other than the Assumed Liabilities, on such terms as expressly assumed, by Purchaser pursuant to this Agreement. 13. Taxes. Any and all sales, excise, transfer and use taxes applicable to the conveyance and transfer to Purchaser of the Assets shall be borne and paid for solely by Seller (except for Vehicle transfer taxes). Purchaser shall have no responsibility or liability for any income, excise, property, business, occupation, withholding or similar tax, or for taxes of any other kind or type on the Business, related to any period prior to the Effective Date, or Seller's operations and activities at the Real Property. 14. Miscellaneous Provisions. 14.1 Expenses. Except as otherwise provided in this Agreement, each party hereto shall pay its own expenses (including, without limitation, legal and accounting fees) incident to the origination, negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby, regardless of whether such transactions are consummated. 14.2 Schedules and Exhibits. Each of the schedules and exhibits attached hereto are incorporated herein by reference and made a part hereof for all purposes. 14.3 Amendments or Waivers. Except as otherwise specifically stated herein, any provision of this Agreement may be amended by, and only by, a written agreement executed by Purchaser, on the one hand, and Selling Parties, on the other. Either party may extend the time for or waive the performance of any obligation of the other party, waive any inaccuracies in the representations or warranties of the other party, waive fulfillment of any conditions or contingencies to such party's obligations to consummate the transactions provided for hereunder, or waive compliance by the other party with any of the terms and conditions contained in this Agreement; provided that, each and every such extension or waiver shall be in writing. 14.4 Further Assurances. From and after the Closing Date, the parties shall, on request, cooperate with one another by furnishing any additional information, executing and delivering any additional documents and instruments, and taking any and all other actions as may reasonably be required by the parties or their respective counsel to consummate or otherwise implement the transactions provided for in this Agreement. 14.5 Successors and Assigns. This Agreement shall apply to, and inure to the benefit of, and be binding upon and enforceable against the parties hereto and their respective -28- successors and permitted assigns. This Agreement shall not be assigned by any party hereto without the prior written consent of the other parties. 14.6 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Wisconsin. 14.7 Notices. Any notice, demand, approval, consent, request, waiver or other communication which may be given or which is required to be given pursuant to this Agreement shall be in writing and shall be deemed given on the earlier of the day actually received or on the close of business on the third business day following the date deposited in the United States mail, postage pre-paid, certified or registered, addressed to the party at the address set forth after its respective name below, or at such different address as such party shall have theretofore advised the party of in writing, with copies sent to the persons indicated: To Purchaser: Ahead Wisconsin Acquisition Corporation 520 Blanding Woods Road South St. Croix Falls, Wisconsin 54024 Attention: Donald Puls To Seller: Vikron, Inc. 5005 Highway 7 Minneapolis, Minnesota 55416 Attention: David Dalquist To Northland: Northland Aluminum Products, Inc. 5005 Highway 7 Minneapolis, Minnesota 55416 Attention: David Dalquist, President To Ahead: Ahead Technology, Inc. c/o 3105 Patrick Henry Drive Santa Clara, California 95054 Attention: Steve Conlisk or to such other address as such party shall have specified by notice in writing to the other. 14.8 Invalid Provisions. If any provision hereof shall be held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, with the remaining provisions hereof remaining in full force and effect and unaffected by the illegal, invalid or unenforceable provision or by its severance herefrom. In lieu of such illegal, -29- invalid or unenforceable provision, there shall be added automatically as a part hereof a provision as similar in terms as the illegal, invalid or unenforceable provision as may be possible and, at the same time, be legal, valid and enforceable. 14.9 Entirety of Agreement. This Agreement (including exhibits, schedules and agreements referenced herein) and any other agreements and instruments delivered at the Closing (or after the Closing pursuant hereto) contain the entire Agreement between the parties. No representations, inducements, promises or agreements, whether oral or otherwise, which are not embodied herein or therein shall be of any force or effect. 14.10 No Commission or Finder's Fee. Selling Parties and Purchaser each represent that no brokerage, finder's or similar fee or commission has been incurred by them or it in connection with the transactions provided for in this Agreement, other than a commission to Goldsmith, Agio, Helms & Company as broker for Seller. Selling Parties, on the one hand, and Purchaser, on the other, hereby indemnify and hold harmless the other party under Section 14.10 hereof from any brokerage, finder's or similar fee or commission incurred by such party in connection with the transactions contemplated by this Agreement. 14.11 Counterparts; Effectiveness. This Agreement may be executed in counterparts, each of which shall be deemed an original for all purposes and all of which shall be deemed, collectively, one Agreement. This Agreement shall become effective when executed and delivered by all parties hereto. 14.12 Confidentiality. Selling Parties and their respective officers, directors and other representatives shall hold in strict confidence the terms and condition of this Agreement, except to the extent required to be provided to any tax or other governmental authority or to enforce a claim hereunder. 14.13 Parties In Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons or entities other than the parties hereto, and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the liability or obligation of any third persons to any party to this Agreement or give any third persons any right of subrogation or action over against any party to this Agreement. 14.14 Attorneys' Fees. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. -30- 14.15 Purchaser's Right of Specific Performance. The Assets to be transferred under this Agreement cannot be readily purchased or sold, as the case may be, in the open market and for that reason, among others, it is agreed that Purchaser will be irreparably damaged by a failure of consummation of the transactions contemplated by this Agreement resulting from a breach by Selling Parties, or either of them, of their obligations hereunder. Accordingly, in the event of any default by Selling Parties under this Agreement, the rights of Purchaser shall be enforceable by decree of specific performance. Such remedy, however, shall be cumulative and not exclusive, and shall be in addition to any other remedies that Purchaser may have. 14.16 Counsel. Each party hereto acknowledges and agrees that such party has been represented by counsel of its choice in connection with execution and delivery of this Agreement and this Agreement has been reviewed by such counsel to such party's satisfaction. -31- IN WITNESS WHEREOF, this Agreement has been signed by duly authorized representatives on behalf of each of the parties hereto on the date first written above. SELLER: VIKRON, INC., a Wisconsin corporation By: /s/ DAVID DALQUIST --------------------------------------- Name: David Dalquist ------------------------------------- Title: President ------------------------------------ NORTHLAND: NORTHLAND ALUMINUM PRODUCTS, INC., a Minnesota corporation By: /s/ DAVID DALQUIST --------------------------------------- Name: David Dalquist ------------------------------------- Title: President ------------------------------------ PURCHASER: AHEAD WISCONSIN ACQUISITION CORPORATION, a Delaware corporation By: /s/ STEVE CONLISK -------------------------------------- Name: Steve Conlisk ------------------------------------ Title: Vice President-Finance ----------------------------------- AHEAD: AHEAD TECHNOLOGY, INC., a Delaware corporation By: /s/ STEVE CONLISK -------------------------------------- Name: Steve Conlisk ------------------------------------ Title: Secretary ----------------------------------- -32- SCHEDULE 2.5 INDUSTRIAL LEASE THIS LEASE is made this 17th day of June, 1996, by and between Vikron, Inc., a Wisconsin corporation (hereinafter sometimes referred to as "Lessor"), and Ahead Wisconsin Acquisition Corporation, a Delaware corporation (hereinafter sometimes referred to as "Lessee"), who hereby mutually covenant and agree as follows: ARTICLE GRANT AND TERM GRANT. Lessor, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of the Lessee to be performed, hereby leases to Lessee, and Lessee hereby lets from Lessor, the real estate located at 520 and 525 Blanding Woods Road South, St. Croix Falls, Wisconsin and legally described on an exhibit which is attached hereto, identified as Exhibit A and made a part hereof by this reference, together with all improvements now located thereon during the term of this Lease, together with all appurtenances belonging to or in any way pertaining to the said premises (such real estate, improvements and appurtenances hereinafter sometimes jointly or severally, as the context requires, referred to as "Leased Premises"). TERM. The term of this Lease shall commence on the 17th day of June, 1996 (hereinafter sometimes referred to as "Commencement Date"), and shall end three (3) years thereafter, unless sooner terminated as set forth herein. ARTICLE CONDITION OF PROPERTY CONDITION. Lessor shall deliver the Leased Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Leased Premises, other than those constructed by Lessee, shall be in proper operating condition on the Commencement Date. If any non-compliance with this warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of non-compliance with this warranty within sixty (60) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Leased Premises comply in all material requests with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect with respect to the Leased Premises and the Business as conducted by the Lessor and the Leased Premises as of the Commencement Date. If the Leased Premises do not comply with this warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth the nature and extent of such non-compliance, rectify the same at Lessor's expense. ARTICLE PURPOSE USE. The Leased Premises shall be used and occupied only for the purpose of producing, manufacturing and selling magnetic heads. USES PROHIBITED. Lessee shall not permit the Leased Premises to be used in any manner which would render the insurance thereon void or the insurance risk more hazardous. Lessee shall not use or occupy the Leased Premises, or permit the Leased Premises to be used or occupied, contrary to any statute, rule, order, ordinance, requirement or regulation applicable thereto, or in any manner which would violate any certificate of occupancy affecting the same, or which would cause structural injury to the improvements, or cause the value or usefulness of the Leased Premises, or any part thereof, to diminish, or which would constitute a public or private nuisance or waste. If the use of the Leased Premises should at any time during the Lease term be prohibited by law or ordinance or other governmental regulation, or prevented by injunction, this Lease shall not be thereby terminated, nor shall Lessee be entitled by reason thereof to surrender the Leased Premises or to any abatement or reduction in rent, nor shall the respective obligations of the parties hereto be otherwise affected. ARTICLE RENT Beginning with the Commencement Date, Lessee shall pay to Lessor a monthly rental of $5,555.56. Lessee shall pay the entire sum of rent in the aggregate amount of $200,000 in advance upon execution of this Lease. ARTICLE IMPOSITIONS PAYMENT BY LESSEE. Lessee shall pay as additional rent for the Leased Premises, all taxes and assessments, general and special, water rates and all other impositions, (hereinafter "Impositions") ordinary and extraordinary, of every kind and nature whatsoever, which may be levied, assessed or imposed upon the Leased Premises, or any part thereof, or upon any improvements at any time situated thereon, accruing or becoming due and payable during the term of the Lease. Lessee may take the benefit of the provisions of any statute or ordinance permitting any assessment to be paid over a period of years, and Lessee shall be obligated to pay only those installments falling due during the term of this Lease. ALTERNATIVE TAXES. If at any time during the term of this Lease the method of taxation prevailing at the commencement of the term hereof shall be altered so that any new tax, assessment, levy, imposition or charge, or any part thereof, shall be measured by or be based in whole or in part upon the Lease or Leased Premises, or the rent, additional rent or other income therefrom and shall be imposed upon the Lessor, then all such taxes, assessments, levies, impositions or charges, or the part thereof, to the extent that they are so measured or based, shall be deemed to be included within the term Impositions for the purposes hereof, to the extent that such Impositions would be payable if the Leased Premises were the only property of Lessor subject to such Impositions, and Lessee shall pay and discharge the same as herein provided in respect of the payment of Impositions. There shall be excluded from Impositions all federal income taxes, federal excess profit taxes, franchise, capital stock and federal or state estate inheritance taxes of Lessor. RIGHT TO CONTEST. Lessee shall not be required to pay any tax, assessment, tax lien or other Imposition or charge upon or against the Leased Premises, or any part thereof, or the improvements situated thereon, so long as the Lessee shall, in good faith and with due diligence, contest the same or the validity thereof by appropriate legal proceeding which shall have the effect of preventing the collection of the tax, assessment, tax lien or other imposition or charge so contested, provided that, pending any such legal proceedings Lessee shall give Lessor such security as may be deemed satisfactory to Lessor to insure payment of the amount of the tax, assessment, tax lien or other imposition or charge, and all interest and penalties thereon. ARTICLE HAZARDOUS SUBSTANCES Section 11 of that certain Asset Purchase Agreement, dated as of the date hereof, among Lessor, as seller, Lessee, as purchaser, Northland Aluminum Products, Inc. and Ahead Technology, Inc. is hereby incorporated herein and made a part hereof by this reference, and Lessor and Lessee acknowledge that they are both bound by its terms. ARTICLE INSURANCE KINDS AND AMOUNTS. Lessee shall procure and maintain policies of insurance, at its own cost and expense, insuring the following: o The improvements situated upon the Leased Premises against loss or damage as provided by the standard fire and extended coverage policy. The insurance coverage shall be for not less than one hundred percent (100%) of the full replacement cost of such improvements with all proceeds of insurance payable to Lessor; and o Lessor and Lessee from all claims, demands or actions for injury to or death of any person in an amount of not less than $3 million for injury to or death of more than one person in any one occurrence to the limit of $5 million, and for damage to property in an amount of not less than $1 million made by or on behalf of, any person or persons, firm or corporation arising from, related to or connected with the Leased Premises. Such insurance shall comprehend full coverage of the indemnity set forth in Section 12.1 hereof. FORM. The aforesaid insurance shall be purchased from companies and in form, substance and amount (where not stated above) satisfactory to Lessor. The aforesaid insurance shall not be subject to cancellation except after at least thirty (30) days prior written notice to Lessor. The original insurance policies (or certificates thereof satisfactory to Lessor), together with satisfactory evidence of payment of the premiums thereon, shall be deposited with Lessor at the Commencement Date and renewals thereof not less than thirty (30) days prior to the end of the term of each such coverage. MUTUAL WAIVER OF SUBROGATION RIGHTS. Whenever (1) any loss, cost, damage or expense resulting from fire, explosion or any other casualty or occurrence is incurred by either of the parties to this Lease in connection with the Leased Premises, and (2) such party is then covered in whole or in part by insurance in place or required to be in place pursuant to this Lease with respect to such loss, cost, damage or expense, then the party so insured hereby releases the other party from any liability it may have on account of such loss, cost, damage or expense to the extent of any amount recovered by reason of such insurance and waives any right of subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release of liability and waiver of the right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within thirty (30) days following written notice, to pay such increased cost, thereupon keeping such release and waiver in full force and effect). ARTICLE DAMAGE OR DESTRUCTION REPAIR. If the Leased Premises are damaged by any cause whatsoever, including, but not limited to, any casualty, fire, acts of God, or the elements, the damage will be repaired by and at the expense of Lessor, provided such repairs can, in Lessor's opinion, be made within one hundred twenty (120) days after notice to Lessor of the occurrence of such damage and, except as set forth below, until such repairs are completed the rent will be abated in proportion to the degree to which Lessee's use of the Leased Premises is impaired during such period of repair until such use is restored. Within thirty (30) days after notice to Lessor of the occurrence of such damage, Lessor will give written notice to Lessee indicating Lessor's estimate as to whether or not the repairs can be completed in one hundred twenty (120) days. RIGHTS OF CANCELLATION. If in Lessor's opinion such repairs cannot be made within such one hundred twenty (120) day-period, or if the Leased Premises are totally destroyed, Lessee may cancel this Lease upon twenty-four (24) hours written notice. Lessee must exercise this cancellation option, it at all, within thirty (30) working days of the date of total destruction or within ten (10) days after the date Lessor notifies Lessee that the repairs cannot be made in one hundred twenty (120) days. If Lessee does not cancel this Lease within the applicable period as set forth above, Lessor, at its option, may make such repairs within a reasonable time and, in such event, this Lease will continue in effect and the rent will be abated in the manner and to the extent provided above. Lessor's election to make such repairs must be evidenced by written notice to Lessee within thirty (30) days after notice to Lessor of the occurrence of the damage advising Lessee whether or not Lessor elects to make such repairs. DELAY IN REPAIRS. In case of any damage or destruction mentioned in this Article which Lessor is required or undertakes to repair as provided herein, if Lessor has not restored and rebuilt the Leased Premises (exclusive of any property of Lessee or improvements installed by Lessee located therein, unless the damage results from the negligence of Lessor, its agents or employees) to substantially the same condition as existed immediately prior to such damage or destruction within six months after notice to Lessor of the occurrence of such damage or destruction, Lessee may terminate this Lease by notice to Lessor any time prior to completion of the required repairs. NO CONSEQUENTIAL DAMAGES. No damages, compensation or claim will be payable by Lessor for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Leased Premises, unless the repair or restoration is necessitated by the negligence of Lessor, its agents or employees. Lessor will use commercially reasonable efforts to effect such repair or restoration promptly and, in such manner as not unreasonably to interfere with Lessee's use and occupancy. INSURANCE. Lessor is not required to carry insurance of any kind on Lessee's personal property and, unless such property is damaged as a result of the negligence of Lessor, its agents or employees, Lessor is not obligated to repair any damage thereto or to replace the same. DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds three (3) months' Rent, Lessor may, at Lessor's option, terminate this Lease effective one hundred twenty (120) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. ADVANCE PAYMENTS. Upon the abatement of rent or the termination of this Lease pursuant to this Article 8, an equitable adjustment shall be made concerning advance Rent and any other advance payments made by Lessee to Lessor. ARTICLE CONDEMNATION EMINENT DOMAIN. If all or any part of the Leased Premises are taken as a result of the exercise of the power of eminent domain or any agreement in lieu thereof, this Lease will terminate as to the part so taken as of the date of taking and, in the case of a partial taking, either Lessor or Lessee has the right to terminate this Lease as to the balance of the Leased Premises by giving written notice to the other within thirty (30) days after such date; provided, however, that a condition to the exercise by Lessee of such right to terminate is that the portion of the Leased Premises taken is of such extent and nature as substantially to handicap, impede or impair Lessee's use of the balance of the Leased Premises. The proceeds of any condemnation award or any private sale in lieu thereof will belong to and be paid to Lessor, except that Lessee will receive from the proceeds the following: o If separately scheduled in the award, a sum attributable to any Lessee improvements or alterations made to the Leased Premises by Lessee in accordance with this Lease, which Lessee improvements or alterations Lessee has the right to remove from the Leased Premises pursuant to the provisions of this Lease; o If separately scheduled in the award, a sum equal to the present value of any excess of the market value of the Leased Premises for the remainder of the term, exclusive of the Lessee improvements or alterations for which Lessee is compensated under this Article, over the minimum monthly rent payable for the remainder of the term; o If separately scheduled in the award, a sum attributable to that portion of the award constituting severance damages for the restoration of the Leased Premises, business interruption, trade fixtures or relocation expenses; and o If separately scheduled in the award, a sum to pay for Lessee's moving expenses. There will be no abatement of rent by reason of any portion of the Leased Premises being unusable for a period equal to one day or less. PARTIAL TAKING. In the case of a partial taking which does not result in a termination of this Lease, Rent and Impositions shall be reduced, proportionately. FURTHER ASSURANCES. Each party agrees to execute and deliver to the other all instructions that may be required to effectuate the provisions of this Article. If this Lease is terminated, any prepaid rent or other prepaid items must be refunded, pro-rata, to Lessee. ARTICLE MAINTENANCE AND REPAIRS MAINTENANCE. Lessee shall keep and maintain the entire exterior and interior of the Leased Premises, including the parking area, in good condition and repair, including any necessary replacements, and in full compliance with all health and police regulations in force. Lessee shall further keep and maintain the improvements at any time situated upon the Leased Premises and all sidewalks and areas adjacent thereto, safe, secure and clean, specifically including, but not by limitation, snow and ice clearance and planting and replacing flowers and landscaping, in conformity with the lawful and valid requirements of any govern mental authority having jurisdiction over the Leased Premises. Lessor shall have no obligation to maintain, repair or replace the Leased Premises. ALTERATIONS. Lessee shall not create any openings in the roof or exterior walls, nor shall Lessee make any alterations or additions to the Leased Premises without the prior written consent of Lessor. Lessee shall make all additions, improvements, alterations and repairs on the Leased Premises and on and to the appurtenances and equipment thereof, required by any governmental authority or which may be made necessary by the act or neglect of any person, firm or corporation (public or private), including supporting the streets and alleys adjoining the Leased Premises. ARTICLE ASSIGNMENT AND SUBLETTING CONSENT REQUIRED. Lessee shall not, without Lessor's prior written consent, or mortgagee's consent (1) assign, convey or mortgage this Lease or any interest under it; (2) allow any transfer thereof or any lien upon Lessee's interest by operation of law; (3) sublet the Leased Premises or any part thereof; or (4) permit the use or occupancy of the Leased Premises or any part thereof by anyone other than Lessee. Lessor agrees that it will not unreasonably withhold its consent to any assignment or sublease, provided that if Lessee requests Lessor's consent to a sublease of the entire Leased Premise, Lessor may, in lieu of granting such consent or reasonably withholding the same, terminate this Lease, effective on the commencement date specified in the sublease to which Lessor's consent was requested. No permitted assignment or subletting shall relieve Lessee of Lessee's covenants and agreements hereunder and Lessee shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment of subletting had been made. MERGER OR CONSOLIDATION. Lessee may, without Lessor's consent, assign this Lease to any corporation resulting from a merger or consolidation of the Lessee upon the following conditions: o That Lessee is not at such time in default hereunder; and o That such successor shall execute an instrument in writing fully assuming all of the obligations and liabilities imposed upon Lessee hereunder and deliver the same to Lessor. OTHER TRANSFER OF LEASE. Lessee shall not allow or permit any transfer of this Lease, or any interest hereunder, by operation of law, or convey, mortgage, pledge, or encumber this Lease or any interest herein. ARTICLE LIENS AND ENCUMBRANCES ENCUMBERING TITLE. Lessee shall not do any act which shall in any way encumber the title of Lessor in and to the Leased Premises, nor shall the interest or estate of Lessor in the Leased Premises be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Lessee. Any claim to, or lien upon, the Leased Premises arising from any act or omission of Lessee shall accrue only against the leasehold estate of Lessee and shall be subject to and subordinate to the paramount title and rights of Lessor in and to the Leased Premises. LIENS AND RIGHT TO CONTEST. Lessee shall not permit the Leased Premises to become subject to any mechanic's, laborer's, or materialman's lien on account of labor or material furnished to Lessee or claimed to have been furnished to Lessee in connection with work of any character performed or claimed to have been performed on the Leased Premises by, or at the direction or sufferance of, Lessee, provided that Lessee shall have the right to contest in good faith and with reasonable diligence the validity of any such lien or claimed lien if Lessee shall give to Lessor such security as may be deemed satisfactory to Lessor to insure payment thereof and to prevent any sale, foreclosure, or forfeiture of the Leased Premises by reason of nonpayment thereof, and provided further that, on final determination of the lien or claim for lien, Lessee shall immediately pay any judgment rendered, with all proper costs and charges, and shall have the lien released and any judgment satisfied. ARTICLE UTILITIES The cost of all service, including, but not limited to, gas, water, sewer and electricity shall be paid by Lessee. Lessor shall provide, to the extent now existing, to the outer boundaries of the Leased Premises service connections for water, sewer, electricity and gas. ARTICLE INDEMNIFICATION Lessee will protect, indemnify and save harmless Lessor and Lessor's agents from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Lessor by reason of (1) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Premises or any part thereof or the adjoining properties, sidewalks, curbs, streets or ways; (2) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, or (3) performance of any labor or services or the furnishing of any materials or other property in respect of the Leased Premises or any part thereof. In case any action, suit or proceeding is brought against Lessor and/or Lessor's agents (and/or Lessor's beneficiary or beneficiaries if Lessor is a land trustee) by reason of any such occurrence, Lessee will, at Lessee's expense, resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel approved by Lessor. ARTICLE INSPECTION Lessor, or Lessor's agent, may enter the Leased Premises upon reasonable prior notice for the purpose of inspecting same, or of making repairs which Lessee may neglect or refuse to make in accordance with the covenants and agreements of this Lease, and also for the purpose of showing the Leased Premises to persons wishing to purchase the same, or at any time within one (1) year prior to the expiration of the Lease term, to persons wishing to rent the Leased Premises. Lessee shall, within one (1) year prior to the expiration of the Lease term, permit the usual notice of "To Let" or "For Sale" to be placed on the Leased Premises and to remain thereon without molestation. ARTICLE QUIET ENJOYMENT So long as Lessee is not in default under the covenants and agreements of this Lease, Lessee's quiet and peaceable enjoyment of the Leased Premises shall not be disturbed or interfered with by Lessor or by any person claiming by, through or under Lessor. ARTICLE SUBORDINATION OR SUPERIORITY The rights and interest of Lessee under this Lease shall be subject and subordinate to any mortgage or trust deed that may be placed upon the Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof, if the mortgagee or trustee named in said mortgages or trust deeds shall elect to subject and subordinate the rights and interest of Lessee under this Lease to the lien of its mortgage or deed of trust and shall agree to recognize this Lease of Lessee in the event of foreclosure if Lessee is not in default. Any mortgagee or trustee may elect to give the rights and interest of Lessee under this Lease priority over the lien of its mortgage or deed of trust. In the event of either such election and upon notification by such mortgagee or trustee to Lessee to that effect, the rights and interest of Lessee under this Lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the lien of the mortgage or trust deed, whether this Lease is dated prior to or subsequent to the date of the mortgage or trust deed. Lessee shall execute and deliver whatever instruments may be required for such purposes, and in the event Lessee fails so to do within thirty (30) days after demand in writing, Lessee does hereby make, constitute and irrevocably appoint Lessor as its attorney-in-fact and in its name, place, and stead so to do. ARTICLE SURRENDER OF PREMISES SURRENDER. Upon the termination of this Lease, whether by forfeiture, lapse of time or otherwise, or upon the termination of Lessee's right to possession of the Leased Premises, Lessee will at once surrender and deliver up the Leased Premises, together with all improvements thereon not removed pursuant to Section 18.2, to Lessor in good condition and repair and at least the same condition as existed on the Commencement Date, reasonable wear and tear excepted. IMPROVEMENTS. Upon the termination or expiration of this Lease, Lessee may remove Lessee's additions, hardware, trade and nontrade fixtures and improvements, and all of Lessee's personal property and equipment, provided that Lessee shall repair any injury or damage to the Leased Premises which may result from such removals. Such improvements shall include all plumbing, lighting, electrical, heating, cooling and ventilating fixtures and equipment and other articles of personal property used in the operation of the Leased Premises (as distinguished from operations incident to the business of Lessee), together with all duct work. If Lessee does not remove Lessee's furniture, machinery, trade fixtures and all other items of personal property of every kind and description from the Leased Premises prior to the end of the term, however ended, Lessor may, at its option, remove the same and deliver them to any other place of business of Lessee or warehouse the same, and Lessee shall pay the cost of such removal, including the repair of any injury or damage to the Leased Premises resulting from such removal, delivery and warehousing to Lessor on demand, or Lessor may treat such property as having been conveyed to Lessor with this Lease as a Bill of Sale, without further payment or credit by Lessor to Lessee. HOLDING OVER. Any holding over by Lessee of the Leased Premises after the expiration of this Lease shall operate and be construed to be a tenancy from month to month only, at a monthly rental of the rate of rent payable hereunder for the Lease term for the first sixty (60) days of such holdover period, and thereafter at the rate of one and one-half times the rental rate for the Lease term. Rent payable during the holdover period shall be due monthly in advance on the first day of each month at Lessor's office. ARTICLE REMEDIES EVENTS OF DEFAULT. Lessee further agrees that any one or more of the following events shall be considered events of default as said term is used herein and Lessee shall be in default if any of the following occurs: o A decree or order appointing a receiver of the property of Lessee shall be made and such decree or order shall not have been vacated, stayed or set aside within sixty (60) days from the date of entry or granting thereof; o Lessee shall vacate the Leased Premises or abandon the same during the term hereof o If Lessee shall fail to contest the validity of any lien or claimed lien, including tax liens levied by any revenue officer or similar officer, and to give security to Lessor to insure payment thereof, or, having commenced to contest the same and having given such security, shall fail to prosecute such contest with diligence, or shall fail to have the same released and to satisfy any judgment rendered thereon, and such default continues for fifteen (15) days after notice thereof in writing to Lessee; o Lessee shall default in any other covenant and agreement herein contained to be kept, observed and performed by Lessee, and such default shall continue for thirty (30) days after notice thereof in writing to Lessee. LESSOR'S REMEDIES. Upon the occurrence of any one or more of such events of default, Lessor may terminate this Lease. Upon termination of this Lease, Lessor may reenter the Leased Premises, with or without process of law and using such force as may be necessary, and remove all persons, fixtures, and chattels therefrom and Lessor shall not be liable for any damages resulting therefrom. Such re-entry and repossession shall not work a forfeiture of the rents to be paid and the covenants to be performed by Lessee during the full term of this Lease. Upon such repossession of the Leased Premises, Lessor shall be entitled to recover as liquidated damages and not as a penalty a sum of money equal to the value of the rent and other sums provided herein to be paid by Lessee to Lessor for the remainder of the Lease term. Upon the happening of any one or more of the above-mentioned events, Lessor may repossess the Leased Premises by forcible entry or detainer suit, or otherwise, without demand or notice of any kind to Lessee (except as hereinabove expressly provided for) and without terminating this Lease, in which event Lessor may, but shall be under no obligation so to do, relet all or any part of the Leased Premises for such rent and upon such terms as shall be satisfactory to Lessor, including the right to relet the Leased Premises for a term greater or lesser than that remaining under the Lease term, and the right to relet the Leased Premises as part of a larger area, and the right to change the character or use made of the Leased Premises. For the purpose of such reletting, Lessor may decorate or make any repairs, changes, alterations or additions in or to the Leased Premises that may be necessary or convenient If Lessor does not relet the Leased Premises, Lessee shall not be obligated to pay any further amounts to Lessor, and, as its sole remedy, Lessor shall be entitled to retain any rent or other amounts paid in advance as liquidated damages if the default occurs during the initial term of this Lease. If the default occurs during any holdover period, rent shall continue to be due and payable pursuant to Section 18.3. If the Leased Premises are relet, then any sums realized from such reletting, after paying all of the reasonable expenses of such reletting and the collection of the rent accruing therefrom (including, but not by way of limitation, redecorations, repairs, changes, alterations, additions, attorneys' fees and brokers' commissions), up to the amount of prepaid rent held by Lessor, shall be paid to Lessee. If default shall be made in any covenant, agreement, condition or undertaking herein contained to be kept, observed and performed by Lessee, other than the making of any payments as herein provided which cannot with due diligence be cured within a period of thirty (30) days, and if notice thereof in writing shall have been given to Lessee, and if Lessee, prior to the expiration of thirty (30) days from and after the giving of such notice, commences to eliminate the cause of such default and proceeds diligently and with reasonable dispatch to take all steps and do all work required to cure such default and does so cure such default, then Lessor shall not have the right to declare the term ended by reason of such default or to repossess without terminating the Lease, provided that the curing of any default in such manner shall not be construed to limit or restrict the right of Lessor to declare the term ended or to repossess without terminating the Lease, and to enforce all of its rights and remedies hereunder for any other default not so cured. CUMULATIVE REMEDIES. No remedy herein or otherwise conferred upon or reserved to Lessor shall be considered to exclude or suspend any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given hereunder now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Lessee may be exercised from time to time and as often as the occasion may arise or as may be deemed expedient. No delay or omission of Lessor to exercise any right or power arising from any default shall impair any such right or power nor shall it be construed to be a waiver of any such default or any acquiescence therein. Neither the rights herein given to receive, collect, sue for or distrain for any rent or rents, monies or payments, or to enforce the terms, provision and condition of this Lease, or to prevent the breach or nonobservance thereof, or the exercise of any such right or of any other right or remedy hereunder or otherwise granted or arising, shall in any way affect, impair or toll the right or power of Lessor to declare the Lease terms hereby granted ended, to terminate this Lease as provided for in this Lease, or to repossess without terminating the Lease, because of any default in or breach of the covenants, provisions or conditions of this Lease. WAIVER. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. ARTICLE MISCELLANEOUS FINANCIAL STATEMENTS. Lessee shall furnish Lessor annually within ninety (90) days after the end of each of Lessee's fiscal years a copy of its annual unaudited statement. It is mutually agreed that Lessor may deliver a copy of such statements to its mortgagee, but otherwise Lessor shall treat such statements and information contained therein as confidential. ESTOPPEL CERTIFICATES. Lessee shall at any time and from time to time upon not less that ten (10) days' prior written request from Lessor, execute, acknowledge and deliver to Lessor, In form reasonably satisfactory to Lessor and/or Lessor's mortgagees, a written statement certifying that Lessee has accepted the Leased Premises, that this Lease is unmodified and in full force and effect (or, if there have been modifications, stating the modifications), that the Lessor is not in default hereunder, the date to which the rental and other charges have been paid in advance, if any, or such other accurate certification as may reasonably be required by Lessor or Lessor's mortgagee, and agreeing to give copies to any mortgagee of Lessor of all notices by Lessee to Lessor. It is intended that any such statement delivered pursuant to this section may be relied upon by any prospective purchaser of the Leased Premises, mortgagee of the Leased Premises or their respective successors and assigns. RIGHT TO CURE. Lessor may, but shall not be obligated to, cure any default by Lessee specifically including, but not by way of limitation, Lessee's failure to pay Impositions, obtain insurance, make repairs, or satisfy lien claims, after complying with the notice provisions established in Article 19, and whenever Lessor so elects, all costs and expenses paid by Lessor in curing such default, including, without limitation, reasonable attorneys' fees, shall be so much additional rent due on the next rent date after such payment together with interest (at the rate of fifteen percent (15%) per annum from the date of advancement to the date of repayment by Lessee to Lessor). AMENDMENTS. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned except by a written instrument, duly signed, acknowledged and delivered by the other party; and no act or acts, omission or omissions or series of acts or omissions, or waiver, acquiescence or forgiveness by Lessor as to any default in or failure to perform, either in whole or in part, by Lessee, any of the covenants, terms and conditions of this Lease, shall be deemed or construed to be a waiver by Lessor of the right at all times thereafter to insist upon the prompt, full and complete performance by Lessee of each and all of the covenants, terms and conditions thereafter to be performed in the same manner and to the same extent as the same are herein covenanted to be performed by Lessee. NOTICES. All notices to or demands upon Lessor or Lessee desired or required to be given under any of the provisions hereof shall be in writing. Any notices or demands from Lessor to Lessee shall be deemed to have been duly and sufficiently given if a copy thereof has been mailed by United States registered or certified mail in envelope properly stamped and addressed to Lessee as follows: Ahead Wisconsin Acquisition Corporation c/o 3105 Patrick Henry Drive Santa Clara, California 95054 Attention: Steve Conlisk or at such address as Lessee may theretofore have furnished by written notice to Lessor, and any notices or demands from Lessee to Lessor shall be deemed to have been duly and sufficiently given if mailed by United States registered or certified mail in an envelope properly stamped and addressed to Lessor as follows: Vikron, Inc. c/o Northland Aluminum Products, Inc. 5005 Highway 7 Minneapolis, Minnesota 55416 Attention: David Dalquist or at such address as Lessor may theretofore have furnished by written notice to Lessee. The effective date of such notice shall be the date of receipt. RECORDATION. This Lease shall not be recorded but the parties agree, at the request of either of them, to execute a Short Form Lease for recording, containing the name of the parties, the legal description and the terms of the Lease. TIME OF ESSENCE. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Lessor and Lessee. CAPTIONS. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SEVERABILITY. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. APPLICABLE LAW. This Lease shall be construed and enforced in accordance with the laws of the state where the Leased Premises are located. BINDING EFFECT. All of the covenants, agreements, conditions and undertakings contained in this Lease shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators, successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. BROKERAGE. Lessee warrants that it has had no dealings with any broker or agent in connection with this Lease. Lessee covenants to pay, hold harmless and indemnify Lessor from and against any and all costs, expenses or liability for any compensation, commissions or charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof. Lessor warrants that it has had no dealings with any broker or agent in connection with this Lease. Lessor covenants to pay, hold harmless and indemnify Lessee from and against any and all costs, expenses or liability for any compensation, commissions or charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof LESSOR. The term "Lessor" as used in this Lease, so far as covenants or obligations on the part of Lessor are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Leased Premises, and in the event of any transfer or transfers of the title to such fee, Lessor herein named (and in case of any subsequent transfer or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Lessor contained in this Lease there after to be performed, provided that any funds in the hands of such Lessor or the then grantor at the time of such transfer, in which Lessee has interest, shall be turned over to the grantee, and any amount then due and payable to Lessee by Lessor or the then grantor under any provisions of this Lease, shall be paid to Lessee. LENDER'S REQUIREMENTS. If any mortgagee or committed financer of Lessor should require, as a condition precedent to the closing of any loan or the disbursal of any money under any loan, that this Lease be amended or supplemented in any manner Lessor shall give written notice thereof to Lessee, which notice shall be accompanied by a Lease Supplement Agreement embodying such amendments and supplements. Lessee shall, within ten (10) business days after the effective date of Lessor's notice, either consent to such amendments and supplements (which consent shall not be unreasonably withheld) and execute the tendered Lease Supplement Agreement, or deliver to Lessor a written statement of its reason or reasons for refusing to so consent and execute. Failure of Lessee to respond within the ten (10) business day period shall be a default under this Lease without further notice. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease Agreement on the day and year first above written. LESSOR: LESSEE: VIKRON, INC. AHEAD WISCONSIN ACQUISITION CORPORATION By: /s/ DAVID Dalquist By: /s/ STEVE CONLISK ------------------------------- ------------------------------- Name: David Dalquist Name: /s/ STEVE CONLISK ----------------------------- ---------------------------- Title: President Title: Vice President-Finance ---------------------------- ---------------------------- SCHEDULE 8.1.1 FORM OF NON-COMPETITION AGREEMENT NON-COMPETITION AGREEMENT THIS NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of June 17, 1996, by and among Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Vikron, Inc., a Wisconsin corporation ("Seller") and Donald A. Puls (the "Shareholder") (Shareholder and Seller are sometimes referred to herein as "Selling Parties"), with reference to the following: A. Seller is engaged in the business of the manufacturing, producing, selling and distributing magnetic data reading and recording heads and other types of magnetic heads. B. Concurrent with the execution and delivery of this Agreement, Selling Parties have conveyed and assigned to Purchaser certain of the assets and properties of Seller and Purchaser has assumed certain liabilities of Seller pursuant to a certain Asset Purchase Agreement, dated as of June 17, 1996, among Purchaser, Seller, Northland Aluminum Products, Inc., a Minnesota corporation, and Ahead Technology, Inc., a Delaware corporation (the "Asset Purchase Agreement"). Capitalized terms used but not defined herein shall have the respective meanings attributed to such terms in the Asset Purchase Agreement. C. Shareholder is the President of Seller and holder of shares of capital stock of Seller. Shareholder also is actively engaged in all aspects of Seller's operations. Shareholder knows or has access to confidential information which is competitively valuable and/or trade secrets associated with the operations of Seller. NOW, THEREFORE, in consideration of the respective covenants of the parties set forth in this Agreement and as an inducement for Purchaser to enter into, and consummate the transactions under, the Asset Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Non-Competition. Selling Parties, jointly and severally, agree that, for a period of thirty six (36) months after the Closing Date, within the territory set forth in Schedule 1 hereto, none of the Selling Parties, either jointly or severally, nor any of their respective associates or affiliates, shall directly or indirectly own, operate, become interested in, or carry on or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of Seller as conducted on or prior to the Closing, including, without limitation, the manufacture, production, distribution or sale of products similar in nature or type to that offered for sale by Seller on or prior to the Closing. Without limiting any of the foregoing, the parties agree that this covenant is intended to prohibit such Selling Parties, either jointly or severally, from engaging in such proscribed activities, either, as the case may be, as an individual, owner, partner, employee, consultant, stockholder (except as a holder of stock in a corporation whose stock is publicly traded and which is subject to the reporting requirements of the Securities Exchange Act of 1934, and then only to the extent of owning not more than one percent (1%) of the issued and outstanding stock of such corporation), agent or salesman for any person, firm or corporation, or otherwise. 2. Interference; Confidentiality. Selling Parties, jointly and severally, agree that: 2.1 For a period of thirty six (36) months after the Closing Date, neither the Selling Parties nor any of their associates or affiliates shall hire, directly or indirectly, any employee employed by Seller as of the Closing Date who is subsequently employed by Purchaser during the term hereof, or attempt to induce any such employee to leave such employ and to work, directly or indirectly, for or with the Selling Parties or any such associates or affiliates thereof. 2.2 For a period of thirty six (36) months after the Closing Date, neither the Selling Parties nor any of their associates or affiliates shall solicit, induce or attempt to induce any customer of Seller at the Closing Date to cease doing business in whole or in part with Purchaser. 2.3 All documents, inventions, customer, supplier and prospect lists, business, marketing and sales information and plans, catalogues, trademarks, processes, drawings, programs, designs, names, copyrights, customer requirements, price and cost information, records, techniques, know-how, business secrets and other information which has come into the possession of any of the Selling Parties from time to time in the course of and for the business of Seller prior to the Closing Date shall be deemed to be the confidential and proprietary information of Purchaser. Each of the Selling Parties shall keep confidential, and shall not divulge to any other party or use following the date of this Agreement, any confidential information or business secrets of Seller existing prior to the Closing Date, including, but not limited to, any matters deemed confidential and proprietary as provided in this section. 3. Separate Covenants. The parties intend that the covenants and subparagraphs contained in Paragraphs 1 and 2 hereof shall be construed as a series of separate covenants, one for each jurisdiction specified. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in the immediately preceding subparagraph. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in the immediately preceding subparagraph, then such unenforceable covenants shall be deemed eliminated from these provisions for the purpose of those proceedings solely to the extent necessary to permit the remaining separate covenants to be enforced. 4. Remedies. In the event that any party breaches any of its covenants under this Agreement, it is agreed that the non-defaulting party or parties shall be entitled to obtain from a court of competent jurisdiction injunctive relief (including but not limited to specific performance) directing that such defaulting party cease and desist from such prohibited conduct and enforcing the agreements of the defaulting party hereunder. Such right to injunctive relief shall be in addition to all other legal and equitable rights and remedies available to such non-defaulting party. 5. Miscellaneous. 5.1 Notices. Any notice to Purchaser required or permitted under this Agreement shall be given in accordance with the provisions of the Asset Purchase Agreement. 5.2 Severability. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 5.3 Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior oral and written agreements, understandings, commitments and practices among the parties with respect thereto. No amendments, modifications or supplements to this Agreement may be made except by a writing signed by the party to be bound. 5.4 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Wisconsin. 5.5 Further Assurances. Each of the parties hereto shall execute and deliver any and all additional instruments, documents and other assurances, and shall do any and all acts and things reasonably necessary in connection with the performance of their respective obligations hereunder, to carry out the intent of the parties hereto. 5.6 Waiver. No delay or omission on the part of any party hereto in exercising any right under this Agreement shall operate as a waiver of such right or any other right, and no waiver of any right conferred by this Agreement shall be binding unless signed by or on behalf of each such party. A waiver on one occasion shall not be construed as a bar to or a waiver of any party's right to enforce any rights hereunder on any future occasion. 5.7 Successors and Assigns. This Agreement shall apply to, and inure to the benefit of, and be binding upon and enforceable against the parties hereto and their respective successors and permitted assigns. 5.8 Attorneys' Fees. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 5.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to be one and the same document. AGREED TO AND ACCEPTED by the parties hereto as of the day and year first above written. VIKRON, INC. By: /s/ DONALD A. PULS ----------------------------------- Donald A. Puls, President /s/ DONALD A. PULS --------------------------------------- DONALD A. PULS ("Shareholder") AHEAD WISCONSIN ACQUISITION CORPORATION By: /s/ STEVE CONLISK ----------------------------------- Name: /s/ Steve Conlisk --------------------------------- Title: Vice President-Finance -------------------------------- SCHEDULE 1 Geographic Territory All cities, counties and jurisdictions within the United States and worldwide within which or to Seller has conducted its business or made sales on or prior to the date hereof, including, without limitation, the County of Polk, in the State of Wisconsin. SCHEDULE 9.2.1 FORM WARRANTY OF BILL OF SALE WARRANTY BILL OF SALE This Warranty Bill of Sale is given with respect to and in accordance with the Asset Purchase Agreement, dated as of June 17, 1996 (the "Purchase Agreement"), between Vikron, Inc., a Wisconsin corporation ("Seller"), Northland Aluminum Products, Inc., a Minnesota corporation, Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), and Ahead Technology, Inc., a Delaware corporation. Capitalized terms not otherwise defined in this Warranty Bill of Sale shall have the meanings given to them in the Purchase Agreement. 1. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller hereby sells, transfers and assigns to Purchaser (and to Purchaser's successors and assigns forever) all of Seller's rights, title and interest in and to the Assets, including, without limitation, all Fixed Assets listed in Schedule 1.1.1 of the Purchase Agreement and all inventory, work-in-progress and stock-in-trade of Seller. 2. Subject to the terms and conditions of the Purchase Agreement, Seller represents and warrants to Purchaser that (i) Seller has good and marketable title to all of the Assets, and (ii) the assets are not subject to any mortgage, pledge, lien, conditional sales agreement, security agreement, encumbrance or charge of any kind or nature. IN WITNESS WHEREOF, Seller has executed this Warranty Bill of Sale, effective as of June 17, 1996. VIKRON, INC. By: /s/ DONALD A. PULS --------------------------------- Donald A. Puls, President SCHEDULE 9.2.2 FORM OF ASSIGNMENT OF INTANGIBLES ASSIGNMENT OF INTANGIBLES This Assignment is given with respect to and in accordance with the Asset Purchase Agreement, dated as of June 17, 1996 (the "Purchase Agreement"), between Vikron, Inc., a Wisconsin corporation ("Seller"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Northland Aluminum Products, Inc. and Ahead Technology, Inc., a Delaware corporation. Capitalized terms not otherwise defined in this Assignment shall have the respective meanings given to them in the Purchase Agreement. Seller, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, hereby sells, assigns and transfers to Purchaser all of its right, title and interest in and to the goodwill and other intangibles of Seller sold pursuant to the Purchase Agreement, including, without limitation, the Proprietary Rights and the Accounts Receivable. IN WITNESS WHEREOF, Seller has executed this Assignment of Intangibles as of June 17, 1996. VIKRON, INC. By: /s/ DONALD A. PULS --------------------------------- Donald A. Puls, President SCHEDULE 9.2.3 FORM OF ASSIGNMENT OF ASSUMPTION OF CONTRACTS ASSIGNMENT AND ASSUMPTION OF CONTRACTS This Assignment and Assumption of Contracts is given with respect to and in accordance with the Asset Purchase Agreement, dated as of June 17, 1996 (the "Purchase Agreement"), among Vikron, Inc., a Wisconsin corporation ("Assignor"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Assignee"), Northland Aluminum Products, Inc., a Minnesota corporation, and Ahead Technology, Inc., a Delaware corporation. Capitalized terms not otherwise defined in this Assignment and Assumption of Contracts shall have the respective meanings given to them in the Purchase Agreement. 1. Assignor, for good and valuable consideration, the receipt and adequacy of which is acknowledged, hereby assigns and transfers to Assignee all of Assignor's right, title and interest in and to all of the contracts and commitments listed on Exhibit "A" attached hereto (the "Assigned Contracts"). 2. Assignee hereby assumes and agrees to perform all of the obligations of Assignor under the Assigned Contracts from and after the Closing Date. 3. Assignee is not assuming any liability or obligation of Assignor relating to or arising from Assignor's performance of or failure to perform any obligation under any Assigned Contracts prior to the Closing Date. 4. This Assignment and Assumption of Contracts will not affect Assignee's right to assert any defense under any Assigned Contract, at law, in equity or otherwise against the validity or enforceability of any liability or obligation under any Assigned Contract. 5. This Assignment and Assumption of Contracts may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to be one and the same document. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment and Assumption of Contracts as of June 17, 1996. VIKRON, INC. By: /s/ DONALD A. PULS --------------------------------- Donald A. Puls, President AHEAD WISCONSIN ACQUISITION CORPORATION By: /s/ STEVE CONLISK --------------------------------- Name: Steve Conlisk Title: Vice President--Finance Exhibit "A" SCHEDULE 9.2.9(a) FORM OF SELLER'S CERTIFICATE CERTIFICATE OF SECRETARY OF VIKRON, INC. Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of June 17, 1996, by and among Vikron, Inc., a Wisconsin corporation ("Seller"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Northland Aluminum Products, Inc., a Minnesota corporation ("Northland") and Ahead Technology, Inc., a Delaware corporation. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. The undersigned, Susan Brust, hereby certifies that: 1. She is the duly elected and qualified Secretary of Seller. 2. Attached hereto as Exhibit A is a true and correct copy of the Articles of Incorporation of Seller in effect as of the date hereof. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Seller in effect as of the date hereof. 4. Attached hereto as Exhibit C is a true and correct copy of (i) resolutions of the Board of Directors of Seller adopted by unanimous written consent of the Board on June __, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Seller's sale of the Assets to Purchaser have been duly approved and adopted by such Board of Directors; and (ii) resolutions of the shareholders of Seller adopted by unanimous written consent of such shareholders on June 17, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Seller's sale of the Assets to Purchaser have been duly approved and adopted by such shareholders. 5. There is currently no proceeding for the dissolution or liquidation of Seller or threatening its existence. 6. All of Seller's obligations set forth in Paragraphs 5, 6 and 8 of the Asset Purchase Agreement have been completed, satisfied and complied with. 7. Seller's conditions to Closing set forth in Section 7 of the Asset Purchase Agreement are either satisfied or deemed waived. 8. Each of the persons set forth below are the duly elected and qualified incumbents in the offices set forth below each person's name, have been and are duly authorized to sign, on behalf of Seller, the Asset Purchase Agreement and all documents relating to the transactions contemplated therein which such person has signed and the signature set forth opposite each person's name below is such person's authentic and genuine signature. Name Signature ---- --------- Donald A. Puls /s/ DONALD A. PULS President Susan Brust /s/ SUSAN BRUST Secretary IN WITNESS WHEREOF, the undersigned has set her hand hereto as of the 17th day of June, 1996. /s/ SUSAN BRUST ------------------------------- Susan Brust Secretary Vikron, Inc. I, Donald A. Puls, President of Vikron, Inc., a Wisconsin corporation ("Seller"), certify that Susan Brust is the duly appointed and acting Secretary of Seller and that the signature above is genuine. Dated: June 17, 1996 /s/ DONALD A. PULS -------------------------------- Donald A. Puls President Vikron, Inc. EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS EXHIBIT C RESOLUTIONS SCHEDULE 9.2.9(b) FORM OF NORTHLAND'S CERTIFICATE CERTIFICATE OF SECRETARY OF NORTHLAND ALUMINUM PRODUCTS, INC. Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of June 17, 1996, by and among Vikron, Inc., a Wisconsin corporation ("Seller"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Northland Aluminum Products, Inc., a Minnesota corporation ("Northland"), and Ahead Technology, Inc., a Delaware corporation. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. The undersigned, Dorothy Dalquist, hereby certifies that: 1. She is the duly elected and qualified Secretary of Northland. 2. Attached hereto as Exhibit A is a true and correct copy of the Articles of Incorporation of Northland in effect as of the date hereof. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Northland in effect as of the date hereof. 4. Attached hereto as Exhibit C is a true and correct copy of (i) the resolutions duly adopted by the Board of Directors of Northland by unanimous written consent on June 17, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Northland's purchase of the Assets from Seller have been duly approved and adopted by such Board of Directors. 5. There is no proceeding for the dissolution or liquidation of Northland or threatening its existence. 6. All of Northland's obligations set forth in Paragraphs 5, 6 and 8 of the Asset Purchase Agreement have been completed, satisfied and complied with. 7. Each of the persons set forth below are the duly elected and qualified incumbents in the offices set forth below each person's name, have been and are duly authorized to sign, on behalf of Northland, the Asset Purchase Agreement and all documents relating to the transactions contemplated therein which such person has signed and the signature set forth opposite each person's name below is such person's authentic and genuine signature. Name Signature ---- --------- David Dalquist /s/ DAVID DALQUIST President --------------------------------- Dorothy Dalquist /s/ DOROTHY DALQUIST Secretary --------------------------------- IN WITNESS WHEREOF, the undersigned has set her hand hereto as of the 17th day of June, 1996. /s/ DOROTHY DALQUIST --------------------------------- Dorothy Dalquist Secretary Northland Aluminum Products, Inc. I, David Dalquist, President of Northland Aluminum Products, Inc. ("Purchaser"), certify that Dorothy Dalquist is the duly appointed and acting Secretary of Northland and that the signature above is genuine. Dated: June 17, 1996 /s/ DAVID DALQUIST --------------------------------- David Dalquist President Northland Aluminum Products, Inc. EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS EXHIBIT C BOARD RESOLUTIONS SCHEDULE 9.2.9(c) FORM OF PURCHASER'S CERTIFICATE CERTIFICATE OF SECRETARY OF AHEAD WISCONSIN ACQUISITION CORPORATION Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of June 17, 1996, by and among Vikron, Inc., a Wisconsin corporation ("Seller"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Northland Aluminum Products, Inc., a Minnesota corporation, and Ahead Technology, Inc., a Delaware corporation. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. The undersigned, Steve Conlisk, hereby certifies that: 1. He is the duly elected and qualified Secretary of Purchaser. 2. Attached hereto as Exhibit A is a true and correct copy of the Articles of Incorporation of Purchaser in effect as of the date hereof. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Purchaser in effect as of the date hereof. 4. Attached hereto as Exhibit C is a true and correct copy of the resolutions duly adopted by the Board of Directors of Purchaser by unanimous written consent on June 17, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Purchaser's purchase of the Assets from Seller have been duly approved and adopted by such Board of Directors. 5. There is no proceeding for the dissolution or liquidation of Purchaser or threatening its existence. 6. All of Purchaser's obligations set forth in Paragraph 7 of the Asset Purchase Agreement have been completed, satisfied and complied with. 7. Purchaser's conditions to Closing set forth in Section 6 of the Asset Purchase Agreement are satisfied or deemed waived. 8. Each of the persons set forth below are the duly elected and qualified incumbents in the offices set forth below each person's name, have been and are duly authorized to sign, on behalf of Purchaser, the Asset Purchase Agreement and all documents relating to the transactions contemplated therein which such person has signed and the signature set forth opposite each person's name below is such person's authentic and genuine signature. Name Signature ---- --------- Arthur Honegger /s/ ARTHUR HONEGGER President -------------------------------- Steve Conlisk /s/ STEVE CONLISK Secretary -------------------------------- IN WITNESS WHEREOF, the undersigned has set his hand hereto as of the 17th day of June, 1996. /s/ STEVE CONLISK -------------------------------- Steve Conlisk Secretary Ahead Wisconsin Acquisition Corporation I, Arthur Honegger, President of Ahead Wisconsin Acquisition Corporation ("Purchaser"), certify that Steve Conlisk is the duly appointed and acting Secretary of Purchaser and that the signature above is genuine. Dated: June 17, 1996 /s/ ARTHUR HONEGGER -------------------------------- Arthur Honegger President Ahead Wisconsin Acquisition Corporation EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS EXHIBIT C BOARD RESOLUTIONS SCHEDULE 9.2.9(d) FORM OF AHEAD'S CERTIFICATE CERTIFICATE OF SECRETARY OF AHEAD TECHNOLOGY, INC. Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of June 17, 1996, by and among Vikron, Inc., a Wisconsin corporation ("Seller"), Ahead Wisconsin Acquisition Corporation, a Delaware corporation ("Purchaser"), Northland Aluminum Products, Inc., a Minnesota corporation, and Ahead Technology, Inc., a Delaware corporation ("Ahead"). Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. The undersigned, Steve Conlisk, hereby certifies that: 1. He is the duly elected and qualified Secretary of Ahead. 2. Attached hereto as Exhibit A is a true and correct copy of the Articles of Incorporation of Ahead in effect as of the date hereof. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Ahead in effect as of the date hereof. 4. Attached hereto as Exhibit C is a true and correct copy of the resolutions duly adopted by the Board of Directors of Ahead by unanimous written consent on June 17, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement has been duly approved and adopted by such Board of Directors. 5. There is no proceeding for the dissolution or liquidation of Ahead or threatening its existence. 6. Each of the persons set forth below are the duly elected and qualified incumbents in the offices set forth below each person's name, have been and are duly authorized to sign, on behalf of Ahead, the Asset Purchase Agreement and all documents relating to the transactions contemplated therein which such person has signed and the signature set forth opposite each person's name below is such person's authentic and genuine signature. Name Signature ---- --------- /s/ ARTHUR HONEGGER Arthur Honegger -------------------------------- President /s/ STEVE CONLISK Steve Conlisk -------------------------------- Secretary IN WITNESS WHEREOF, the undersigned has set his hand hereto as of the 17th day of June, 1996. /s/ STEVE CONLISK -------------------------------- Steve Conlisk Secretary Ahead Technology, Inc. I, Arthur Honegger, President of Ahead Technology, Inc. ("Ahead"), certify that Steve Conlisk is the duly appointed and acting Secretary of Ahead and that the signature above is genuine. Dated: June 17, 1996 /s/ ARTHUR HONEGGER -------------------------------- Arthur Honegger President Ahead Technology, Inc. EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS EXHIBIT C BOARD RESOLUTIONS EX-10.100 3 LOAN AGREEMENT ================================================================================ REVOLVING LINE OF CREDIT LOAN AGREEMENT executed by and between DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., as the Borrower, AND MELLON BANK, N.A., as the Lender Dated: May 31, 1996 ================================================================================ TABLE OF CONTENTS Page PREAMBLE AND RECITALS.......................................................1 ARTICLE I DEFINITIONS AND RULES OF INTERPRETATION AND CONSTRUCTION Section 1.01 Definitions...................................................2 Section 1.02 Rules of Interpretation and Construction.....................19 Section 1.03 Accounting Principles........................................20 ARTICLE II AMOUNT AND TERMS FOR THE REVOLVING CREDIT FACILITY Section 2.01 Revolving Credit Facility....................................22 Section 2.02 Interest on the Revolving Credit Loans.......................26 Section 2.03 Fees.........................................................29 Section 2.04 Voluntary Prepayments........................................30 Section 2.05 Payments; Collection of Accounts.............................30 Section 2.06 Special Provision Governing Eurodollar Rate Loans............31 Section 2.07 Increased Capital............................................35 Section 2.08 Authorized Officers of the Borrower..........................35 Section 2.09 Taxes........................................................36 ARTICLE III CONDITIONS TO THE REVOLVING CREDIT LOANS Section 3.01 Conditions Precedent to the Effectiveness of this Loan Agreement....................................................37 Section 3.02 Conditions Precedent to All Revolving Credit Loans and the Issuance of Letters of Credit................................39 i ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Representations and Warranties on the Effective Date.........41 Section 4.02 Subsequent Funding Representations and Warranties............48 ARTICLE V REPORTING COVENANTS Section 5.01 Statement of Accounting......................................49 Section 5.02 Reporting and Information Requirements.......................49 ARTICLE VI AFFIRMATIVE COVENANTS Section 6.01 Corporate Existence, Etc.....................................54 Section 6.02 Corporate Powers, Etc........................................54 Section 6.03 Compliance with Laws, Etc....................................54 Section 6.04 Payment of Taxes and Claims..................................54 Section 6.05 Maintenance of Properties; Insurance.........................54 Section 6.06 Inspection of Property; Books and Records; Discussion........55 Section 6.07 Litigation, Claims, Etc......................................55 Section 6.08 Labor Disputes...............................................55 Section 6.09 Maintenance of Licenses, Permits, Etc........................56 Section 6.10 Use of Proceeds..............................................56 Section 6.11 Continuation of or Change in Business........................56 Section 6.12 Additional Corporate Guarantors and/or Partnership Guarantors...................................................56 ii ARTICLE VII NEGATIVE COVENANTS Section 7.01 Consolidated Debt............................................57 Section 7.02 Sale of Assets; Liens .......................................57 Section 7.03 Loans, Advances and Investments..............................58 Section 7.04 Restricted Junior Payments...................................59 Section 7.05 Transactions with Shareholders and Affiliates................59 Section 7.06 Restriction on Fundamental Changes...........................59 Section 7.07 ERISA........................................................59 Section 7.08 Amendment of Articles of Incorporation or By-laws............60 Section 7.09 Margin Regulations...........................................60 Section 7.10 Cancellation of Consolidated Debt; Prepayment................60 Section 7.11 Environmental Liabilities....................................60 Section 7.12 Guaranties...................................................61 Section 7.13 No Negative Pledge to Other Person...........................61 ARTICLE VIII FINANCIAL COVENANTS Section 8.01 Minimum Consolidated Quick Ratio.............................62 Section 8.02 Maximum Consolidated Leverage Ratio..........................62 Section 8.03 Minimum Consolidated Interest Coverage Ratio.................62 ARTICLE IX EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 9.01 Events of Default............................................63 Section 9.02 Rights and Remedies..........................................65 Section 9.03 Application of Proceeds......................................65 Section 9.04 No Notices...................................................66 Section 9.05 Agreement to Pay Attorneys' Fees and Expenses ...............66 Section 9.06 No Additional Waiver Implied by One Waiver...................66 Section 9.07 Failure to Exercise Rights...................................66 Section 9.08 Waiver of Jury Trial.........................................67 Section 9.09 Remedies Cumulative..........................................67 iii ARTICLE X MISCELLANEOUS Section 10.01 Expenses....................................................68 Section 10.02 Indemnity...................................................68 Section 10.03 Amendments and Waivers......................................69 Section 10.04 Independence of Covenants...................................69 Section 10.05 Notices.....................................................69 Section 10.06 Survival of Warranties and Agreements.......................69 Section 10.07 Payments Set Aside..........................................69 Section 10.08 Severability................................................70 Section 10.09 Governing Law...............................................70 Section 10.10 Successors and Assigns......................................70 Section 10.11 Consent to Jurisdiction and Service of Process..............70 Section 10.12 Counterparts; Effectiveness; Inconsistencies................71 Section 10.13 Entire Agreement............................................71 iv EXHIBITS AND SCHEDULES Exhibits Exhibit "A" List of Eurodollar Affiliates Exhibit "B" Form of Notice of Borrowing Exhibit "C" Form of Notice of Conversion/Continuation Exhibit "D" Form of Revolving Credit Note Exhibit "E" Form of Opinion Letter Exhibit "F" Form of Officer's Certificate Exhibit "G" Form of Letter of Credit Reimbursement Agreement Schedules Schedule 2.01 List of Subsidiaries and/or Affiliates Who May Borrow and/or have Letters of Credit Issued for Their Account Schedule 2.01 (iv) Existing Debt to be Refinanced Schedule 4.01(iii) Existing Issued and Authorized Capital Stock of the Borrower Schedule 4.01(vii) Pending Actions, Suits, Proceedings, Governmental Investigations or Arbitrations Schedule 4.01(xv) Environmental Disclosure Schedule 4.01(xvi) ERISA Schedule 4.01 (xx) List of Joint Ventures Schedule 4.01(xxi) Existing Insurance Policies, Programs and Claims Schedule 4.01(xxvii) Labor Unions/Collective Bargaining Agreements Schedule 6.05 Insurance Policies and Programs Schedule 7.01(iii) Permitted Existing Consolidated Debt Schedule 7.03 Existing Loans and Investments Schedule 7.12(i) List of Existing Guaranties v REVOLVING LINE OF CREDIT LOAN AGREEMENT THIS REVOLVING LINE OF CREDIT LOAN AGREEMENT (including all amendments, modifications and supplements is hereinafter referred to as the "Loan Agreement"), is made this 31st day of May 1996, by and between DIAGNOSTIC/RETRIEVAL 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 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as the "Borrower"), 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 (hereinafter referred to as the "Lender"). W I T N E S S E T H: WHEREAS, the Borrower is engaged in the business of designing, manufacturing and marketing high technology products for military and commercial customers in the United States and abroad; and WHEREAS, the Borrower has requested that the Lender make to the Borrower an unsecured recourse revolving line of credit loan in the aggregate principal amount of up to Fifteen Million and 00/100 ($15,000,000.00) Dollars for the purposes of (i) refinancing existing indebtedness of the Borrower and its "Subsidiaries" and "Affiliates" (as such terms are hereinafter defined) and (ii) financing a portion of the Borrower's working capital and standby letters of credit requirements (hereinafter referred to as the "Revolving Credit Facility"); and WHEREAS, the Lender has agreed to make the Revolving Credit Facility available to the Borrower, subject to the terms, conditions and provisions hereinafter set forth; and NOW, THEREFORE, in consideration of these premises and the mutual representations, covenants and agreements of the Borrower and the Lender, each party binding itself and its successors and assigns, does hereby promise, covenant and agree as follows: ARTICLE I DEFINITIONS, RULES OF INTERPRETATION AND CONSTRUCTION, AND ACCOUNTING PRINCIPLES Section 1.01 Definitions. The following terms, as used in this Loan Agreement, shall have the following meanings, unless the context clearly indicates and requires otherwise: "Affiliate" of any Person shall mean any other Person which or who, directly or indirectly, controls or is controlled by, or is under common control with such Person; provided, however, natural persons and minority partners of any said Person shall not be deemed an Affiliate for purposes of this definition. For the purposes of the preceding sentence, "controls" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, fifty percent (50%) or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, fifty percent (50%) or more of any class of equity interest). "Agreement of Guaranty" shall mean that certain Agreement of Guaranty executed by the Corporate Guarantors and the Partnership Guarantors, on a joint and several basis, and delivered to the Lender, dated the date of this Loan Agreement, pursuant to which the Corporate Guarantors and the Partnership Guarantors unconditionally guaranty the prompt and complete performance of all of the Borrower's duties, covenants and obligations under this Loan Agreement and the Revolving Credit Note. The term "Agreement of Guaranty" shall also be deemed to mean and refer to all amendments, modifications and supplements to said agreement made and/or entered into subsequent to the Closing Date, including, without limitation, all amendments which are consummated for the purposes of adding any new and/or additional Persons as guarantors, all as provided for in Section 6.12 of this Loan Agreement. "Applicable Interest Rate" shall mean the applicable per annum interest rate on each of the Revolving Credit Loans determined pursuant to Section 2.02(i) of this Loan Agreement. "Authorized Officer" shall mean those officers/general partners of the Borrower, the Corporate Guarantors and/or the Partnership Guarantors, whose signatures and incumbency shall have been certified to the Lender pursuant to an Officer's Certificate delivered on the Closing Date or any other form of resolution or certification delivered to and approved by the Lender after the Closing Date. "Bankruptcy Code" shall mean Title 11 of the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended from time to time, or any successor statute. 2 "Benefit Plan" shall mean a defined benefit plan as defined in Section 3 (35) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Big-Six Accounting Firm" shall mean any of Arthur Andersen & Co., KPMG Peat Marwick, Coopers & Lybrand, Ernst & Young, Deloitte & Touche and Price Waterhouse or any of their respective successors. "Borrower" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Borrowing" and/or "Borrowings" shall mean a borrowing consisting of Revolving Credit Loans made on the same day by the Lender. "Borrowing Date" shall mean with respect to any Revolving Credit Loan, any Business Day specified in any Notice of Borrowing delivered to the Lender by the Borrower in accordance with the provisions of Section 2.01 (ii) of this Loan Agreement, as the date upon which the Borrower requests the Lender to make a Revolving Credit Loan hereunder and upon which such Revolving Credit Loan is made. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania, or is a day upon which banking institutions located in such state are required or authorized by law or other governmental action to close and (ii) with respect to all notices, determinating fundings and payments in connection with the Eurodollar Rate, any day which is a Business Day described in clause (i) above, and which is also a day for trading by and between banks in the London interbank eurodollar market. "Capital Expenditures" shall mean, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during such period) of the Borrower, its Subsidiaries and its Affiliates during such period which would be classified as capital expenditures in accordance with Generally Accepted Accounting Principles (including, without limitation, expenditures for maintenance and repairs which are capitalized, and Capitalized Leases to the extent an asset is recorded in connection therewith in accordance with Generally Accepted Accounting Principles). "Capitalized Lease" and "Capitalized Leases" shall mean at any time any lease which is, or is required under Generally Accepted Accounting Principles to be, capitalized on the balance sheet of the lessee at such time. "Capitalized Lease Obligation" shall mean all monetary obligations of any Person under any leasing or similar arrangement which, in accordance with Generally Accepted Accounting Principles, are or would be classified as Capitalized Leases. 3 "CERCLIS" shall mean the Comprehensive Environmental Response, Compensation and Liability Information System List, as the same may be amended from time to time. "Claim" shall mean any claim or demand, by any Person, of whatsoever kind or nature for any alleged Liabilities and Costs, based in a dispute whether involving contract, tort, implied or express warranty, strict liability, criminal or civil statute, permit, ordinance or regulation, common law or otherwise, the consequences of which dispute are reasonably likely to result in a Material Adverse Effect. "Closing Date" shall mean the date upon which this Loan Agreement is executed by the Lender and the Borrower, and the conditions set forth in Section 3.01 of this Loan Agreement have been completed and fulfilled to the satisfaction of the Lender. "Code" means the Internal Revenue Code of 1986, as amended, any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Commitment Letter" shall mean the commitment letter dated March 25, 1996, from the Lender to the Borrower, as amended by the letters dated March 28, 1996 and April 8, 1996, from the Lender to the Borrower, pursuant to which the Lender offered and the Borrower accepted the Lender's commitment to provide the Revolving Credit Facility. "Consolidated Cash and Cash Equivalents" shall mean all (i) cash and cash equivalents and (ii) any of the following: (a) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year after the date of acquisition thereof; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one (1) year after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc. and not listed in Credit Watch published by Standard & Poor's Corporation; (c) commercial paper of a corporation having a net worth of not less than $1,000,000,000.00, other than commercial paper issued by the Borrower, its Subsidiaries or its Affiliates, maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (d) domestic certificates of deposit or domestic time deposits or repurchase agreements maturing within one (1) year after the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having FDIC insurance; (e) any funds deposited or invested by the Borrower, its Subsidiaries and/or its Affiliates of the Borrower in accounts maintained with the Lender and/or with any other commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having FDIC insurance; and (f) money market funds having assets in excess of $1,000,000,000.00. 4 "Consolidated Current Liabilities" shall mean, as at any date of determination, all liabilities which, in accordance with Generally Accepted Accounting Principles, would be classified on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates as current liabilities, and in any event all Borrowings under the Revolving Credit Facility. "Consolidated Debt" shall mean with respect to the Borrower, its Subsidiaries and its Affiliates, the aggregate sum of the following items as such items appear on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates to any Person (other than each other) in accordance with Generally Accepted Accounting Principles: (i) the unpaid principal balance of all indebtedness or liability for money borrowed or owed by the Borrower, its Subsidiaries and/or its Affiliates to any Person (other than each other) from time to time (including any renewals, extensions and refundings thereof), whether or not the indebtedness was heretofore or hereafter created, issued, incurred, assumed or guarantied; (ii) the unpaid principal balance of all indebtedness or liability for the deferred purchase price of property or services incurred (including trade obligations); (iii) all obligations as lessee under leases which have been or should be recorded as Capitalized Lease Obligations; (iv) all current Obligations in respect of any unfunded vested benefits under any Plan covered by Title IV of ERISA; (v) all obligations, contingent or otherwise relative to the face amount of all Letters of Credit issued for the Borrower's, its Subsidiaries' and/or Affiliates' account, whether or not drawn; (vi) all obligations arising under bankers' acceptance facilities issued for the account of the Borrower, its Subsidiaries and/or its Affiliates; (vii) all guaranties, endorsements and other contingent obligations to purchase, to provide funds for payments, to supply funds to invest in the Borrower, its Subsidiaries and/or its Affiliates or otherwise to assure a creditor against loss (except endorsements of negotiable instruments for deposit or collection in the ordinary course of business shall not constitute Consolidated Debt); and (viii) all obligations secured by any mortgage, lien, pledge, or security interest or other charge or encumbrance on property, whether or not the obligations have been assumed. "Consolidated Interest Coverage Ratio" shall mean, as of any date of determination thereof for the period of four (4) consecutive Fiscal Quarters immediately preceding said date of determination taken together as one accounting period, the ratio of (i) the sum of (a) Consolidated Net Income for such test period plus (b) all interest expenses on all Consolidated Debt for such test period minus (c) prepaid principal on Consolidated Subordinated Debt as permitted under Sections 7.04 and 7.10 of this Agreement, during such test period -to- (ii) all interest expenses on all Consolidated Debt for such test period, all as calculated in accordance with Generally Accepted Accounting Principles. "Consolidated Net Income" shall mean, as of any date of determination for any test period, all amounts which, in accordance with Generally Accepted Accounting Principles, would be included under net income (after the payment of all federal and state income taxes) on a consolidated income statement of the Borrower, its Subsidiaries and its Affiliates for such test period. 5 "Consolidated Net Worth" shall mean, as at any date of determination, all items which, in accordance with Generally Accepted Accounting Principles, would be included under shareholders' equity on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates at such date. "Consolidated Quick Ratio" shall mean, as at any date of determination, the ratio of (i) the sum of (a) Consolidated Cash and Cash Equivalents plus, (b) billed accounts receivable of the Borrower, its Subsidiaries and its Affiliates as shown on their consolidated balance sheet in accordance with Generally Accepted Accounting Principles -to- (ii) Consolidated Current Liabilities. "Consolidated Senior Liabilities" shall mean, as at any date of determination, all items which, in accordance with Generally Accepted Accounting Principles, would be included on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates as Consolidated Debt, excluding, however, Consolidated Subordinated Debt. "Consolidated Subordinated Debt" shall mean, as at any date of determination, any Consolidated Debt of the Borrower, its Subsidiaries and/or its Affiliates, which in accordance with the terms of the documentation evidencing said Consolidated Debt, is subordinated to the repayment of the Revolving Credit Facility, including, without limitation, (i) the then outstanding principal balance of an original $25,000,000.00 9% Senior Subordinated Convertible Debentures Due October 1, 2003, evidenced by that certain Indenture dated as of September 22, 1995, executed by and between the Borrower and The Trust Company of New Jersey and (ii) the then outstanding principal balance of an original $25,000,000.00 8-1/2% Convertible Subordinated Debentures Due August 1, 1998, evidenced by that certain Indenture dated August 1, 1983, executed by and between the Borrower and Bankers Trust Company. "Consolidated Tangible Net Worth" shall mean, as at any date of determination, Consolidated Net Worth minus the following: (i) goodwill, including any amounts (however designated on the balance sheet) representing the cost of acquisitions of Subsidiaries and/or Affiliates in excess of underlying tangible assets; (ii) patents, trademarks and copyrights; and (iii) deferred charges (including, without limitation, unamortized debt discount and expense, organization expenses and experimental and development expenses, but excluding prepaid expenses). "Contractual Obligation" shall mean with respect to any Person, any provision of any Securities issued by that Person or any indenture, mortgage, deed of trust, contract, undertaking, document, instrument or other agreement or instrument to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject (including, without limitation, any restrictive covenant affecting such Person or any of its properties). "Corporate Guarantors" shall mean the collective reference to (i) Technology Applications & Service Company, 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, 6 Gaithersburg, Maryland 20879; (ii) Photronics Corp., 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 270 Motor Parkway, Hauppauge, New York 11788; (iii) 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; (iv) 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; (v) OMI Acquisition Corp., (also doing business as OMI Corp.), a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 270 Motor Parkway, Hauppauge, New York 11788; (vi) 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 138 Bauer Drive, Oakland, New Jersey 07436; (vii) Ahead Technology Acquisition 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 3105 Patrick Henry Drive, Santa Clara, California 95054; (viii) 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 138 Bauer Drive, Oakland, New Jersey 07436 and (ix) any new or additional Subsidiaries of the Borrower which are purchased, acquired or created during the term of the Revolving Credit Facility. Each of the Corporate Guarantors may sometimes be hereinafter referred to individually as a "Corporate Guarantor". "Customary Permitted Liens" shall mean (i) Liens (other than Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority or claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Generally Accepted Accounting Principles; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than any Lien imposed under ERISA) imposed by Law, including, without limitation, Liens in favor of any Governmental Authority securing progress payments made under government contracts created in the ordinary course of business and for amounts not yet due or which are being contested in good faith by appropriate proceedings which are sufficient to prevent imminent foreclosure of such Liens, are promptly instituted and diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Generally Accepted Accounting Principles; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts, statutory obligations and other similar obligations or arising as a result of progress payments or deposits under government contracts (including foreign government contracts); 7 (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property or impair the use thereof; (v) Liens arising as a result of the filing of any financing statement under the Uniform Commercial Code of a particular State or comparable law of any jurisdiction covering consigned or leased goods which do not constitute assets of the Borrower, its Subsidiaries and/or its Affiliates and which consignment and/or lease is not intended as security for an obligation; (vi) Liens arising out of and with respect to customer deposits made in the ordinary course of the Borrower's, its Subsidiaries' and/or its Affiliates' businesses; and (vii) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (vi) above, provided (a) that, in the case of paragraphs (i) through (iii) above, the principal amount of the obligation secured thereby is not increased and (b) that any such extension, renewal or replacement is limited to the property originally encumbered thereby. "Default Rate" shall mean a rate of interest equal to three percent (3.0%) above the applicable nondefault interest rate with respect to the Revolving Credit Loans. "DOL" shall mean the United States Department of Labor and any successor department or agency. "Dollar," "Dollars" and the symbol "$" shall mean lawful money of the United States of America. "Environment" shall mean all air, surface water, water, vapor, groundwater, drinking water supply or land, including land surface or subsurface, and includes all fish, wildlife, biota and all other natural resources. "Environmental Approval" shall mean any Governmental Action pursuant to or required under any Environmental Law. "Environmental Claim" shall mean, with respect to any Person, any action, suit, proceeding, investigation, notice, claim, complaint or demand, made by any other Person (including but not limited to, any Governmental Authority, citizens' group or present or former employee of such first Person) alleging, asserting or claiming any actual or potential (i) violation of any Environmental Law, (ii) liability under any Environmental Law or (iii) liability for investigatory costs, cleanup costs, governmental response costs, damages to the Environment, property damages, personal injuries, fines or penalties arising out of, based on or resulting from the presence, or release into the Environment, of any Environmental Concern Materials at any location, whether or not owned by such Person; provided, however, in no event shall any voluntary action, proceeding or investigation 8 made or brought by the Borrower, its Subsidiaries and/or its Affiliates from time to time in connection with their own activities or inactivities be included in this definition. "Environmental Cleanup Site" shall mean any location which is listed or proposed for listing on the National Priorities List, on CERCLIS or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding or investigation related to or arising from any alleged violation of any Environmental Law. "Environmental Concern Materials" shall mean (i) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollution, contaminate or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in any Environmental Law), (ii) any toxic chemical or other substance from or related to industrial, commercial or institutional activities and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea-formaldehyde. "Environmental Law" and "Environmental Laws" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (i) pollution or protection of the Environment, (ii) exposure of Persons, including, but not limited to, employees, to Environmental Concern Materials, (iii) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (iv) regulation of the manufacture, generation, use or introduction into commerce of Environmental Concern Materials including their manufacture, formulation, packaging, labeling, distribution, treatment, transportation, handling, storage or disposal. Without limitation, "Environmental Law" shall include (a) any Environmental Approval and the terms and conditions thereof; (b) the following statutes: the Clean Air Act (42 U.S.C. ss.7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. ss.9601 et seq.); the Federal Water Pollution Control Act (33 U.S.C. ss.1251 et seq.); the Hazardous Material Transportation Act (49 U.S.C. ss.1801 et seq.); the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.136 et seq.); the Resource Conservation and Recovery Act of 1976 (42 U.S.C. ss.6901 et seq.) (including the Hazardous and Solid Waste Amendments of 1984), the Toxic Substance Control Act (15 U.S.C. ss.2601 et seq.); the Federal Occupational Safety & Health Act of 1970 (29 U.S.C. ss.651 et seq.) (including ss.3101 of the Omnibus Reconciliation Act of 1990), and the regulations promulgated thereunder and all as amended from time to time; and (c) any common law doctrine (including, without limitation, injunctive relief and tort, such as negligence, nuisance, trespass and strict liability) that may impose obligations or liabilities for personal injury or property damage due to, or threatened as a result of, the presence of or exposure to Environmental Concern Materials. "Environmental Lien" shall mean a Lien in favor of any Governmental Authority for (i) any liability currently due and payable under any Environmental Laws or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of any Environmental Concern Materials into the Environment. 9 "Equipment" of any Person, shall mean and include (i) all of such Person's now owned and hereafter acquired machinery; (ii) all manufacturing, distribution, selling, data processing and office equipment; and (iii) all furniture, furnishings, appliances, fixtures and trade fixtures, tools, toolings, molds, dies, vehicles, vessels, aircraft and all other goods of every type and description (other than inventory). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute of similar import, together with the regulations promulgated thereunder by the United States Treasury Department, the DOL and/or the PBGC. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower, its Subsidiaries and/or its Affiliates would be deemed to be a "single employer" within the meaning of Section 4001 of ERISA. "Eurodollar Affiliate" shall mean with respect to the Lender, the affiliate of the Lender, if any, set forth on Exhibit "A" attached to this Loan Agreement. "Eurodollar Interest Period" shall mean one or more periods of time during which the Borrower may select, convert to or continue a Eurodollar Rate Loan, such funding period with respect to the Revolving Credit Facility, to be either a fourteen, thirty, sixty or ninety day period, subject to availability, all as more fully subject to the provisions of Section 2.06 of this Loan Agreement. "Eurodollar Interest Payment Date" shall mean, with respect to any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable to such Loan. "Eurodollar Interest Rate Determination Date" shall mean the date on which the Lender determines the Eurodollar Rate applicable to (i) a Borrowing or (ii) the continuation or conversion of Eurodollar Rate Loans. The Eurodollar Interest Rate Determination Date shall be the second Business Day prior to the first day of the Eurodollar Interest Period applicable to such Borrowing, continuation or conversion. "Eurodollar Portion" of any Revolving Credit Loans shall mean at any time the portion, including the whole, of such Revolving Credit Loans bearing interest at any time under the Eurodollar Rate. "Eurodollar Rate" shall mean, with respect to any Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans, an interest rate per annum determined by the Lender obtained by dividing (i) the rate of interest determined by the Lender in good faith in accordance with its usual procedures (which determination shall be conclusive) to be the average (rounded upward to the nearest whole multiple of one one-thousandth of one percent (1/1000 of 1%) per annum if such average is not such a multiple) of the rates per annum at which deposits in Dollars are offered to major money center banks in the London interbank eurodollar market at approximately 11:00 a.m. 10 (London time) on the Eurodollar Interest Rate Determination Date for a period equal to such Eurodollar Interest Period and in an amount substantially equal to the amount of the Eurodollar Rate Loan to be made by the Lender and to be outstanding during such Eurodollar Interest Period by (ii) a percentage equal to 100% minus the Eurodollar Reserve Percentage. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. The "Eurodollar Rate" may also be expressed by the following formula: [average of the rates offered to major] [money center banks in the ] Eurodollar Rate = [London interbank Eurodollar market as determined by the Agent] [1.00 - Eurodollar Reserve Percentage] Finally, the "Eurodollar Rate" shall in all circumstances mean the rate of interest which is customarily referred to as the "London Interbank Offered Rate". "Eurodollar Rate Loans" shall mean those Revolving Credit Loans outstanding which bear interest at a rate determined by reference to the Eurodollar Rate as provided for in Sections 2.02(i) and 2.06 of this Loan Agreement. "Eurodollar Rate Option" shall mean one of the interest rates available to the Borrower as provided for and described in Section 2.02(i)(a)(2) of this Loan Agreement. "Eurodollar Rate Taxes" shall have the meaning ascribed to such term in Section 2.06(vii)(a) of this Loan Agreement. "Eurodollar Reserve Percentage" shall mean for any date that percentage, if any (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Lender (which determination shall be conclusive) which is in effect on such date, as prescribed by the Federal Reserve Board, for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in respect of "eurocurrency liabilities" having a term equal to the applicable Eurodollar Interest Period (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). "Event of Default" or "Events of Default" shall mean any of the events of default as defined and described in Section 9.01 of this Loan Agreement. "Facility Fee" shall mean that certain facility fee in the amount of $20,000.00 paid by the Borrower to the Lender as follows: $10,000.00 upon acceptance of the Commitment Letter and $10,000.00 on the Closing Date. "FDIC" shall mean the Federal Deposit Insurance Corporation or any successor thereto. 11 "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System or any governmental authority succeeding to its functions. "Fiscal Quarter" shall mean the following three month periods of each Fiscal Year: April 1 - June 30 July 1 - September 30 October 1 - December 31 January 1 - March 31 "Fiscal Year" shall mean that period commencing on April 1 and ending on March 31 of each year or such other period as the Borrower may designate and the Lender may approve in writing. "Funding Segment" shall mean with respect to an Eurodollar Rate Loan, the entire principal amount of such Eurodollar Portion to which at the time in question there is applicable a particular Eurodollar Interest Period beginning on a particular day and ending on a particular day. (By definition, each such Eurodollar Portion is at all times composed of an integral number of discrete Funding Segments and the sum of the principal amounts of all Funding Segments of any such Eurodollar Portion at any time equals the principal amount of such Eurodollar Portion at such time.) "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in the United States of America, as in effect from time to time, as developed, modified and set forth in the opinions and pronouncements of the Accounting Principles Board, the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, or in such other statements by such other Person as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination, subject to the terms of Section 1.03 of this Loan Agreement. "Governmental Action" shall mean any approval, order, consent, authorization, certificate, license, permit or validation of, or exemption or other action by, or filing, recording or registration with or notice to, any Governmental Authority. "Governmental Acts" shall have the meaning ascribed and assigned to such term as set forth in Section 2.01 (vii) of this Loan Agreement. "Governmental Authority" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Indemnified Party" and "Indemnified Parties" shall mean the Lender and the directors, officers, trustees, employees, agents, attorneys and controlling shareholders of the Lender. 12 "Independent Certified Public Accountant" shall mean KPMG Peat Marwick and any other recognized independent certified public accounting firm selected by the Borrower, its Subsidiaries and/or its Affiliates which accounting firm is satisfactory to the Lender, including, without limitation, any one of the other Big-Six Accounting Firms. "IRS" shall mean the Internal Revenue Service and any Person succeeding to the functions thereof. "Law" shall mean any law (including common law), constitution, statute, treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "Lender" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Letter of Credit" or "Letters of Credit" shall mean any standby letter of credit issued by the Lender for the account of the Borrower pursuant to Section 2.01(vi) of this Loan Agreement. "Letter of Credit Obligations" shall mean, at any time, the sum of (i) Reimbursement Obligations at such time and (ii) the aggregate maximum amount then available for drawing under outstanding Letters of Credit. "Letters of Credit Reimbursement Agreement" shall mean, with respect to any Letter of Credit, such form of application therefor and form of continuing Letters of Credit Agreement therefor as the Lender may employ in the ordinary course of its business. "Liabilities and Costs" shall mean all liabilities, obligations, responsibilities, losses, damages, punitive damages, consequential damages, treble damages, costs and reasonable expenses (including, without limitation, attorneys', experts' and consulting fees and costs of investigation and feasibility studies), fines, penalties and monetary sanctions, interest, direct or indirect, known or unknown, absolute or contingent, past, present or future arising out of or relating to any action, suit, proceeding or resolution or settlement thereof. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or preference, priority, security interest or other security agreement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan Account" shall have the meaning ascribed to such term in Section 2.05(iv) hereof. 13 "Loan Agreement" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Loan Documents" shall mean any and all agreements, documents, certificates and instruments executed by the Borrower, the Corporate Guarantors, the Partnership Guarantors and/or any other Person and delivered by them to the Lender pursuant to and in connection with the Revolving Credit Facility, including, without limitation, this Loan Agreement, the Revolving Credit Note and the Agreement of Guaranty, in each case as amended, supplemented, restated, extended or otherwise modified from time to time in accordance with the provisions hereof or thereof. "Margin Stock" shall have the meaning ascribed and assigned to such term in Regulation G and Regulation U. "Marketable Securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness commonly known as "securities", secured or unsecured, convertible, subordinated or otherwise, and in general any instruments commonly known as "securities" and any certificates of interest, shares or participation in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing which can readily be bought and sold on any nationally recognized securities exchange and would properly be classified as marketable securities on the consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates in accordance with Generally Accepted Accounting Principles. "Material Adverse Effect" shall mean a material adverse effect upon (i) the business, financial condition, financial performance, properties or operations of the Borrower, its Subsidiaries and its Affiliates taken as a whole or (ii) the ability of the Borrower, the Corporate Guarantors and the Partnership Guarantors to perform their collective obligations and duties under the Loan Documents. "Maximum Amount of Revolving Credit Loans" shall mean, at any time, the Revolving Credit Loan Sublimit, minus the amount of Letter of Credit Obligations in excess of $7,500,000.00. "Multiemployer Plan" shall mean an employee benefit plan defined in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate. "Notice of Borrowing" shall mean, with respect to a proposed Borrowing pursuant to Section 2.01(ii) hereof, a notice substantially in the form of Exhibit "B" attached hereto and made a part thereof. "Notice of Conversions/Continuation" shall mean, with respect to a proposed conversion or continuation of a Revolving Credit Loan pursuant to Section 2.02(iii) hereof, a notice in the form of Exhibit "C" attached hereto and made a part hereof. 14 "Obligations" shall mean all present and future indebtedness and other liabilities of the Borrower owing to the Lender, or any Person entitled to indemnification pursuant to Section 10.02 hereof, or any of their respective successors, transferees or assigns, of every type and description, whether or not evidenced by any note, guaranty or other instrument, arising under or in connection with this Loan Agreement or any other Loan Document, whether or not for the payment of money, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to the Borrower under this Loan Agreement or any other Loan Document. "Office" when used in connection with the Lender, shall mean its principal office located at 1735 Market Street, Philadelphia, Pennsylvania 19101, or at such office or offices of the Lender or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Lender to the Borrower. "Officer's Certificate" shall mean a certificate of the Borrower executed by any of the Authorized Officers of the Borrower, including, without limitation, the president, any vice-president or the chief financial officer, in the form of Exhibit "F" attached hereto and made a part hereof. "Operating Lease" shall mean, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which is not a Capitalized Lease. "Partnership Guarantors" shall mean (i) Laurel Technologies Partnership t/a 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; (ii) DRS Medical Systems, a general partnership duly organized, validly existing and in good standing under the laws of the State of New Jersey, having its principal office located at 138 Bauer Drive, Oakland, New Jersey 07436 and (iii) any new or additional Affiliates of the Borrower in which the Borrower acquires an ownership interest of more than fifty percent (50%). "PBGC" shall mean the Pension Benefit Guaranty Corporation and any Person succeeding to any or all of its functions and duties under ERISA. "Permits" shall mean any permit, approval, authorization, license, variance, or permission required from a Governmental Authority under any applicable Requirement of Law. "Person" or "Persons" shall mean any natural person, employee, general or limited partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, company, trust, bank or other organization, whether or not a legal entity or any other non-governmental entity, or any Governmental Authority. 15 "Plan" shall mean any employee pension benefit plan within the meaning of Section 3(2) of ERISA (other than a Multiemployer Plan) covered by Title IV of ERISA by reason of Section 4021 of ERISA, of which the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate is or has been within the preceding five years a "contributing sponsor" within the meaning of Section 4001(a)(13) of ERISA, or which is or has been within the preceding five years maintained for employees of the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate. "Potential Event of Default" shall mean an event, condition or situation which, with the giving of any required notice and/or the passage of any required grace or cure periods, or any combination of the foregoing, would constitute an Event of Default. "Prime Rate" or "Prime Lending Rate" shall mean the fluctuating interest rate publicly announced by the Lender from time to time as its "prime rate "or "prime lending rate", which per annum rate may not necessarily be the rate actually charged by the Lender to its most creditworthy customers. "Prime Rate Loans" shall mean all Revolving Credit Loans outstanding which bear interest at a rate determined by reference to the Prime Rate as provided for in Section 2.02(i) of this Loan Agreement. "Prime Rate Option" shall mean one of the interest rates available to the Borrower as provided for and described in Section 2.02(i)(a)(1) of this Loan Agreement. "Property" shall mean any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by the Borrower, its Subsidiaries and/or its Affiliates. "RCRA" shall mean the Resource Conservation and Recovery Act of 1976, 42 U.S.C. '6901 et. seq., and any successor statute, and regulations promulgated thereunder. "Regulation D" shall mean Regulation D of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation G" shall mean Regulation G of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation T" shall mean Regulation T of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation U" shall mean Regulation U of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation X" shall mean Regulation X of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. 16 "Reimbursement Obligations" shall mean the unpaid reimbursement or repayment obligations of the Borrower owed to the Lender pursuant to this Loan Agreement and/or any Letters of Credit Reimbursement Agreement in connection with any Letters of Credit. "Release" shall mean release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of Environmental Concern Materials in violation of Environmental Laws into the indoor or outdoor Environment or into or out of any Property, including the movement of Environmental Concern Materials through or in the air, soil, surface water, groundwater or Property. "Remedial Action" shall mean actions, other than voluntary actions on the part of any Person, required to (i) clean up, remove, treat or in any other way address Environmental Concern Materials in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Environmental Concern Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Reportable Event" shall have the meaning ascribed to such term in Section 4043 of ERISA or regulations promulgated thereunder. "Requirements of Law" shall mean, as to any Person, the charter and by-laws or other organization or governing documents of such Person, and any law, rule or regulation, Permit, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, including, without limitation, the Securities Act, the Securities Exchange Act, Regulations G, U and X, and any certificate of occupancy, zoning ordinance, building, environmental or land use requirement or Permit or occupational safety or health law, rule or regulation. "Restricted Junior Payments" shall mean (i) any dividend or other distribution to the shareholders of the Borrower (whether direct or indirect and whether in cash, property, Securities or otherwise) on account of any shares of any class of capital stock (or equivalent partnership interest) of the Borrower now or hereafter outstanding, (ii) any payment or prepayment of principal of, premium, if any, or interest on, or fees in respect of, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Consolidated Subordinated Debt after the occurrence of an Event of Default and (iii) any prepayment in advance of anticipated and scheduled payment dates of principal of, premium, if any, or interest on, or fees in respect of, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Consolidated Subordinated Debt (except for (a) prepayments in connection with the refinance of such Consolidated Subordinated Debt in amounts and on terms and conditions equal to or better than the existing terms and conditions and (b) prepayments of up to $1,000,000.00 in the aggregate of outstanding principal on any said Consolidated Subordinated Debt). 17 "Revolving Credit Accommodations" shall mean, at any time, the sum of (i) all Revolving Credit Loans outstanding at such time and (ii) all Letter of Credit Obligations outstanding at such time. "Revolving Credit Facility" shall have the meaning ascribed and assigned to such term as set forth in the second recital of this Loan Agreement. "Revolving Credit Loan" and "Revolving Credit Loans" shall have the meaning ascribed and assigned to such term in Section 2.01(i) of this Loan Agreement. "Revolving Credit Loan Sublimit" shall mean the $7,500,000.00 maximum amount of Revolving Credit Loans that may be advanced under the Revolving Credit Facility. "Revolving Credit Note" shall mean that certain Revolving Line of Credit Note in substantially the form attached hereto as Exhibit "D" with blanks appropriately filled in, such note payable to the order of the Lender in a face amount equal to the Revolving Credit Facility. "Revolving Credit Termination Date" shall mean the earlier of (i) June 30, 1999 or (ii) the date of termination of the Revolving Credit Facility pursuant to Section 9.02 of this Loan Agreement. "Securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness commonly known as "securities", secured or unsecured, convertible, subordinated or otherwise, and in general any instruments commonly known as "securities", and any certificates of interest, shares or participation in temporary or interim certificates for the purchase or acquisition of, and any right to subscribe to, purchase or acquire any of the foregoing, but shall not include any evidence of the Obligations. "Securities Act" shall mean the Securities Act of 1933, as amended to the date hereof and from time to time hereafter, and any successor statute. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended to the date hereof from time to time hereafter, and any successor statute. "Single Employer Plan" shall mean any Plan which is not a Multiemployer Plan under Title IV of ERISA. "Solvent" shall mean when used with respect to any Person, that at the time of determination: (i) the fair value of its assets (at fair valuation) is in excess of the total amount of its liabilities, including, without limitation, contingent liabilities; 18 (ii) it is then able to pay its debts as they mature; and (iii) it owns property having a value (at fair valuation) in excess of the total amount required to pay its debts. "Subsidiary" or "Subsidiaries" shall mean (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect a majority of directors is at the time, directly or indirectly, owned by the Borrower, by the Borrower and one or more Subsidiaries of the Borrower or by one or more Subsidiaries of the Borrower, (ii) any other Person (other than a corporation) in which the Borrower and one or more Subsidiaries of the Borrower, directly or indirectly, at the date of determination thereof has at least majority ownership interest and/or (iii) any entity whose net earnings (losses) or portions thereof would be properly included and consolidated with the net earnings of the Borrower; provided, however, that the term Subsidiary shall not include any entity that is not reflected on the balance sheet of the Borrower due to inactivity and lack of material assets and liabilities. "Taxes" shall have the meaning ascribed and assigned to such term as set forth in Section 2.02(vi) of this Loan Agreement. "Termination Event" shall mean (i) any Reportable Event with respect to any Benefit Plan described in Section 4043 of ERISA and the regulations issued thereunder for which the notice requirements have not been waived by the PBGC, (ii) the withdrawal of the Borrower, any of its Subsidiaries and/or Affiliates, or an ERISA Affiliate from a Benefit Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the occurrence of an obligation arising under Section 4041 of ERISA of the Borrower, any of its Subsidiaries and/or Affiliates or an ERISA Affiliate to provide affected parties with a written notice of an intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA, (iv) the institution by the PBGC of proceedings to terminate any Benefit Plan, (v) any event or condition which constitutes grounds under Section 4042 of ERISA for the appointment of a trustee to administer a Benefit Plan or (vi) the partial or complete withdrawal of the Borrower, any of its Subsidiaries and/or Affiliates or any ERISA Affiliate from a Multiemployer Plan. "Uniform Customs" shall mean the Uniform Customs and Practice for Documentary Credits (1993 Revisions), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. Section 1.02 Rules of Interpretation and Construction. In this Loan Agreement unless the context otherwise clearly requires: (i) Articles and Sections mentioned by number only are the respective Articles and Sections of this Loan Agreement as so numbered; (ii) Words importing a particular gender mean and include every other gender, and words importing the singular number mean and include the plural number and vice versa; 19 (iii) Words importing persons mean and include firms, associations, partnerships (including limited partnerships), societies, trusts, corporations or other legal entities, including public or governmental bodies, as well as natural persons; (iv) Any headings preceding the texts of the several Articles and Sections of this Loan Agreement, and any table of contents or marginal notes appended to copies hereof, shall be solely for convenience of reference and shall not affect or control the meaning, construction or interpretation of this Loan Agreement; (v) If any clause, provision or section of this Loan Agreement shall be ruled invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any of the remaining provisions thereof, unless not invalidating or rendering unenforceable the remaining provisions shall be inequitable; (vi) The terms "herein", "hereunder", "hereby", "hereto", "hereof" and any similar terms as used in this Loan Agreement refer to this Loan Agreement as a whole and not to any particular provision of this Loan Agreement; the term "heretofore" means before the date of execution of this Loan Agreement; and the term "hereafter" means on or after the date of execution of this Loan Agreement; (vii) This Loan Agreement and all matters relating hereto shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania; and (viii) If any clause, provision or section of this Loan Agreement shall be determined to be apparently contrary to or conflicting with any other clause, provision or section of this Loan Agreement, then the clause, provision or section containing the more specific provisions shall control and govern with respect to such apparent conflict; and (ix) References in this Loan Agreement to "determination" (and similar terms) by the Lender include good faith and reasonable estimates by the Lender (in the case of quantitative determinations) and good faith and reasonable beliefs by the Lender (in the case of qualitative determinations). Section 1.03 Accounting Principles. (i) As used in this Loan Agreement "Generally Accepted Accounting Principles" shall be established on the date a relevant computation or determination is to be made or the date of relevant financial statements as the case may be. (ii) Except as otherwise provided in this Loan Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Loan Agreement shall be prepared, in accordance with Generally Accepted Accounting Principles (including principles of consolidation where appropriate), and all 20 accounting or financial terms shall have the meanings ascribed to such terms by Generally Accepted Accounting Principles. (iii) If any change in Generally Accepted Accounting Principles after the date of this Loan Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more provisions of this Loan Agreement shall have occurred or in the opinion of the Borrower would likely occur which would not have occurred or be likely to occur if no change in accounting principles had taken place, (a) the Borrower and the Lender agree that such violation shall not be considered to constitute an Event of Default or a Potential Event of Default for a period of thirty (30) days from the date the Borrower notifies the Lender of the applicability of this Section 1.03(iii); (b) the Borrower and the Lender agree in such event to negotiate in good faith an amendment of this Loan Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in Generally Accepted Accounting Principles; and (c) if the Borrower and the Lender are unable to negotiate such an amendment within the thirty (30) day period described above in clause (a), the Borrower shall have the option of (A) prepaying and terminating the Loan (pursuant to applicable provisions hereof) or (B) submitting the drafting of such an amendment to a firm of Independent Certified Public Accountants of nationally recognized standing acceptable to the Borrower and the Lender, which shall complete its draft of such amendment within thirty (30) days of submission; if the Borrower and the Lender cannot agree, the firm shall be selected by binding arbitration in the City of Philadelphia, Pennsylvania in accordance with the then applicable rules of the American Arbitration Association. If the Borrower does not exercise either such option within said period, then as used in this Loan Agreement, "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in effect at the relevant date. The Borrower and the Lender agree that if the Borrower elects the option in clause (B) above, until such firm has been selected and completes drafting such amendment, no such violation shall constitute an Event of Default or a Potential Event of Default. (iv) If any change in Generally Accepted Accounting Principles after the date of this Loan Agreement is required to be applied to transactions or conditions then or thereafter in existence, and the Lender shall assert that the effect of such change is or shall likely be to distort materially the effect of any of the definitions of financial terms in Article I of this Loan Agreement or any of the covenants of the Borrower in Article VIII of this Loan Agreement (hereinafter referred to as the "Financial Provisions"), so that the intended economic effect of any of the Financial Provisions will not in fact be accomplished, then (a) the Lender shall notify the Borrower of such assertion, specifying the change in Generally Accepted Accounting Principles which is objected to, and until otherwise determined as provided below, the specified change in Generally Accepted Accounting Principles shall not be made by the Borrower in its financial statements for the purpose of applying the Financial Provisions; and (b) The Lender and the Borrower shall follow the procedures set forth in paragraph (iii)(b) and the first sentence of paragraph (c) of subsection (iii) of this Section 1.03. If 21 the Borrower and the Lender are unable to agree on an amendment as provided in said paragraph (iii)(b) and if the Borrower does not exercise either option set forth in the first sentence of said paragraph (iii)(c) within the specified period, then as used in this Loan Agreement "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in effect at the relevant date, except that the specified change in "Generally Accepted Accounting Principles" which is objected to by the Lender shall not be made in applying the Financial Provisions. The Borrower and the Lender agree that if the Borrower elects the option in clause (B) of the first sentence of said paragraph (iii)(c), until such independent accounting firm has been selected and completes drafting such amendment, the specified change in "Generally Accepted Accounting Principles" shall not be made in applying the Financial Provisions. (v) All expenses of compliance with this Section 1.03 shall be paid for by the Borrower, except the Borrower and the Lender shall be responsible for their own costs and expenses associated with proceedings under Section 1.03(iii)(c) hereof other than the cost and expense payable to the American Arbitration Association and any such accounting firm which shall be divided equally between the Lender on the one hand and the Borrower on the other. ARTICLE II AMOUNTS AND TERMS FOR THE REVOLVING CREDIT FACILITY Section 2.01 Revolving Credit Facility. (i) Availability. (a) Subject to the terms and conditions set forth in this Loan Agreement, the Lender hereby agrees to make to the Borrower or to any other Person described on Schedule 2.01 hereof as directed by the Borrower pursuant to this Loan Agreement, from time to time during the period from the Closing Date to the Business Day next preceding the Revolving Credit Termination Date, revolving credit loans (hereinafter each individually, a "Revolving Credit Loan" and collectively, the "Revolving Credit Loans"), in an amount which shall not exceed, in the aggregate at any time outstanding, the Revolving Credit Loan Sublimit; provided, however, at no time shall the aggregate principal amount of all Revolving Credit Loans outstanding at any time exceed the Maximum Amount of Revolving Credit Loans at such time. The Revolving Credit Loans shall be evidenced by the Revolving Credit Note. The Lender is hereby authorized to record the date and amount of each Revolving Credit Loan made by the Lender, the date and amount of each payment or prepayment of principal thereof either (1) on the Schedule "A" annexed to and constituting a part of the Revolving Credit Note or (2) by entering such information into the Lender's automated loan tracking system, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided, however, the failure to make such notation(s) with respect to any Borrowing shall not limit or otherwise affect the obligation of the Borrower to the Lender under this Loan Agreement or the Revolving Credit Note. If the outstanding amount of the Revolving Credit Loans shall exceed the amount of the Revolving Credit Loan Sublimit at any time, such excess shall be immediately payable to the Lender. 22 (b) Revolving Credit Loans may be voluntarily prepaid pursuant to Section 2.04 hereof and, subject to the provisions of this Loan Agreement, any amounts so prepaid may be reborrowed, up to the amount available under this Section 2.01(i) at the time of such Borrowing, until the Business Day next preceding the Revolving Credit Termination Date. The Lender's commitment to make Revolving Credit Loans shall expire, and each Revolving Credit Loan then outstanding shall be repaid by the Borrower no later than the Revolving Credit Termination Date. (ii) Notice of Borrowing. Whenever the Borrower desires to borrow a Prime Rate Loan or an Eurodollar Rate Loan under this Section 2.01, the Borrower shall deliver to the Lender a Notice of Borrowing no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the proposed Borrowing Date, in the case of a Borrowing as a Prime Rate Loan, and at least two (2) Business Days in advance of the proposed Borrowing Date in the case of a Borrowing as a Eurodollar Rate Loan. The Notice of Borrowing shall specify (a) the Borrowing Date (which shall be a Business Day) in respect of the Revolving Credit Loan, (b) the amount of the proposed Borrowing which shall not be less than $25,000.00, (c) the intended use of the proceeds of such Borrowing, (d) the applicable interest rate option as described in Section 2.02(i) of this Loan Agreement and, if applicable (e) the Eurodollar Interest Period. In lieu of delivering the above-described Notice of Borrowing, the Borrower may give the Lender telephonic notice of any proposed Borrowing by the time required under this Section 2.01(ii); provided, however, that such notice shall be confirmed in writing by delivery to the Lender promptly (but in no event later than the Borrowing Date of the requested Revolving Credit Loan) of a Notice of Borrowing. Any Notice of Borrowing (or telephonic notice in lieu thereof) pursuant to this Section 2.01(ii) shall be irrevocable. (iii) Making of Revolving Credit Loans. The Lender shall make the proceeds of such Revolving Credit Loan available to the Borrower at the Lender's Office, no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on such Borrowing Date and shall disburse such funds in Dollars and in immediately available funds to an account of the Borrower maintained with the Lender and thereafter to any substitute account, designated in writing by the Borrower in the Notice of Borrowing. (iv) Use of Proceeds of Revolving Credit Facility. The proceeds of the Revolving Credit Facility shall be used by the Borrower for (a) refinancing Consolidated Debt as permitted under this Loan Agreement, including, without limitation, the Consolidated Debt described on Schedule "2.01(iv)" attached hereto, (b) working capital in the ordinary course of the Borrower's and/or its Subsidiaries' and Affiliates' businesses and (c) the issuance of Letters of Credit. Letters of Credit may be used in support of working capital in the ordinary course of business and for other lawful and permitted corporate and/or partnership purposes to the extent not otherwise prohibited hereunder. (v) Reduction of Revolving Credit Facility; Revolving Credit Termination Date. (a) The Borrower shall have the right, at any time and from time to time, to terminate in whole or permanently reduce in part, without premium or fee, the Revolving Credit Facility by an amount up to the amount of the Revolving Credit Facility minus all Revolving Credit 23 Accommodations, then outstanding. The Borrower shall give not less than two (2) Business Days' prior express written notice to the Lender designating the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction. Such termination or partial permanent reduction of the Revolving Credit Facility shall be effective on the date specified in the Borrower's notice. Any such partial permanent reduction of the Revolving Credit Facility shall be in an aggregate minimum principal amount of $250,000.00 and integral multiples of $25,000.00 in excess of that amount. (b) The Revolving Credit Facility shall expire without further action on the part of the Lender, and all then outstanding Revolving Credit Loans and Reimbursement Obligations shall be repaid in full on June 30, 1999, except for the Letter of Credit described in Section 2.01 (vi) (a) (3) below. (vi) Issuance of Letters of Credit. (a) Subject to the terms and conditions set forth in this Loan Agreement, the Lender agrees to issue for the account of the Borrower and/or those Persons described on Schedule 2.01 of this Loan Agreement, one or more Letters of Credit up to an aggregate face amount at any time outstanding equal to the amount of the Revolving Credit Facility minus all outstanding Revolving Credit Accommodations, from time to time during the period commencing on the Closing Date and ending on a Business Day at least two (2) Business Days preceding the Revolving Credit Termination Date. The Letter of Credit Obligations shall constitute financial accommodations under the Revolving Credit Facility and shall reduce availability for Revolving Credit Loans under the Revolving Credit Facility by the amount of such Letter of Credit Obligations in excess of $7,500,000.00. Each Letter of Credit (1) shall be denominated in Dollars, (2) shall be in all instances a standby letter of credit except with respect to a direct pay Letter of Credit which the Lender will issue in connection with the replacement of the JP Morgan Irrevocable Letter of Credit No. PB-284327, dated December 19, 1991 and (3) shall expire no later than June 30, 1999, except for the Letter of Credit between OMI Acquisition Corp. d/b/a OMI Corp and the Government of Israel in the maximum amount of $3,650,000.00 which may terminate no later than July 30, 1999. Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the Commonwealth of Pennsylvania. (b) In addition to being subject to the satisfaction of the conditions precedent contained in Section 3.02 hereof, the obligation of the Lender to issue any Letter of Credit is subject to the satisfaction in full of the following conditions: (1) the Borrower shall have delivered to the Lender at such times and in such manner as the Lender may prescribe, a Letters of Credit Reimbursement Agreement and such other documents and materials as may be required pursuant to the terms thereof; (2) immediately after the issuance of such Letter of Credit the aggregate principal amount of Letter of Credit Obligations then existing shall not exceed the difference between the amount of the Revolving Credit Facility minus all Revolving Credit Accommodations then existing; and 24 (3) as of the date of issuance, no order, judgment or decree of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain the Lender from issuing the Letter of Credit and no Law applicable to the Lender and no request or directive (whether or not having the force of Law and whether or not the failure to comply therewith would be unlawful) from any Governmental Authority with jurisdiction over the Lender shall prohibit or request that the Lender refrain from the issuance of letters of credit generally or the issuance of such Letter of Credit. (c) Notwithstanding any provisions to the contrary in any Letter of Credit Reimbursement Agreement: (1) the Borrower shall unconditionally reimburse the Lender for drawings under such Letter of Credit no later than the time specified in such Letters of Credit Reimbursement Agreement irrespective of any claim, setoff, defense or other right which the Borrower may have at any time against the Lender or any other Person, except with respect to the Lender's gross negligence or willful misconduct; and (2) in connection with a Letter of Credit issued by the Lender, to the extent any Reimbursement Obligation is not paid when due, such Reimbursement Obligation shall be deemed to be a Revolving Credit Loan payable to the Lender in the amount of such Reimbursement Obligation; (3) any Reimbursement Obligation with respect to any Letter of Credit shall bear interest from the date of the relevant drawing under the pertinent Letter of Credit at the interest rate applicable to Prime Rate Loans until paid in full. (d) No action taken or omitted to be taken by the Lender under or in connection with any Letter of Credit (except in connection with its gross negligence or willful misconduct) shall put the Lender under any resulting liability to the Borrower. In the event this Loan Agreement and any Letter of Credit Reimbursement Agreement are inconsistent, the terms of this Loan Agreement shall prevail. In addition, notwithstanding any terms, conditions and/or provisions of any Letter of Credit Reimbursement Agreement that states that a Letter of Credit has been collateralized or otherwise secured by assets of the Borrower, the Lender agrees that (1) no collateral has been or will be given to it as security for any Letter of Credit, (2) no property is or will be held in trust for the Lender and (3) the Lender will not be granted a security interest of any kind. (e) The Borrower and/or the Persons described on Schedule 2.01 attached hereto, may from time to time request that the Lender issue a Letter of Credit by delivering to the Lender at its address for notices specified herein, Letters of Credit Reimbursement Agreement therefor, completed to the satisfaction of the Lender, and such other certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Lender be required to issue any Letter of Credit earlier than three Business Days 25 after its receipt of the Letters of Credit Reimbursement Agreement therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by Lender and the Borrower. The Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. (vii) Lender Not Liable. (a) In addition to amounts payable as provided elsewhere in Section 2.01(vi) hereof, the Borrower hereby agrees to protect, indemnify, pay and save the Lender harmless from and against any and all Liabilities and Costs which the Lender may incur or be subject to as a consequence, direct or indirect, of (1) the issuance of a Letter of Credit for the account of the Borrower, other than as a result of the Lender's gross negligence or willful misconduct, as determined by the final judgment of a court of competent jurisdiction or (2) the failure of the Lender to honor a drawing under such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions hereinafter referred to as the "Governmental Acts"). (b) As between the Borrower, its Subsidiaries, its Affiliates and the Lender, the Borrower assumes all risks of the acts and omissions of, or misuses of any Letter of Credit by the beneficiary of such Letter of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letters of Credit Reimbursement Agreement, the Lender shall not be responsible (except in connection with its gross negligence or willful misconduct): (1) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (2) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or part, which may prove to be invalid or ineffective for any reason; (3) for failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (4) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, or other similar form of teletransmissions or otherwise, whether or not they be in cipher; (5) for errors in interpretation of technical terms; (6) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (7) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (8) for any consequences arising from causes beyond the control of the Lender including, without limitation, any Governmental Acts. None of the above shall affect, impair, or prevent the vesting of any of the rights or powers of the Lender under this Loan Agreement. (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Lender under or in connection with Letters of Credit issued on behalf of the Borrower and/or the Persons described on Schedule 2.01 attached hereto, or any related certificates, if taken or omitted in good faith, shall not, in the absence of gross negligence or willful misconduct, put the Lender under any resulting liability to the Borrower or relieve the Borrower of any of its obligations hereunder to any such Person. 26 Section 2.02 Interest on the Revolving Credit Loans. (i) Rate of Interest. (a) All Revolving Credit Loans shall bear interest computed daily on the outstanding principal balance thereof from the date made until paid in full at one or more of the interest rate options selected by the Borrower from among the two (2) interest rate options set forth below. Subject to the provisions of this Loan Agreement, the Borrower may select different options to apply simultaneously to different portions of the Revolving Credit Loans and may select different Funding Segments to apply simultaneously to different parts of the Eurodollar Rate Portion of the Revolving Credit Loans. Each selection of a rate option shall apply separately and without overlap to the Revolving Credit Loans as a class. The aggregate number of Funding Segments applicable to the Eurodollar Rate Portion of the Revolving Credit Loans at any time shall not exceed twenty (20). Interest Rate Options For Revolving Credit Loans: (1) Prime Rate: A fluctuating rate per annum for each day equal to the Prime Rate of the Lender, in effect from time to time (such interest rate to change immediately upon any change in the Prime Rate); or (2) Eurodollar Rate. A fixed rate per annum for each day during a Eurodollar Interest Period equal to the Eurodollar Rate for such Eurodollar Interest Period plus one hundred seventy-five (175) basis points. The Lender shall give prompt notice to the Borrower of the Eurodollar Rate determined or adjusted in accordance with the provisions hereof, which determination or adjustment shall be conclusive (absent manifest error) if made in good faith. (b) Notwithstanding subparagraph (a) above, interest in respect of any Revolving Credit Loans shall not exceed the maximum rate permitted by applicable Law. (ii) Interest Payments. Subject to Section 2.02(iv) hereof, interest accrued on all Prime Rate Loans shall be payable by the Borrower in arrears (a) on the first day of each Fiscal Quarter during the term of this Loan Agreement, with the first payment commencing on July 1, 1996 and (b) at maturity. Interest accrued on each Eurodollar Rate Loan shall be payable by the Borrower in arrears (1) on each Eurodollar Interest Payment Date applicable to that Loan, (2) upon prepayment thereof in full or in part and (3) at maturity. (iii) Conversion or Continuation. (a) Subject to the provisions of Section 2.06 hereof, the Borrower shall have the option (1) to convert at any time all or any part of outstanding Revolving Credit Loans which, in the aggregate, equal $100,000.00 or an integral multiple of $1,000.00 in excess of that amount from Prime Rate Loans to Eurodollar Rate Loans; or (2) to convert all or any part of outstanding Revolving Credit Loans which, in the aggregate, equal $100,000.00 or an integral multiple of $1,000.00 in excess of that amount from Eurodollar Rate Loans to Prime Rate Loans on the expiration date of any Eurodollar Interest Period applicable thereto; or (3) upon the 27 expiration of any Eurodollar Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Revolving Credit Loans equal to $100,000.00 or an integral multiple of $1,000.00 in excess of that amount as Eurodollar Rate Loans of the same type, and the succeeding Eurodollar Interest Period of such continued Revolving Credit Loans shall commence on the expiration date of the Eurodollar Interest Period applicable thereto; provided, however, that no outstanding Revolving Credit Loan may be continued as, or be converted into, a Eurodollar Rate Loan when any Event of Default or Potential Event of Default has occurred and is continuing. (b) In the event the Borrower shall elect to convert or continue a Revolving Credit Loan under this Section 2.02(iii), the Borrower shall deliver a Notice of Conversion/Continuation to the Lender no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the proposed conversion date in the case of a conversion to a Prime Rate Loan, and no later than 2:00 p.m. (Philadelphia, Pennsylvania time) at least two Business Days in advance of the proposed conversion/continuation date in the case of a conversion to or a continuation of a Eurodollar Rate Loan. A Notice of Conversion/Continuation shall specify (1) the proposed conversion/continuation date (which shall be a Business Day), (2) the amount of the Revolving Credit Loan to be converted/continued, (3) the nature of the proposed conversion/continuation and (4) in the case of a conversion to, or continuation of, a Eurodollar Rate Loan, the requested Eurodollar Interest Period. In lieu of delivering the above-described Notice of Conversion/Continuation, the Borrower may give the Lender telephonic notice of any proposed conversion/continuation by the time required under this Section 2.02(iii); provided, however, that such notice shall be confirmed in writing by delivery to the Lender promptly (but in no event later than the proposed conversion/continuation date) of a Notice of Conversion/Continuation. (c) Any Notice of Conversion/Continuation for conversion to, or continuation of, a Revolving Credit Loan (or telephonic notice in lieu thereof) shall be irrevocable and the Borrower shall be bound to convert or continue in accordance therewith. (iv) Default Interest. Notwithstanding the rates of interest specified in Section 2.02(i) hereof and the payment dates specified in Section 2.02(ii) hereof, effective immediately upon the occurrence of any Event of Default under Section 9.01 of this Loan Agreement and for as long thereafter as any such Event of Default shall be continuing, the principal balance of all Loans then outstanding and, to the extent permitted by applicable Law, any interest payments on the Loans not paid when due, shall bear interest payable upon demand at the Default Rate. (v) Computation of Interest. Interest on Prime Rate Loans and Eurodollar Rate Loans shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days. In computing interest on any Revolving Credit Loan, the date of the making of the Revolving Credit Loan or the first day of a Eurodollar Interest Period, as the case may be, shall be included and the date of payment or the expiration date of a Eurodollar Interest Period, as the case may be, shall be excluded; provided, however, that if a Revolving Credit Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Revolving Credit Loan. 28 (vi) Changes; Legal Restrictions. Except as provided in Section 2.06(iv) hereof with respect to certain determinations on Eurodollar Interest Rate Determination Dates, in the event that after the date hereof (a) the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a court or Governmental Authority or any change in the interpretation or application thereof by a court or Governmental Authority, or (b) compliance by the Lender with any request or directive from any central bank or other Governmental Authority or quasi-governmental authority: (1) subjects the Lender (or its applicable lending office or Eurodollar Affiliate) to any taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any kind which the Lender determines to be applicable to this Loan Agreement, the Revolving Credit Loans, or change in the basis of taxation of payments to the Lender of principal, fees, interest, or any other amount payable hereunder, except for net income or franchise taxes imposed by any jurisdiction (all such non-excepted taxes, duties and other charges being hereinafter referred to as "Taxes"); or (2) does or may impose, modify, or hold applicable, in the determination of a Lender, any reserve, special deposit, compulsory loan, FDIC insurance, capital allocation or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, commitments made, or other credit extended by, or any other acquisition of funds by, the Lender or any applicable lending office or Eurodollar Affiliate of the Lender (except, with respect to Prime Rate Loans to the extent that the reserve and FDIC insurance requirements are reflected in the definition of "Prime Rate" and, with respect to a Eurodollar Rate Loan, to the extent that the reserve requirements are reflected in the definition of "Eurodollar Rate"); or (3) does or is reasonably likely to impose on the Lender any other condition materially more burdensome in nature, extent or consequence than those in existence as of the Closing Date; and the result of any of the foregoing is to increase the cost to the Lender of making, renewing or maintaining the Revolving Credit Loans, then, in any such case, the Borrower shall promptly pay to the Lender, upon demand, such amount or amounts (based upon an allocation thereof by the Lender to the financing transactions contemplated by this Loan Agreement and effected by this Section 2.02 (vi) as may be necessary to compensate the Lender for any such additional cost incurred or reduced amount received. The Lender shall deliver to the Borrower a written statement of the costs or reductions claimed and the basis therefore, and the allocation made by the Lender of such costs and reductions shall be conclusive, absent manifest error. If the Lender subsequently recovers any amounts previously paid by the Borrower pursuant to this Section 2.02 (vi), the Lender shall, within thirty (30) days after receipt of such refund and to the extent permitted by applicable Law, pay to the Borrower the amount of any such recovery. Section 2.03. Fees. (i) Facility Fee. The Borrower has paid to the Lender the Facility Fee as of the Closing Date. 29 (ii) Unused Commitment Fee. The Borrower shall pay to the Lender an unused commitment fee accruing at the rate of one-eighth of one percent (0.125%) per annum from and after the Closing Date until the Obligations are repaid in full and the Revolving Credit Facility is terminated, upon the average daily amount of the excess of the Revolving Credit Facility over all Revolving Credit Accommodations from time to time. All such commitment fees payable under this Section 2.03 shall be calculated and payable quarterly in arrears on the first Business Day in each Fiscal Quarter beginning after the Closing Date. (iii) Late Charge Fee. In the event that any payment, including, without limitation, interest or principal, required to be made by the Borrower under the Revolving Credit Note or under this Loan Agreement shall not be received by the Lender within fifteen (15) days of when due, the Lender may charge, and if so charged, the Borrower shall pay, a late charge of ($0.05) for each dollar ($1.00) of each delinquent payment for the purpose of defraying the expense incident to the handling of such delinquent payment. In no event shall said late charge fee be less than ten dollars ($10.00). (iv) Letter of Credit Fees. The Borrower shall pay to the Lender in connection with the issuance, termination, draw under, transfer of and any other related Letter of Credit activity, the Lender's customary fees as are established from time to time and are generally applicable to customers of the Lender. Such fees shall include, but not be limited to, a fee payable at the time of issuance of each Letter of Credit in the amount equal to seventy-five (75) basis points of the face amount of said Letter of Credit, calculated on an annualized basis. (v) Payment of Fees. The fees described in this Section 2.03 represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit, and the obligation of the Borrower to pay each fee described herein shall be in addition to, and not in lieu of, the obligation of the Borrower to pay interest, other fees and expenses otherwise described in this Loan Agreement and the Commitment Letter. Fees shall be payable when due at the Office of the Lender in immediately available funds. All fees shall be non-refundable when paid. All fees and expenses specified or referred to in this Loan Agreement due and owing to the Lender, including, without limitation, those referred to in this Section 2.03 and in Section 10.01 hereof and in the Commitment Letter, shall bear interest, if not paid when due, at the Default Rate (but not to exceed the maximum rate permitted by applicable Law), shall constitute Obligations. All fees described in this Section 2.03 and the Commitment Letter which are expressed as a per annum charge shall be calculated on the basis of the actual number of days elapsed in a 360-day year. Section 2.04 Voluntary Prepayments. (i) The Borrower may, at any time and from time to time, upon the giving of at least one (1) Business Days' prior express written notice to the Lender, voluntarily prepay any Prime Rate Loan in whole or in part, without premium or fee, in an aggregate minimum amount of $25,000.00 and in integral multiples of $1,000.00 ,provided, however,: any principal prepayment of a Prime Rate Loan shall be accompanied by the payment of all unpaid accrued interest due and owing on said Prime Rate Loan. 30 (ii) The Borrower may, at any time and from time to time, upon the giving of at least one (1) Business Days' prior express written notice to the Lender, voluntarily prepay any Eurodollar Rate Loan in whole or in part, in an aggregate minimum amount of $25,000.00 and in integral multiples of $1,000.00, subject to the following: (a) any principal prepayment of a Eurodollar Rate Loan shall be accompanied by the payment of all unpaid accrued interest due and owing on said Eurodollar Rate Loan and (b) the Borrower shall pay to the Lender all amounts described in Section 2.06(vi) of this Loan Agreement. (iii) Notwithstanding any provision of this Section 2.04 to the contrary, in the event that any prepayments of any Revolving Credit Loans are made in connection with the termination of this Loan Agreement, such prepayments shall be made only upon ten (10) Business Days' prior express written notice to the Lender. Section 2.05 Payments; Collection of Accounts. (i) Manner and Time of Payment. All payments of principal, interest and fees hereunder payable to the Lender shall be made without condition or reservation or right, in Dollars and in immediately available funds, delivered to the Lender not later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the date due, to such account of the Lender at its Office, as the Lender may designate. Funds received by the Lender after that time and date shall be deemed to have been paid on the next succeeding Business Day. The Lender shall send a monthly and/or quarterly invoice, as applicable, to the Borrower reflecting the accrued interest due and owing and all fees due and owing hereunder. The Borrower hereby agrees that on the Business Day that any payment of principal, interest and fees are due, the Lender shall automatically charge a demand deposit account of the Borrower, which account shall be maintained with the Lender at all times throughout the term of the Revolving Credit Facility. The Borrower's authorization of the Lender to charge such account having sufficient funds on deposit shall constitute payment of the amount so authorized notwithstanding the Lender's failure to charge said account. Any failure or delay by the Lender in submitting invoices for interest and fee payments shall not discharge or relieve the Borrower of the obligation to make such payments into the demand deposit account. (ii) Apportionment of Payments. So long as there does not exist an Event of Default, all payments of principal and interest in respect of outstanding Revolving Credit Loans, all payments of the fees described herein and in the Commitment Letter, and all payments in respect of any other Obligation shall be allocated by the Borrower as it may be entitled thereto as provided herein. After the occurrence and during the continuance of an Event of Default, the Lender shall, after providing notice to the Borrower that payments and proceeds shall be so applied, apply all payments remitted to the Lender subject to the provisions of this Loan Agreement, (a) first, to pay Obligations in respect of any fees, expense reimbursements or indemnities then due and owing to the Lender from the Borrower; (b) second, to pay interest due in respect of Revolving Credit Loans and Reimbursement Obligations; (c) third, to pay or prepay principal of Revolving Credit Loans and (d) fourth, to the ratable payment of all other Obligations. 31 (iii) Payments on Non-Business Days. Whenever any payment to be made by the Borrower hereunder shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder and of any of the fees specified in Section 2.03 hereof, as the case may be. (iv) Lender's Accounting. The Lender shall maintain a loan account (hereinafter referred to as the "Loan Account") on its books in which shall be recorded (a) principal amount of Revolving Credit Loans owing to the Lender from time to time; (b) all other appropriate debits and credits as provided in this Loan Agreement, including, without limitation, all interest, fees, expenses, charges and other Obligations; (c) all payments of Obligations made by the Borrower or for the Borrower's account; and (d) all Letter of Credit Obligations. All entries in the Loan Account shall be made in accordance with the Lender's customary accounting practices as in effect from time to time. The Lender will render a statement of the Loan Account upon the request of the Borrower. Each and every such statement shall be deemed final, binding and conclusive upon the Borrower in all respects as to all matters reflected therein (absent manifest error), unless the Borrower, within ten (10) days after the date such statement is rendered, delivers to the Lender written notice of any objection which the Borrower may have to any such statement. In that event, only those items expressly objected to in such notice shall be deemed to be disputed by the Borrower. Section 2.06 Special Provisions Governing Eurodollar Rate Loans. Notwithstanding other provisions of this Loan Agreement to the contrary, if any, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: (i) Amount of Eurodollar Rate Loans. Each Eurodollar Rate Loan shall be for a minimum amount of $100,000.00 and in integral multiples of $1,000.00 in excess of that amount. (ii) Determination of Eurodollar Interest Period. By giving notice as set forth in Sections 2.01 (ii) and 2.02(iii) hereof (with respect to a conversion into or a continuation of Eurodollar Rate Loans), the Borrower shall have the option, subject to the other provision of this Section 2.06, to specify an Eurodollar Interest Period to apply to the Borrowing of Eurodollar Rate Loans described in such notice, subject to availability. The determination of Eurodollar Interest Periods shall be subject to the following provisions: (a) In the case of immediately successive Eurodollar Interest Periods applicable to a Borrowing of Eurodollar Rate Loans, each successive Eurodollar Interest Period shall commence on the day on which the next preceding Eurodollar Interest Period expires; (b) If any Eurodollar Interest Period would otherwise expire on a day which is not a Business Day, the Eurodollar Interest Period shall be extended to expire on the next succeeding Business Day; provided, however, that if any such Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans would otherwise expire on a day which is not a Business Day 32 but is a day of the month after which no further Business Day occurs in that month, that Eurodollar Interest Period shall expire on the immediately preceding Business Day; (c) The Borrower may not select a Eurodollar Interest Period for any Revolving Credit Loan which terminates later than the Revolving Credit Termination Date; (d) The Borrower may not select a Eurodollar Interest Period with respect to any portion of principal of a Eurodollar Rate Loan which extends beyond a date on which the Borrower is required to make a scheduled payment of any portion of principal, it being understood and agreed that any Eurodollar Rate Loan whose Eurodollar Interest Period ends less than one month prior to such required principal payment date shall be deemed converted to a Prime Rate Loan as of the last day of such Eurodollar Interest Period for purposes of determining whether any portion of principal of any Eurodollar Rate Loan is required in order to make a mandatory payment of principal; and (e) There shall be no more than twenty (20) Eurodollar Interest Periods under this Loan Agreement in effect at any one time under the Revolving Credit Facility. (iii) Determination of Interest Rate. As soon as practicable after 2:00 p.m. (Philadelphia, Pennsylvania time) on any Eurodollar Interest Rate Determination Date, the Lender shall determine (which determination shall, absent manifest error, be rebuttably presumed correct) the interest rate which shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Eurodollar Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrower. (iv) Interest Rate Unascertainable, Inadequate or Unfair. If, with respect to any Eurodollar Interest Period, the Lender determines that (a) deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Eurodollar Interest Period, (b) adequate and reasonable means do not exist for ascertaining the Eurodollar Rate or (c) a contingency has occurred which materially and adversely affects the London interbank Eurodollar market then the Lender shall forthwith give notice thereof to the Borrower, whereupon until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (1) the right of the Borrower to elect to have Revolving Credit Loans bear interest based upon the Eurodollar Rate shall be suspended and (2) each outstanding Eurodollar Rate Loan shall be converted into a Prime Rate Loan on the last day of the then current Eurodollar Interest Period therefor, notwithstanding any prior election by the Borrower to the contrary. (v) Illegality. (a) In the event that on any date the Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties) that the making or continuation of any Eurodollar Rate Loan has become unlawful by compliance by the Lender in good faith with any Law, of any Governmental Authority (whether or not having the force of Law and whether or not failure to comply therewith would be unlawful), then, and in any such event, the Lender shall promptly give notice (by telephone promptly confirmed in writing) to the Borrower. 33 (b) Upon the giving of the notice referred to in Section 2.06(v)(a) hereof, (1) the Borrower's right to request of the Lender and the Lender's obligation to make Eurodollar Rate Loans shall be immediately suspended, and the Lender shall make a Revolving Credit Loan, as part of any requested Borrowing of Eurodollar Rate Loans, as a Prime Rate Loan, which Prime Rate Loan shall, for all purposes, be considered a part of such Borrowing, and (2) if the affected Eurodollar Rate Loan or Loans are then outstanding, the Borrower shall immediately (or, if permitted by applicable Law, no later than the date permitted thereby, upon at least one Business Day's written notice to the Lender) convert each such Revolving Credit Loan into a Prime Rate Loan. (c) In the event that the Lender determines at any time following its giving of the notice referred to in Section 2.06(iv) and Section 2.06(v)(a) hereof that the Lender may lawfully make Eurodollar Rate Loans of the type referred to in such notice, the Lender shall promptly give notice (by telephone confirmed in writing) to the Borrower of that determination, whereupon the Borrower's right to request of the Lender, and the Lender's obligation to make, Eurodollar Rate Loans shall be restored. (vi) Compensation. In addition to such amounts as are required to be paid by the Borrower pursuant to Sections 2.02(iv), 2.02(vi), 2.03 (iii), 2.04(ii), 2.06(vii), 2.07 and 2.09 hereof, the Borrower shall compensate the Lender, upon demand, for all losses, expenses and liabilities (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds required by the Lender to fund or maintain the Lender's Eurodollar Rate Loans) which losses, expenses and liabilities the Lender may sustain (a) if for any reason a Borrowing, conversion or continuation of Eurodollar Rate Loans does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion/Continuation or in a telephonic request for borrowing or conversion/continuation or a successive Eurodollar Interest Period does not commence after notice therefor is given pursuant to Section 2.02(iii) hereof as a result of any action or inaction on the part of any Person (other than the Lender), (b) if any prepayment of an Eurodollar Rate Loan (including, without limitation, any prepayment pursuant to Section 2.04 hereof) occurs for any reason on a date which is not the last day of the applicable Eurodollar Interest Period, (c) as a consequence of any required conversion of a Eurodollar Rate Loan to a Prime Rate Loan as a result of any of the events indicated in Section 2.06(v) or (d) as a consequence of any other failure by the Borrower to repay Eurodollar Rate Loans when required by the terms of this Loan Agreement. The Lender shall deliver to the Borrower a written statement as to such losses, expenses and liabilities which statement shall be conclusive as to such amounts in the absence of manifest error. (vii) Eurodollar Rate Taxes. The Borrower agrees that: (a) the Borrower will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of a Revolving Credit Loan solely as a result of the interest rate being determined by reference to the Eurodollar Rate or the provisions of this Loan Agreement relating to the Eurodollar Rate or the recording, registration, notarization or other 34 formalization of any thereof or any payments of principal, interest or other amounts made on or in respect of a Revolving Credit Loan made to the Borrower when the interest rate is determined by reference to the Eurodollar Rate (all such taxes, levies, costs and charges being hereinafter collectively called "Eurodollar Rate Taxes"); provided, however, that Eurodollar Rate Taxes shall not include net income or franchise taxes imposed by any jurisdiction. The Borrower shall also pay such additional amounts equal to increases in net income or franchise taxes attributable to payments made by the Borrower pursuant to this clause (a). Promptly after the date on which payment of any such Eurodollar Rate Tax is due pursuant to applicable law, the Borrower will, at the request of the Lender, furnish to the Lender evidence, in form and substance satisfactory to the Lender, that the Borrower has met its obligation under this Section 2.06(vii); and (b) the Borrower will indemnify the Lender against, and reimburse the Lender on demand for, any Eurodollar Rate Taxes paid by the Lender in respect of a Revolving Credit Loan made to the Borrower, as determined by the Lender in its sole discretion. The Lender shall provide the Borrower with (1) appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this clause (b) and (2) such information as may reasonably be required to indicate the basis for such Eurodollar Rate Taxes; provided, however, that if the Lender subsequently recovers, or receives a net tax benefit with respect to, any amount of Eurodollar Rate Taxes previously paid by the Borrower pursuant to this Section 2.06(vii)(b), the Lender shall, within thirty (30) days after receipt of such refund, and to the extent permitted by applicable law, pay to the Borrower the amount of any such recovery or permanent net tax benefit. (viii) Booking of Eurodollar Rate Loans. The Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of, any of its branch offices, agencies or the office of an Affiliate of the Lender; provided, however, the Lender shall not be entitled to receive any greater amount under Section 2.02(vi) or 2.06(vii) hereof as a result of the transfer of any such Revolving Credit Loan than the Lender would be entitled to immediately prior thereto unless (a) such transfer occurred at a time when circumstances giving rise to the claim for such greater amount did not exist and were not reasonably foreseeable in the view of the Lender and (b) such claim would have arisen even if such transfer had not occurred. (ix) Affiliates Not Obligated. No Eurodollar Affiliate or other Affiliate of the Lender shall be deemed a party to this Loan Agreement or shall have any rights, liability or obligation under this Loan Agreement. Section 2.07 Increased Capital. If either (i) the introduction of or any change in or in the interpretation of any Law or regulation or (ii) compliance by the Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender determines that the amount of such capital is increased by or based upon the existence of the Lender's commitment to make Revolving Credit Loans and other commitments of this type or upon the existence of letters of credit (or similar contingent obligations), then, upon demand by the Lender, the Borrower shall immediately pay to the Lender, 35 from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender in the light of such circumstances, to the extent that the Lender determines such increase in capital to be allocable to the existence of the Lender's commitment to fund the Revolving Credit Facility. A certificate as to such amounts submitted to the Borrower by the Lender, shall, in the absence of manifest error, be conclusive and binding for all purposes. Section 2.08. Authorized Officers of the Borrower. The Borrower shall notify the Lender in writing of the names of the officers and employees authorized to request Revolving Credit Loans and shall provide the Lender with a specimen signature of each such Authorized Officer. The Lender shall be entitled to rely conclusively on such officer's or employee's authority to request such Revolving Credit Loans until the Lender receives written notice to the contrary. The Lender shall have no duty to verify the authenticity of the signature appearing on any written Notice of Borrowing or Notice of Conversion/Continuation and, with respect to an oral request for such a Revolving Credit Loan, the Lender shall have no duty to verify the identity of any Person representing himself as one of the officers or employees authorized to make such request on behalf of the Borrower. The Lender shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above which the Lender believes in good faith to have been given by a duly Authorized Officer or other Person authorized to borrow on behalf of the Borrower or for otherwise acting in good faith under this Section 2.08. 36 Section 2.09 Taxes. (i) Payments Net of Taxes. All payments made by the Borrower under this Loan Agreement or any other Loan Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to the Lender under this Loan Agreement or any other Loan Document, the Borrower shall pay the relevant amount of such Taxes and the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Loan Agreement and the other Loan Documents. Whenever any Taxes are paid by the Borrower with respect to payments made in connection with this Loan Agreement or any other Loan Document, as promptly as possible thereafter, the Borrower shall send to the Lender for its own account a certified copy of an original official receipt received by the Borrower showing payment thereof. (ii) Indemnity. The Borrower hereby indemnifies the Lender for the full amount of all Taxes attributable to payments by or on behalf of the Borrower hereunder or under any of the other Loan Documents (including any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any failure to pay such Taxes unless such failure was the result of the action or inaction of the Lender to notify the Borrower in writing of the existence of such Taxes). Such indemnification shall be made within thirty (30) days from the date the Lender makes written demand therefor. 37 ARTICLE III CONDITIONS TO THE REVOLVING CREDIT LOANS Section 3.01 Conditions Precedent to the Effectiveness of this Loan Agreement. This Loan Agreement shall become effective on the Closing Date when the following conditions precedent have been satisfied (unless waived by the Lender or unless the deadline for delivery has been extended by the Lender): (i) Certain Documents. The Lender shall have received on or before the Closing Date all of the following, all of which, except as otherwise specifically described below, shall be in form and substance satisfactory to the Lender: (a) This Loan Agreement together with all Exhibits and Schedules attached hereto; (b) A Notice of Borrowing pursuant to Section 2.01 hereof dated the Closing Date executed by the Borrower; (c) The Revolving Credit Note; (d) The Agreement of Guaranty; (e) The opinions of counsel to the Borrower substantially in the form of Exhibit "E" attached hereto; (f) A certificate of the Secretary or Assistant Secretary of the Borrower, its Subsidiaries and its corporate Affiliates dated the Closing Date certifying (1) the names and true signatures of the incumbent officers of the Borrower, its Subsidiaries and its corporate Affiliates authorized to sign this Loan Agreement and all other Loan Documents executed by the Borrower, its Subsidiaries and its corporate Affiliates in connection with this Loan Agreement, (2) the By-Laws of the Borrower, its Subsidiaries and its corporate Affiliates as in effect on the date of such certification, (3) the resolutions of the Borrower's, its Subsidiaries' and its corporate Affiliates' respective Boards of Directors approving and authorizing the execution, delivery and performance of this Loan Agreement and all other Loan Documents which were executed by the Borrower, its Subsidiaries and its corporate Affiliates in connection herewith and (4) that there have been no changes in the Certificate of Incorporation and By-Laws of the Borrower since the date of the most recent certification thereof by the Office of the appropriate Secretary of State delivered to the Lender prior to the Closing Date; (g) The Certificate of Incorporation of the Borrower, its Subsidiaries and/or its corporate Affiliates as amended, modified or supplemented to the Closing Date, shall be certified to be true, correct and complete by the appropriate Secretaries of State as of dates acceptable to the Lender; 38 (h) Good Standing Certificate(s) certified by the appropriate Secretaries of State relating to the Borrower, its Subsidiaries and/or its corporate Affiliates for each of the states in which the Borrower, its Subsidiaries and/or its corporate Affiliates are qualified to conduct business; (i) The annual operating plan for the 1997 Fiscal Year. (j) Evidence of the insurance required by this Loan Agreement; (k) A contemporaneous search of UCC, real property, tax, judgment and litigation dockets and records and other appropriate registers shall have revealed no filings or recordings in effect with respect to the Borrower, its Subsidiaries and its Affiliates, except such as are acceptable to the Lender, and the Lender shall have received a copy of the search reports received as a result of the search; and (l) The partnership agreements for each of the Partnership Guarantors shall be certified to be true, correct and complete by the Partnership Guarantors as of the Closing Date. (m) Such additional documentation as the Lender may reasonably require. (ii) Fees and Expenses Paid. The Borrower shall have paid to the Lender, for its own account, all fees and expenses due and payable under this Loan Agreement and the Commitment Letter on or before the Closing Date. (iii) Representations and Warranties. All of the representations and warranties of the Borrower, the Corporate Guarantors and/or the Partnership Guarantors contained in subsections (i) through (xxxi) of Section 4.01 hereof and in any other Loan Document (other than for changes permitted or contemplated by this Loan Agreement and/or the Agreement of Guaranty) shall be true and correct in all material respects on and as of the Closing Date as though made on and as of that date (except any such representations and warranties stated to be given on a specific date other than the Closing Date). (iv) No Default. No Event of Default or Potential Event of Default hereunder or under the other Loan Documents shall have occurred and be continuing on the Closing Date. (v) No Injunction. No Requirements of Law shall prohibit, and no order, judgment or decree of any Governmental Authority shall and, except as set forth on Schedule 4.01(vii) hereto, no litigation shall be pending or threatened which in the judgment of the Lender would, enjoin, prohibit, restrain, impose or result in the imposition of any material adverse condition upon the consummation of the transactions contemplated hereby. (vi) Consents. The Borrower, the Corporate Guarantors and/or the Partnership Guarantors shall have received all consents and authorizations required pursuant to any material 39 Contractual Obligation with any other Person and shall have obtained all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary to allow the Borrower, the Corporate Guarantors and/or the Partnership Guarantors lawfully to execute, deliver and perform, in all material respects, its obligations under this Loan Agreement and the other Loan Documents. (vii) No Material Adverse Change. No adverse change deemed material by the Lender, in its sole opinion, shall have occurred since the date of the most recent annual audited financial report of the Borrower, its Subsidiaries and its Affiliates delivered to the Lender through the Closing Date, as to the condition (financial or otherwise), operations, performance or properties of the Borrower, its Subsidiaries and its Affiliates individually or taken as a whole. 3.02. Conditions Precedent to All Revolving Credit Loans and the Issuance of Letters of Credit. The obligation of the Lender to make any Revolving Credit Loan and/or issue any Letter of Credit requested to be made and/or issued by it, on any date, is subject to the following conditions precedent as of such date: (i) Notice of Borrowing. With respect to a request for a Revolving Credit Loan, the Lender shall have received in accordance with the provisions of Section 2.01(ii) hereof, on or before any Borrowing Date, an original and duly executed Notice of Borrowing. (ii) Application for Letters of Credit. With respect to a request for the issuance of a Letter of Credit, the Lender shall have received in accordance with the provisions of Section 2.01(vi) hereof, on or before the date of issuance, an original and duly executed Letters of Credit Reimbursement Agreement. (iii) Additional Matters. As of the Borrowing Date for any Revolving Credit Loan and the date of the issuance of any Letter of Credit: (a) Representations and Warranties. All of the representations and warranties of the Borrower contained in subsections (i) through (xxx) of Section 4.01 hereof and in any other Loan Document (other than representations and warranties which expressly speak only of a different date and other than for changes permitted or contemplated by this Loan Agreement) shall be true and correct in all material respects; (b) No Default. No Event of Default or Potential Event of Default shall have occurred and be continuing or would result from the making of the requested Revolving Credit Loan or the issuance of the requested Letter of Credit; (c) No Injunction. No law or regulations shall prohibit, and no order, judgment or decree of any Governmental Authority shall, and, except as set forth on Schedule 4.01(vii) hereto, no litigation shall be pending or threatened which in the reasonable judgment of the Lender would, enjoin, prohibit, restrain, impose or result in the imposition of any material adverse condition upon (1) the Lender from making the Revolving Credit Loan requested to be 40 made on the Borrowing Date and (2) the Lender from issuing the Letter of Credit requested to be issued; and (d) No Material Adverse Change. No adverse change deemed material by the Lender, in its reasonable opinion, shall have occurred after the Closing Date as to the condition (financial or otherwise), operations, performance or properties of the Borrower, its Subsidiaries and/or its Affiliates, individually or taken as a whole. Each submission by the Borrower to the Lender of a Notice of Borrowing with respect to a Revolving Credit Loan and the acceptance by the Borrower of the proceeds of each such Revolving Credit Loan made hereunder or the request for the issuance of a Letter of Credit and the issuance of such Letter of Credit, shall constitute a representation and warranty by the Borrower as of the Borrowing Date in respect of such Revolving Credit Loan that all the conditions contained in this Section 3.02 have been satisfied. 41 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Representations and Warranties on the Effective Date. In order to induce the Lender to enter into this Loan Agreement, the Borrower hereby represents and warrants to the Lender that the following statements are true, correct and complete on and as of the Closing Date: (i) Organization; Corporate Powers. The Borrower (a) is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, (b) is duly qualified to conduct business as a foreign corporation and is in good standing under the Laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) has all requisite power and authority to own, operate and encumber its property and assets and to conduct its business as presently conducted and as proposed to be conducted in connection with and following the consummation of the transactions contemplated by the Loan Documents. (ii) Authority. (a) The Borrower has the requisite corporate power and authority (1) to execute, deliver and perform each of the Loan Documents executed by it, or to be executed by it, and (2) to file the Loan Documents filed by it, or to be filed by it, with the appropriate Governmental Authority. (b) The execution, delivery and performance (or filing, as the case may be) of each of the Loan Documents to which it is a party and the consummation of the transactions contemplated thereby, have been duly authorized by the Board of Directors of the Borrower and no further corporate proceedings on the part of the Borrower are necessary to consummate such transactions. (c) Each of the Loan Documents to which the Borrower is a party has been duly executed and delivered (or filed, as the case may be) by the Borrower and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. (iii) Subsidiaries and Ownership of Capital Stock. As of the Closing Date, the Borrower has eight (8) Subsidiaries. In addition, the two (2) Partnership Guarantors are Affiliates of the Borrower. Schedule 4.01(iii) attached hereto sets forth the number of issued and authorized shares of each class of capital stock of the Borrower. No capital stock (or any securities, instruments, warrants, option or purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock) of the Borrower is subject to issuance under any security, instrument, warrant, option or purchase rights, conversion or exchange rights, call, commitment or claim of any right, title or interest therein or thereto, except as set forth on Schedule 4.01(iii) attached hereto. The outstanding capital stock of the Borrower is duly authorized, validly issued, fully paid and nonassessable and is not Margin Stock. 42 (iv) No Conflict. The execution and delivery by the Borrower, the Corporate Guarantors and the Partnership Guarantors of each Loan Document and the performance of each of the transactions contemplated thereby do not and will not (a) to the best knowledge of the Borrower, constitute a tortious interference with any Contractual Obligation of the Borrower, the Corporate Guarantors and the Partnership Guarantors, (b) conflict with or violate the Borrower's and/or the Corporate Guarantors' respective Certificates of Incorporation or By-Laws, (c) conflict with or violate the Partnership Guarantors' partnership agreements, (d) conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law or, subject to clause (a) above, Contractual Obligation of the Borrower, or require termination of any Contractual Obligation, the consequences of which conflict or default or termination would have or is reasonably likely to have a Material Adverse Effect (e) result in or require the creation or imposition of any Lien whatsoever upon any of the properties or assets of the Borrower, its Subsidiaries and/or its Affiliates (other than Liens permitted pursuant to Section 7.02(ii) hereof) or (f) require any approval of stockholders, other than as otherwise obtained. (v) Governmental Consents. The execution, delivery and performance of each Loan Document and the transactions contemplated thereby do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by any Governmental Authority, except filings, consents or notices which have been, or will in due course, be made, obtained or given. (vi) Governmental Regulation. The Borrower, its Subsidiaries and its Affiliates are not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, the Investment Company Act of 1940 or any other Law such that the Borrower's, its Subsidiaries' and/or its Affiliates' ability to incur indebtedness is limited or their ability to consummate the transactions contemplated hereby is materially impaired. (vii) Litigation; Adverse Effects. (a) Except as set forth in Schedule 4.01(vii) attached hereto, there is no action, suit, proceeding, governmental investigation or arbitration, at law or in equity, or before or by any Governmental Authority, pending, or to the knowledge of the Borrower, threatened against the Borrower, its Subsidiaries and/or its Affiliates or threatened against any Property of the Borrower, its Subsidiaries and its Affiliates which is reasonably likely to (1) result in any Material Adverse Effect, (2) materially and adversely affect the ability of the Borrower, its Subsidiaries and its Affiliates to perform their respective obligations under the Law, any material Contractual Obligation and/or the Loan Documents or (3) materially and adversely affect the ability of the Borrower, its Subsidiaries and/or its Affiliates to perform their collective Obligations or the Lender's ability to enforce such Obligations. (b) The Borrower, its Subsidiaries and its Affiliates are not (1) in violation of any applicable Law which violation has or is reasonably likely to have a Material Adverse Effect or (2) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or Governmental Authority which has or is reasonably likely to have a Material Adverse Effect. Except as set forth in Schedule 4.01(vii) attached hereto, there is no action, suit, proceeding or investigation pending or, to the best knowledge of the Borrower, 43 threatened against or affecting the Borrower, its Subsidiaries and/or its Affiliates challenging the validity or the enforceability of any of the Loan Documents. (viii) No Material Adverse Change. No material adverse change has occurred in (a) the condition (financial or otherwise), operations or performance of the Borrower, its Subsidiaries and its Affiliates taken as a whole, or the ability of the Borrower to perform its Obligations under the Loan Documents to which it is a party. (ix) Payment of Taxes. All tax returns and reports of the Borrower, its Subsidiaries and its Affiliates required to be filed, have been timely filed (or appropriate extensions of time for the filing of same have been timely requested), and all taxes, assessments, fees and other governmental charges thereupon and upon their respective Properties, assets, income and franchises which are shown on such returns as being due and payable, have been paid when due and payable, except such taxes, if any, that are reserved against in accordance with Generally Accepted Accounting Principles, such taxes as are being contested in good faith by appropriate proceedings or such taxes the failure to make payment of which when due and payable would not have, in the aggregate, a Material Adverse Effect. The Borrower has no knowledge of any proposed tax assessment against the Borrower, the Corporate Guarantors and/or the Partnership Guarantors that is reasonably likely to have a Material Adverse Effect, which is not being actively contested in good faith by the Borrower, the Corporate Guarantors and/or the Partnership Guarantors. (x) Material Adverse Agreements. The Borrower, its Subsidiaries and/or its Affiliates are not a party to or subject to any Contractual Obligation or other restriction contained in their respective Certificates of Incorporation, By-laws, partnership agreements or similar governing documents which has or is reasonably likely to have a Material Adverse Effect. (xi) Performance. The Borrower, its Subsidiaries and its Affiliates are not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation applicable to them, and no condition exists which, with the giving of notice or the lapse of time or both, would constitute a default under such Contractual Obligation, in each case, except where the consequences, direct or indirect, of such default or defaults, if any, would not have or are not reasonably likely to have a Material Adverse Effect. (xii) Securities Activities. The Borrower, its Subsidiaries and its Affiliates are not engaged principally in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. (xiii) Requirements of Law. The Borrower has no actual knowledge of any non-compliance with respect to all Requirements of Law applicable to the Borrower, its Subsidiaries, its Affiliates and their respective businesses, and the Borrower, its Subsidiaries and its Affiliates are not charged with, or to the best of the Borrower's knowledge, under investigation with respect to, any violation of any such Requirements of Law, except where a non-compliance or violation of all Requirements of Law would not result in a Material Adverse Effect. 44 (xiv) Patents, Trademarks, Permits, Etc. The Borrower, its Subsidiaries and its Affiliates own, license or otherwise have the lawful right to use, or have all permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of their respective businesses as currently conducted which are material to their condition (financial or otherwise), operations and performance, taken as a whole. The use of such permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know how and processes by the Borrower, its Subsidiaries and its Affiliates does not infringe on the rights of any Person, subject to such claims and infringements and do not, in the aggregate, give rise to any liability on the part of the Borrower, its Subsidiaries and its Affiliates which has or is reasonably likely to have a Material Adverse Effect. (xv) Environmental Matters. Except as disclosed in Schedule 4.01(xv) attached hereto and except where the failure to comply with the provisions of clauses (a) through (k) below does not result in a Material Adverse Effect, (a) the operations of the Borrower, its Subsidiaries and its Affiliates comply in all substantial respects with all applicable environmental, health and safety Requirements of Law; (b) the Borrower, its Subsidiaries and its Affiliates have obtained all environmental, health and safety Permits necessary for their respective operations, and all such Permits are in good standing, and the Borrower, its Subsidiaries and its Affiliates are in material compliance with all terms and conditions of such Permits; (c) the Borrower's, its Subsidiaries' and its Affiliates' respective present Properties and operations, and to the best of the Borrower's knowledge, the Borrower's, its Subsidiaries' and its Affiliates' respective past Properties and operations, are not the subject of any order from or agreement with any Governmental Authority or private party or any judicial or administrative proceeding or investigations respecting any environmental, health or safety Requirements of Law, and are not the subject of any Remedial Action or other Liabilities and Costs arising from the Release or threatened Release of an Environmental Concern Material into the Environment; (d) the Borrower, its Subsidiaries and its Affiliates have not filed any notice under any Requirement of Law indicating past or present treatment, storage or disposal of an Environmental Concern Material in violation of any Environmental Law; (e) the Borrower, its Subsidiaries and its Affiliates have not filed any notice under any applicable Requirement of Law reporting a Release of an Environmental Concern Material into the Environment in violation of any Environmental Law; (f) there is not now, nor has there ever been, on or in the Property of the Borrower, its Subsidiaries and/or its Affiliates in violation of any Environmental Law: (1) any generation, treatment, recycling, storage or disposal of any Environmental Concern Material, (2) any underground storage tanks or surface impoundments, (3) any asbestos-containing material, or (4) any polychlorinated biphenyls (PCB's) used in hydraulic oils, electrical transformers or other equipment; (g) the Borrower, its Subsidiaries and/or its Affiliates has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Environmental Concern Material into the Environment, or as a result of exposure to asbestos or to cotton dust, which may result in any liability; (h) after due inquiry, no Environmental Lien has attached to any Property of the Borrower, its Subsidiaries and/or its Affiliates; (i) the Borrower, its Subsidiaries and its Affiliates have not entered into any negotiations or agreements with any Person (including, without limitation, the prior owner(s) of any Property owned or leased by the Borrower, its Subsidiaries and /or its 45 Affiliates) relating to any Remedial Action or environmentally related Claim; (j) the Borrower, its Subsidiaries and its Affiliates have no material contingent liability in connection with any Release or threatened Release of any Environmental Concern Material into the Environment; and (k) none of the products that the Borrower, its Subsidiaries and/or its Affiliates manufacture, distribute or sell, or, to the best of the Borrower's knowledge, ever has manufactured, distributed or sold, contains an asbestos-containing material. (xvi) ERISA. As of the Closing Date, the Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate do not maintain or contribute to any Plan other than a Plan listed on Schedule 4.01(xvi) attached hereto. Except as otherwise provided on Schedule 4.01(xvii), each Plan which is intended to be a qualified plan has been determined by the IRS to be qualified under Section 401(a), and each trust related to any such Plan has been so determined to be exempt from federal income tax under Section 501(a) of the Code prior to its amendment by the Tax Reform Act of 1986, and such Plan and trust are being operated in all material respects in compliance with and will be timely amended in accordance with the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1987 as interpreted by the regulations promulgated thereunder. Except as otherwise provided on Schedule 4.01(xvi) attached hereto, the Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate do not maintain or contribute to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA which provides lifetime benefits to retirees other than as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and interpreted by regulations promulgated thereunder. The Borrower, its Subsidiaries, its Affiliates and all of their ERISA Affiliates are in compliance in all material respects with the responsibilities, obligations or duties imposed on them by ERISA or regulations promulgated thereunder with respect to all Plans. No material accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code) exists in respect to any Benefit Plan. The Borrower, its Subsidiaries, its Affiliates any ERISA Affiliate and any fiduciary of any Plan (a) have not engaged in a nonexempt "prohibited transaction" described in Section 406 of ERISA or Section 4975 of the Code or (b) have not taken any action which would constitute or result in a Termination Event with respect to any Plan such that actions under (a) or (b) or both would result in a material obligation to pay money. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate have not incurred any material liability to the PBGC which remains outstanding other than the liability to pay the PBGC insurance premiums for the current year. Schedule B to the most recent annual report filed with the IRS with respect to each Benefit Plan (which has been furnished to the Lender) is complete and accurate in all material respects. Except as provided on Schedule 4.01(xvi) attached hereto, since the date of each such Schedule B, there has been no material adverse change in the funding status or financial condition of the Benefit Plan relating to such Schedule B which would result in a Material Adverse Effect. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate have not failed to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment which would in the aggregate have a Material Adverse Effect. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate are not required to provide security to a Plan under Section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the plan year. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate are not contributing and have not ever 46 contributed to or been obligated to contribute to any Multiemployer Plan, and no employees or former employees of the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate have been covered by any Multiemployer Plan in respect of their employment by the Borrower or any ERISA Affiliate, and, accordingly, the representations and warranties in this paragraph (xvi) do not apply to Multiemployer Plans. (xvii) Solvency. The Borrower, its Subsidiaries and its Affiliates taken as a whole are Solvent after giving effect to the transactions contemplated by this Loan Agreement and the other Loan Documents, the payment and accrual of all costs payable on the Closing Date with respect to any of the foregoing, and all obligations, if any, under any Plan or the equivalent for unfunded past service liability and any other unfunded medical (including post-retirement) and death benefits. (xviii) Notes Qualification. As of the date on which this representation and warranty is made, the offering and issuance of the Revolving Credit Note is exempt from registration under Section 5 of the Securities Act or has been registered pursuant to a registration statement filed pursuant to the Securities Act and, if so registered, is qualified under the Trust Indenture Act of 1939, as amended. (xix) Assets and Properties. Substantially all of the assets and properties owned by, leased to or used by the Borrower, its Subsidiaries and its Affiliates (a) are in good operating condition and repair, (ordinary wear and tear excepted), (b) are free and clear of any known defects (except such defects as do not substantially interfere with the continued use thereof in the conduct of normal operations) and (c) are able to serve the function for which they are currently being used, in each case where the failure of such asset to meet such requirements would not have or is not reasonably likely to have a Material Adverse Effect. (xx) Joint Venture; Partnership. Except as set forth in Schedule 4.01 (xx) attached hereto, as of the Closing Date the Borrower, its Subsidiaries and its Affiliates are not engaged in any joint venture or partnership with any other Person. (xxi) Insurance. The Borrower, its Subsidiaries and its Affiliates maintain with financially sound and reputable insurers not related to or affiliated with the Borrower, its Subsidiaries and its Affiliates, insurance with respect to its properties and businesses, insured against such liabilities, casualties and contingencies and in such types and amounts as is customary in the case of corporations engaged in the same or a similar business or having similar properties similarly situated. Schedule 4.01(xxi) attached hereto sets forth a list of all insurance currently maintained by or in respect of the Borrower, its Subsidiaries and its Affiliates setting forth the identity of the insurance carrier, the type of coverage, the amount of coverage and the deductible. There are no claims, actions, suits, proceedings against, arising under or based upon any of such insurance policies except as set forth in Schedule 4.01(xxi) attached hereto. (xxii) Title to Property. The Borrower, its Subsidiaries and its Affiliates have good and marketable title in fee simple to all respective Property owned or purported to be owned by 47 them, including, without limitation to all property reflected in the most recent consolidated balance sheet referred to in Section 4.01(xxiii) hereof or submitted pursuant to Article V (except as sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet), in each case free and clear of all Liens, other than Liens permitted under the terms of Section 7.02 of this Loan Agreement. (xxiii) Audited Financial Statements. The Borrower has heretofore furnished to the Lender consolidated and consolidating balance sheet of the Borrower, its Subsidiaries and its Affiliates dated as of March 31, 1995, and the related statements of income, cash flows and changes in stockholders' equity for the 1995 Fiscal Year then ended, as examined and reported on by its Independent Certified Public Accountant, who delivered an unqualified opinion in respect thereof, all as set forth in the Form 10-K. Such financial statements (including the notes thereto) present fairly the financial condition of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Year and the results of its operations and its cash flows for the Fiscal Year then ended, all in conformity with Generally Accepted Accounting Principles. (xxiv) Interim Financial Statements. The Borrower has heretofore furnished to the Lender interim balance sheets of the Borrower, its Subsidiaries and its Affiliates as of the end of its first, second and third Fiscal Quarters of the Fiscal Year beginning April 1, 1995, together with the related statements of income and cash flows for the applicable fiscal periods ending on each such date, all as set forth in the Form 10-Q. Such financial statements present fairly the financial condition of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Quarters and the results of its operations and its cash flows for the fiscal periods then ended, all in conformity with Generally Accepted Accounting Principles (except to the extent set forth in the notes to said financial statements), subject to normal and recurring year-end audit adjustments. (xxv) Absence of Undisclosed Liabilities. The Borrower, its Subsidiaries and its Affiliates have no liability or obligation of any nature whatever (whether absolute, accrued, contingent or otherwise, whether or not due), forward or long-term commitments or unrealized or anticipated losses from unfavorable commitments, except (a) as disclosed in the financial statements referred to in Sections 4.01(xxiii) and (xxiv) hereof, (b) matters that, individually or in the aggregate could not have a Material Adverse Effect and (c) Contractual Obligations incurred in the ordinary course of the Borrower's, its Subsidiaries' and its Affiliates' business. (xxvi) Margin Regulations. No part of the proceeds of the Revolving Credit Facility will be used for the purpose of buying or carrying any Margin Stock, as such term is used in Regulations G and U of the Federal Reserve Board, as amended from time to time, or to extend credit to others for the purpose of buying or carrying any Margin Stock. The Borrower, its Subsidiaries and its Affiliates are not engaged in the business of extending credit to others for the purpose of buying or carrying Margin Stock. Neither the making of any Revolving Credit Loan nor any use of proceeds of any such Revolving Credit Loan will violate or conflict with the provisions of Regulation G, T, U or X of the Federal Reserve Board, as amended from time to time. 48 (xxvii) Labor Matters. Except as set forth on Schedule 4.01(xxvii) attached hereto, the Borrower, its Subsidiaries and its Affiliates is not a party to any labor union or collective bargaining agreements. The Borrower, its Subsidiaries and its Affiliates is in compliance with all applicable laws respecting employment and employment practices, including, without limitation, laws, regulations, and judicial and administrative decisions relating to wages, hours, conditions of work, collective bargaining, health and safety, payment of social security, payroll, withholding and other taxes, worker's compensation, insurance requirements, as well as requirements of ERISA and the Consolidated Omnibus Budget Reconciliation Act, except to the extent that noncompliance would not have a Material Adverse Effect. There is no (a) unfair labor practice complaint pending or, to the best knowledge of the Borrower, threatened against the Borrower before the National Labor Relations Board or any court nor any pending or, to the best knowledge of the Borrower, threatened sexual harassment, or wrongful discharge claim, (b) labor strike, dispute, slowdown, or stoppage pending or, to the best knowledge of the Borrower, threatened against the Borrower, or (c) representation petition, respecting the employees of the Borrower filed or threatened to be filed with the National Labor Relations Board. (xxviii) Brokerage Commissions. No other Person is entitled to receive from the Borrower, its Subsidiaries and/or its Affiliates any brokerage commission, finder's fee or similar fee or payment in connection with the consummation of the transactions contemplated by this Loan Agreement. No brokerage or other fee, commission or compensation is to be paid by the Lender by reason of any act, alleged act or omission of the Borrower, its Subsidiaries and/or its Affiliates with respect to the transactions contemplated hereby. (xxix) Books and Records. The Borrower maintains its books and records relative to its assets, properties and business transactions at the Borrower's principal corporate offices located at 5 Sylvan Way, Parsippany, New Jersey 07054; provided, however, with respect to the books and records of the Borrower's division commonly known as "DRS Military Systems", its books and records are maintained at 138 Bauer Drive, Oakland New Jersey 07436. (xxx) Business Name. The only name by which the Borrower is known or under which the Borrower is conducting its business is "Diagnostic/Retrieval Systems, Inc." or "DRS". Section 4.02. Subsequent Funding Representations and Warranties. In order to induce the Lender to enter into this Loan Agreement and to make the Revolving Credit Loans, the Borrower hereby represents and warrants to the Lender that the statements set forth in sections (i) through (xxx) of Section 4.01 hereof (except (i) to the extent that such statements (a) are made expressly only as of the Closing Date or (b) other than for changes permitted or contemplated by this Loan Agreement), are true, correct and complete in all material respects on and as of the Borrowing Date in respect of each Borrowing after the Closing Date. 49 ARTICLE V REPORTING COVENANTS On and after the Closing Date and so long as the Borrower shall have any Obligation hereunder, unless the Lender shall give its prior express written consent to the effect otherwise, then: Section 5.01. Statement of Accounting. The Borrower shall make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and any other accounting principles applicable thereto and (b) to maintain accountability for assets and (iii) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 5.02 Reporting and Information Requirements. The Borrower shall deliver or cause to be delivered to the Lender the following financial statements, data, reports and information, at the Borrower's own cost and expense: (i) Annual Audited Consolidated and Consolidating Financial Statements of the Borrower, its Subsidiaries and its Affiliates. As soon as available, but in any event within ninety (90) days after the close of each Fiscal Year of the Borrower, "audited" consolidated statements of income, retained earnings and a statement of cash flows for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Year and a consolidated balance sheet for the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Year, and notes to each, all as set forth in the Form 10-K filed with the United States Securities and Exchange Commission. Such consolidated financial statements shall be accompanied by an opinion of the Independent Certified Public Accountant, which opinion shall be free of exceptions or qualifications which is of "going concern" or like nature or which relates to a more limited scope of examination. Such opinion shall in any event contain a written statement of such accountants substantially to the effect that (a) such accountants examined the financial statements in accordance with Generally Accepted Auditing Standards and accordingly made such tests of accounting records and such other auditing procedures as such accountants considered necessary under the circumstances and (b) in the opinion of such accountants such financial statements present fairly the financial position and cash flows of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Year, and the results of the Borrower's, its Subsidiaries' and its Affiliates' operations and the changes in their financial position for such Fiscal Year, in conformity with Generally Accepted Accounting Principles applied on a basis consistent with that of the preceding Fiscal Year. In addition to the delivery of the annual "audited" consolidated financial statements, the Borrower shall also deliver to the Lender, at the same time, an "unaudited" management prepared consolidating statement of income for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Year and a consolidating balance 50 sheet for the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Year, all prepared and certified to the Lender by the Borrower's chief accounting officer in her capacity as an Authorized Officer. (ii) Annual Operating Plan. As soon as available, but in any event within ninety (90) days after the close of each Fiscal Year of the Borrower, a copy of the Borrower's, its Subsidiaries' and its Affiliates' annual operating plan for the then current Fiscal Year. (iii) Quarterly Consolidated and Consolidating Financial Statements of the Borrower, its Subsidiaries and its Affiliates. As soon as available, but in any event within forty-five (45) days after the close of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, "unaudited" consolidated statements of income and a statement of cash flows for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the end of such Fiscal Quarter, and an "unaudited" balance sheet of the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Quarter, all as set forth in the Form 10-Q filed with the United States Securities and Exchange Commission. In addition to the delivery of the quarterly consolidated financial statements, the Borrower shall also deliver to the Lender, at the same time, an "unaudited" management prepared consolidating statement of income for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the end of such Fiscal Quarter and an "unaudited" consolidating balance sheet of the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Quarter, all as certified by the chief accounting officer of the Borrower in her capacity as an Authorized Officer as presenting fairly the financial position of the Borrower, its Subsidiaries and its Affiliates as of the end of such dates and fiscal periods and the results of the Borrower's, its Subsidiaries' and its Affiliates' operations and the changes in the Borrower's, its Subsidiaries' and its Affiliates' financial position and cash flows for such fiscal periods, in conformity with Generally Accepted Accounting Principles applied in a manner consistent with that of the most recent audited financial statements furnished to the Lender, subject to normal and recurring year-end audit adjustments. (iv) Contract Backlog Report. As soon as available, but in any event within forty-five (45) days after the close of each Fiscal Quarter of each Fiscal Year of the Borrower, a contract backlog report for the Borrower, its Subsidiaries and its Affiliates signed by an Authorized Officer of the Borrower. (v) Compliance Certificates. Together with each delivery of any financial statement pursuant to this Section 5.02(i) and Section 5.02(iii) above, an Officer's Certificate of the Borrower substantially in the form of Exhibit "F" attached hereto, (a) stating that the officer signatory thereto in his capacity as an Authorized Officer has reviewed the terms of this Loan Agreement and the principal Loan Documents, and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and condition of the Borrower, its Subsidiaries and its Affiliates, taken as a whole, during the accounting period covered by such financial statements, and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date 51 of the Officer's Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto; and (b) demonstrating in reasonable detail compliance during and at the end of such accounting periods with the covenants contained in Article VIII of this Loan Agreement. (vi) Quarterly Accounts Receivable Aging Reports, Etc. As soon as available, but in any event within forty-five (45) days after the close of each Fiscal Quarter of each Fiscal Year of the Borrower, a quarterly accounts receivable aging report in summary form only, setting forth the amounts due and owing to each of the Borrower, its Subsidiaries and its Affiliates, respectively, as of the close of the preceding Fiscal Quarter. (vii) Other Reports and Information. Promptly upon their becoming available to the Borrower, a copy of (a) all reports, financial statements and other information distributed generally by the Borrower, its Subsidiaries and/or its Affiliates to their respective stockholders, partners, bondholders or the financial community and (b) all accountants' management letters pertaining to, all other reports submitted by accountants in connection with any audit of, and all other material reports, if any, from outside accountants with respect to, the Borrower, its Subsidiaries and/or its Affiliates. (viii) Further Information. The Borrower shall promptly furnish to the Lender such business, financial or other information concerning the Borrower, its Subsidiaries and its Affiliates in such form as the Lender may reasonably request from time to time. (ix) Notice of Event of Default. Promptly upon becoming aware of any Event of Default or Potential Event of Default, the Borrower shall give the Lender written notice thereof, together with a written statement of the President or chief accounting officer of the Borrower in her capacity as an Authorized Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower. (x) Notice of Material Adverse Change. Promptly upon becoming aware thereof, the Borrower shall give the Lender written notice concerning any material adverse change in the business, assets, operations or financial condition of the Borrower, its Subsidiaries and/or its Affiliates taken as a whole, including, without limitation, any loss from casualty or theft in excess of $500,000.00 whether or not insured, affecting any Property of the Borrower, setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower. (xi) Notice of Material Proceedings. Promptly upon becoming aware thereof, the Borrower shall give the Lender written notice of the commencement, existence or threat of any action, suit, proceeding, governmental investigation or arbitration against or affecting the Borrower, its Subsidiaries and/or its Affiliates (including without limitation, litigation, arbitration or 52 administration proceedings) which, if adversely decided, would have a Material Adverse Effect on the business, assets, operations or financial condition of the Borrower, its Subsidiaries and/or its Affiliates taken as a whole or on the ability of the Borrower, its Subsidiaries and/or its Affiliates to perform their obligations under this Loan Agreement or the other Loan Documents. (xii) Notice of Pension-Related Events. The Borrower shall give the Lender the following: (a) As soon as possible, and in any event within ten (10) days after the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate knows or has reason to know that a Termination Event has occurred, a written statement of the chief accounting officer of the Borrower describing such Termination Event and the action, if any, which the Borrower, its Subsidiaries, its Affiliates. or an ERISA Affiliate has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the IRS, the DOL or PBGC with respect thereto; (b) As soon as possible, and in any event within fifteen (15) days, after the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate knows or has reason to know that a non-exempt prohibited transaction (as defined in Section 406 of ERISA and Section 4975 of the Code) has occurred, a statement of the chief accounting officer of the Borrower describing such transaction; (c) Within ten (10) days after the filing thereof with the DOL, IRS or PBGC, copies of each annual report, filed with respect to each Benefit Plan; (d) Within ten (10) days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by the Borrower, its Subsidiaries, its Affiliates, or an ERISA Affiliate with respect to such request; (e) Within thirty (30) days after a written request from the Lender, information describing an amendment of any existing Benefit Plan which will result in a material increase in the benefits under such Benefit Plan or a notification of any such increase, or the establishment of any new Plan or the commencement of contributions to any Plan to which the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate was not previously contributing in a material amount; (f) Promptly upon, and in any event within fifteen (15) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice; (g) Promptly upon, and in any event within ten (10) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of an unfavorable determination letter from the IRS regarding the qualification of a Plan under Section 401(a) of the Code; 53 (h) Promptly upon, and in any event within fifteen (15) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of a notice from a Multiemployer Plan regarding the imposition of withdrawal liability; and (i) Promptly upon, and in any event within fifteen (15) Business Days after, the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate fails to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or payment, a notification of such failure provided that such installment payment is an amount which is material. (xiii) Notice of Other Material Defaults. Promptly upon becoming aware of any material default by the Borrower, its Subsidiaries and/or its Affiliates under any Contractual Obligation to which the Borrower, its Subsidiaries and/or its Affiliates or by which the Borrower, its Subsidiaries and/or its Affiliates or their respective properties may be bound (the result of which could reasonably be expected to have a Material Adverse Effect), the Borrower shall give the Lender written notice thereof, together with a written statement of the President or chief accounting officer of the Borrower in her capacity as an Authorized Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower, its Subsidiaries and/or its Affiliates. (xiv) Notice of Material Claims. The Borrower shall promptly notify the Lender of all written claims, complaints, orders, citations or notices, whether formal or informal, received by the Borrower, its Subsidiaries or its Affiliates from a Governmental Authority or other Person relating to any Law, including, without limitation, any Environmental Law or health and safety law, which could reasonably be expected to have a Material Adverse Effect. Such notices shall include, among other information, the name of the party who filed the claim, the potential amount of the claim, and the nature of the claim. 54 ARTICLE VI AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all of the Obligations, unless the Lender shall give its prior express written consent to the effect otherwise, then: Section 6.01 Corporate Existence, etc. The Borrower, its Subsidiaries and its Affiliates shall at all times maintain their respective status as a corporation and/or partnership, as applicable, duly organized, validly existing and in good standing under the laws of their respective jurisdiction of incorporation and/or formation and preserve and keep in full force and effect their rights and franchises unless the failure to maintain such rights and franchises would not have a Material Adverse Effect. Section 6.02 Corporate Powers, etc. The Borrower, its Subsidiaries and its Affiliates shall qualify and remain qualified to conduct business in each jurisdiction in which the nature of their respective businesses or the ownership of their respective properties or both requires it to be so qualified, unless the failure to maintain so qualified would not have a Material Adverse Effect. The Borrower, its Subsidiaries and its Affiliates shall transact business in their own names and trade names and shall invoice all accounts in their own respective names and trade names. Section 6.03 Compliance with Laws, etc. The Borrower, its Subsidiaries and its Affiliates shall comply with all Requirements of Law, and all restrictive covenants affecting the Borrower, its Subsidiaries and its Affiliates or the business, properties, assets or operations of the Borrower, its Subsidiaries and its Affiliates except to the extent non-compliance with this Section 6.03 would not result in a Material Adverse Effect. Section 6.04 Payment of Taxes and Claims. The Borrower, its Subsidiaries and its Affiliates shall pay or cause to be paid (i) all taxes, assessments and other governmental charges imposed upon them or on any of their respective properties or assets or in respect of any of their respective franchises, business, income or property before any penalty or interest accrues thereon and (ii) all Claims (including, without limitation, claims for labor, services, materials and supplies) for sums material in the aggregate to the Borrower, its Subsidiaries and its Affiliates which have become due and payable and which by Law have or may become a Lien (other than a Customary Permitted Lien) upon the Borrower's, its Subsidiaries' and/or its Affiliates' Property, prior to time when any penalty or fine shall be incurred with respect thereto; provided, however, that no such taxes, assessments and governmental charges referred to in clause (i) above or Claims referred to in clause (ii) above need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if adequate reserves shall have been set aside therefor in accordance with Generally Accepted Accounting Principles. Section 6.05. Maintenance of Properties; Insurance. The Borrower, its Subsidiaries and its Affiliates shall maintain or cause to be maintained in good repair, working order and condition, 55 excepting ordinary wear and tear, all of their respective Properties material to their operations and will make or cause to be made all appropriate repairs, renewals and replacements thereof, consistent with past practice. The Borrower, its Subsidiaries and its Affiliates shall maintain or cause to be maintained with financially sound and reputable insurers reasonably acceptable to the Lender, the insurance policies and programs listed on Schedule 6.05 attached hereto or substantially similar programs or policies and amounts or other programs, policies and amounts acceptable to the Lender. Not later than thirty (30) days later than the renewal, replacement or material modification of any policy or program, the Borrower shall deliver or cause to be delivered to the Lender a certificate of insurance setting forth for each such policy or program: (i) the amount of such policy, (ii) the risks insured against by such policy, (iii) the name of the insurer and each insured party under such policy, and (iv) the policy number of such policy. Section 6.06. Inspection of Property; Books and Records; Discussions. Except for information and records which the Borrower may not under applicable Law disseminate or disclose to the Lender, the Borrower shall permit any authorized representative(s) designated by the Lender to visit, to conduct a field audit or to otherwise inspect any of the Borrower's, its Subsidiaries' and/or its Affiliates' respective Properties, including their financial and accounting records, and to make copies and take extracts therefrom, and to discuss the Borrower's, its Subsidiaries' and/or its Affiliates' respective affairs, finances and accounts with the Lender's officers, employees, representatives or independent certified public accountants, upon reasonable notice and during normal business hours. All information furnished to the Lender shall be received and maintained by the Lender in strict confidence and in accordance with applicable Law, and the Lender shall not disseminate said information to any Person except where required by and in accordance with applicable Law or where contemplated by the Loan Documents. The Lender agrees that it shall not take any action or omit to take any action which would cause or result in the violation of Law (including without limitation, any export control law) by the Borrower, its Subsidiaries and its Affiliates. Each such visitation and inspection by or on behalf of the Lender after the occurrence and during the continuance of an Event of Default shall be at the Borrower's own cost and expense. The Borrower shall, and shall cause its Subsidiaries and its Affiliates, to keep proper books and records and account in accordance with sound and accepted accounting practices, consistently applied (and all Requirements of Law). Section 6.07. Litigation, Claims, etc. The Borrower shall provide the Lender with (i) a litigation status report with respect to any suit at law or in equity asserted against it of the type referred to in Schedule 4.01(vii) attached hereto, in form and substance satisfactory to the Lender, promptly after the close of each calendar quarter; (ii) notice of any suit at law or in equity or claim brought or asserted against the Borrower, its Subsidiaries and/or its Affiliates promptly after learning thereof with respect to any suit or claim involving money or property valued in excess of $500,000.00 or any such suits or claims which in the aggregate involve money or property valued in excess of $500,000.00; and (iii) prompt notice of any investigation or proceeding before or by any Governmental Authority, the effect of which is reasonably likely to have a Material Adverse Effect. 56 Section 6.08 Labor Disputes. The Borrower shall notify the Lender in writing, promptly, but in any event within two (2) Business Days after learning thereof, of any material labor dispute to which the Borrower, its Subsidiaries and/or its Affiliates may become a party, any strikes or walkouts relating to any of their Properties and the expiration of any labor contract to which they are a party or by which they are bound. Section 6.09 Maintenance of Licenses, Permits, etc. The Borrower (i) shall maintain in full force and effect, and shall cause each of its Subsidiaries and Affiliates, to maintain in full force and effect, all licenses, permits, governmental approvals, franchises, authorizations or other rights necessary for the operation of the Borrower's, its Subsidiaries' and/or its Affiliates' businesses, except where the failure to obtain any of the foregoing would not have or is not reasonably likely to have a Material Adverse Effect and (ii) shall notify the Lender in writing, promptly after learning thereof, of the suspension, cancellation, revocation or discontinuance of or of any pending or threatened action or proceeding seeking to suspend, cancel, revoke or discontinue any such license, permit, governmental approval, franchise authorization or right, where the result thereof could reasonably be expected to have a Material Adverse Effect. Section 6.10 Use of Proceeds. The Borrower shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose, in any manner inconsistent with Section 2.01(iv) hereof, or inconsistent with any other provision of any Loan Document. Section 6.11 Continuation of or Change in Business. The Borrower, its Subsidiaries and its Affiliates shall continue to engage in their collective businesses substantially as conducted and operated during the present and preceding Fiscal Year, and the Borrower, its Subsidiaries and its Affiliates shall not engage in any other material business other than the business of high technology products and services for military and commercial customers in the United States and abroad. Section 6.12 Additional Corporate Guarantors and/or Partnership Guarantors. The Borrower shall cause any Subsidiaries and/or Affiliates which are acquired or formed after the Closing Date to execute the Agreement of Guaranty. 57 ARTICLE VII NEGATIVE COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all of the Obligations, unless the Lender shall give its prior written consent to the effect otherwise, then: Section 7.01. Consolidated Debt. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly create, incur, assume or otherwise become or remain directly or indirectly liable with respect to, any Consolidated Debt, except for: (i) the Obligations; (ii) accounts payable owing to and letters of credit in favor of trade creditors arising from current liabilities for goods and services purchased in the normal course of the Borrower's, its Subsidiaries' and/or its Affiliates' respective businesses; (iii) the permitted existing Consolidated Debt as described on Schedule 7.01 (iii) attached hereto, and extensions, renewals, replacements and refinancing thereof, not exceeding the principal amount outstanding on the date of such extension, renewal, replacement or refinancing, provided that the terms are no less advantageous to the Borrower, its Subsidiaries and/or its Affiliates than the predecessor obligation; (iv) Consolidated Debt in respect of loans, advances or guarantees permitted by Section 7.03 hereof; and (v) Consolidated Debt in connection with purchase money Liens permitted by Section 7.02 (ii) (e) hereof; and (vi) Consolidated Debt in the form of term loans only, having in the aggregate an outstanding principal balance of not more than $5,000,000.00, which Consolidated Debt was acquired by the Borrower, its Subsidiaries and/or its Affiliates in connection with the acquisition (whether a stock acquisition or asset acquisition) of any Subsidiary, Affiliate or any other Person. Section 7.02. Sales of Assets; Liens. (i) Sales. The Borrower, its Subsidiaries and its Affiliates shall not sell, assign, transfer, lease, convey, abandon or otherwise dispose of, voluntarily or involuntarily, any Properties, whether now owned or hereafter acquired, or any income or profits therefrom, except such sales, assignments, transfer, leases, conveyances, etc., which do not result in a Material Adverse Effect. 58 (ii) Liens. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any of their respective Properties except: (a) Liens securing the Obligations, if any such liens are granted to the Lender in the future; (b) any interest or title of a lessor or secured by a lessor's interest under any lease permitted by this Loan Agreement; (c) Liens existing on the date of this Loan Agreement securing any of the existing Consolidated Debt described on Schedule 7.01(iii) attached hereto (but said Liens may not be increased in principal amount); (d) Customary Permitted Liens; (e) purchase money Liens securing Consolidated Debt (including the interest of a lessee under a Capitalized Lease) in the aggregate principal amount outstanding at any time not to exceed $1,000,000.00; and (f) Liens securing Consolidated Debt permitted under Section 7.01 (vi) above. Section 7.03. Loans, Advances and Investments. The Borrower, its Subsidiaries and its Affiliates shall not, at any time make or suffer to exist or remain outstanding, any loan or advance to, or purchase, acquire or own (beneficially or of record) any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other interest in, or make any capital contribution to or other investment in, any other Person, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (i) Loans and investments existing on the date hereof and listed in Schedule 7.03 attached hereto and extensions, renewals and refinancing thereof on terms no less favorable than those existing immediately before such extension, renewal or refinancing); (ii) Accounts receivable owing to the Borrower, its Subsidiaries and its Affiliates arising from sales of inventory under usual and customary terms in the ordinary course of business and loans and advances extended by the Borrower, its Subsidiaries and/or its Affiliate to subcontractors or suppliers (excluding subcontractors or suppliers who are Subsidiaries or Affiliates) under usual and customary terms in the ordinary course of business; (iii) Loans from the Borrower, a Subsidiary or an Affiliate to either the Borrower, another Subsidiary or another Affiliate; 59 (iv) Loans or advances not to exceed $250,000.00 in the aggregate at any time outstanding made to officers, partners or other employees of the Borrower; its Subsidiaries and/or its Affiliates; (v) Investments in Cash or Cash Equivalents; (vi) Investments in all existing and any new Subsidiaries or Affiliates; and (vii) Loans not to exceed $2,000,000.00 in the aggregate at any time outstanding to Persons whom the Borrower, its Subsidiaries and/or its Affiliates have identified to the Lender in writing are targets of a proposed or contemplated acquisition by the Borrower, its Subsidiaries and/or its Affiliates. Section 7.04. Restricted Junior Payments. The Borrower, its Subsidiaries and its Affiliates shall not declare or make any Restricted Junior Payment. Section 7.05. Transactions with Subsidiaries and Affiliates. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Subsidiary or Affiliate, on terms that are less favorable than those that might be obtained in an arm's length transaction at the time from Persons who are not such a Subsidiary or Affiliate. Nothing contained in this Section 7.05 shall prohibit any transaction expressly permitted by Section 7.03 hereof. Section 7.06. Restriction on Fundamental Changes. The Borrower, its Subsidiaries and its Affiliates shall not enter into any merger or consolidation, or liquidate, windup or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or any substantial part of their respective businesses, properties or assets, whether now or hereafter acquired except (i) as permitted by Section 7.02(i) hereof and (ii) mergers of any Subsidiary or Affiliate into (a) the Borrower or (b) another Subsidiary or Affiliate. Section 7.07. ERISA. The Borrower, its Subsidiaries and its Affiliates shall not, and the Borrower shall not permit any of its ERISA Affiliates to, do any of the following to the extent that such act or failure to act would result in the aggregate, after taking into account any other such acts or failure to act, in an obligation to pay a sum of money that is material to the business of the Borrower, its Subsidiaries and its Affiliates: (i) Engage, or permit an ERISA Affiliate to engage, in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which a class exemption is not available or a private exemption has not been obtained from the DOL; (ii) Permit to exist any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived; 60 (iii) Fail, or permit an ERISA Affiliate to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (iv) Terminate, or permit an ERISA Affiliate to terminate, any Benefit Plan which would result in any liability of the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate under Title IV of ERISA; or (v) Fail, or permit any ERISA Affiliate to fail, to pay any required installment under section (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment. Section 7.08 Amendment of Articles of Incorporation or By-Laws. The Borrower, its Subsidiaries and its Affiliates shall not materially amend, modify or supplement their respective articles of incorporation, by-laws or partnership agreements, except upon at least ten (10) days' prior express written notice to the Lender. Section 7.09 Margin Regulations. No portion of the proceeds of any credit extended under this Loan Agreement shall be used in any manner which might cause the extension of credit or the application of such proceeds to violate Regulation G, Regulation U or Regulation X or any other regulation of the Federal Reserve Board or to violate the Securities Exchange Act or the Securities Act, in each case as in effect on the date or dates of such Borrowing and such use of proceeds. Section 7.10 Cancellation of Consolidated Debt; Prepayment. The Borrower, its Subsidiaries and its Affiliates shall not cancel any Claim or Consolidated Debt (except for adequate consideration and in the ordinary course of their respective businesses) and shall not prepay any long-term Consolidated Subordinated Debt; provided, however, that the foregoing shall not prohibit the prepayment of the Obligations and the refinance of any Consolidated Subordinated Debt (i) in amounts and on terms and conditions equal to or better than the existing terms and conditions and (ii) in an aggregate amount of up to $1,000,000.00 at any time. Section 7.11 Environmental Liabilities. The Borrower, its Subsidiaries and its Affiliates shall not become subject to any Liabilities and Costs which the Lender deems has or is likely to have a Material Adverse Effect arising out of or related to (i) the Release or threatened Release at any location of any Environmental Concern Material into the Environment, or any Remedial Action in response thereto, or (ii) any violation of any Environmental, health or safety Requirement of Law; provided, however, that this covenant shall not be violated so long as (a) the Borrower, its Subsidiaries and its Affiliates shall have notified the Lender of the assertion of such liability or required expenditures promptly upon receiving written notice of such assertion, (b) the Borrower shall have continued to furnish the Lender with such information concerning such asserted liability or required expenditure as the Lender shall have reasonably requested, or as otherwise provided herein, (c) the Borrower, its Subsidiaries and its Affiliates shall be diligently pursuing indemnification for such liability or required expenditures from any Person which has an obligation to provide such indemnification, and (d) the Lender is satisfied that the imposition of such liability 61 during the pendency of the Borrower's, its Subsidiaries' or its Affiliates' pursuit of indemnification will not materially impair the Borrower's, its Subsidiaries' or its Affiliates' ability to perform its financial obligations under this Loan Agreement. Section 7.12 Guaranties. The Borrower, its Subsidiaries and its Affiliates shall not assume, guaranty, endorse or otherwise be or become directly or contingently responsible or liable, for obligations or liabilities of any Person, except for: (i) guaranties existing on the Closing Date as described on Schedule 7.12(i) attached hereto; (ii) guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (iii) guaranties of direct obligations of either the Borrower, its Subsidiaries and/or its Affiliates. Section 7.13 No Negative Pledges to Other Person. The Borrower, its Subsidiaries and its Affiliates shall not grant to another Person a covenant commonly referred to as a "negative pledge" with respect to their respective assets and properties. 62 ARTICLE VIII FINANCIAL COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all the Obligations, unless the Lender shall give its prior written consent to the effect otherwise: Section 8.01 Minimum Consolidated Quick Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a Consolidated Quick Ratio, equal to or greater than 1.0 to 1.0. Section 8.02 Maximum Consolidated Leverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a ratio of (i) Consolidated Senior Liabilities (excluding all contingent liabilities under Generally Accepted Accounting Principles)-to- (ii) the sum of (a) Consolidated Tangible Net Worth plus (b) Consolidated Subordinated Debt, equal to or less than 1.0 to 1.0. Section 8.03 Minimum Consolidated Interest Coverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a Consolidated Interest Coverage Ratio equal to or greater than 1.75 to 1.0. 63 ARTICLE IX EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 9.01 Events of Default. The occurrence of any of the following events with the passing of any applicable notice and cure periods shall constitute an "Event of Default" under this Loan Agreement (hereinafter referred to as an "Event of Default"): (i) Any representation or warranty made by the Borrower, the Partnership Guarantors, the Corporate Guarantors or any other Person in any of the Loan Documents furnished in connection with the Revolving Credit Facility, shall prove to have been false, incorrect or misleading in any substantial and material respect on the date as of which made; (ii) The Borrower shall have failed to make any payment of any installment of interest on any of the Revolving Credit Note, the Letters of Credit Reimbursement Agreement and/or under this Loan Agreement on their respective due dates; (iii) The Borrower shall have failed to make any payment of principal on any of the Revolving Credit Note, the Letters of Credit Reimbursement Agreement and/or under this Loan Agreement on their respective due dates; (iv) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have failed to duly observe or perform any covenant, condition or agreement with respect to the payment of moneys on the part of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors to be observed or performed pursuant to the terms of the Loan Documents, other than the payment of principal and interest which shall be governed by Section 9.01(ii) and (iii) above, and such default shall have remained uncured for a period of thirty (30) days after written notice thereof to the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by the Lender; (v) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have failed to duly observe or perform any covenant, condition or agreement on the part of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors to be observed or performed pursuant to the terms of the Loan Documents other than the payment of moneys which shall be governed by Section 9.01 (ii), (iii) and (iv) above, and such default shall have remained uncured for a period of thirty (30) days after written notice thereof to the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by the Lender; (vi) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have applied for or consented to the appointment of a custodian, receiver, trustee or liquidator of all or a substantial part of their respective assets; a custodian shall have been appointed with or without consent of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors; the Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall generally not be paying their respective Debts as they become due; the Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have made a general assignment for the benefit of their respective creditors; the Borrower, the Partnership Guarantors and/or the Corporate Guarantors, shall have filed a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with their respective creditors, or shall have taken advantage of any insolvency law, or shall have filed an answer admitting the material allegations of a petition in bankruptcy, reorganization or insolvency proceeding; or a petition in bankruptcy shall have been filed against the Borrower, the Partnership Guarantors and/or 64 the Corporate Guarantors and shall not have been dismissed for a period of sixty (60) consecutive days, or an Order for Relief shall have been entered against the Borrower, the Partnership Guarantors and/or the Corporate Guarantors under the Bankruptcy Code; or an order, judgment or decree shall have been entered without the application, approval or consent of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by any court of competent jurisdiction appointing a receiver, trustee, custodian or liquidator of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors of a substantial part of their respective assets and such order, judgment or decree shall have continued unstayed and in effect for any period of sixty (60) consecutive days; (vii) A writ of execution or attachment or any similar process shall be issued or levied against all or any part of or interest in any of the Properties of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors or any judgment involving monetary damages shall be entered against the Borrower, the Partnership Guarantors and/or the Corporate Guarantors which shall become a lien on the Borrower's, the Partnership Guarantors' and/or the Corporate Guarantors' Properties or any portion thereof or interest therein and such execution, attachment or similar process is not released, bonded, satisfied, vacated or stayed within thirty (30) days after its entry or levy, and said writ of execution, attachment, levy or judgment shall involve monetary damages aggregating more than $500,000.00; (viii) Seizure or foreclosure of any of the Properties of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors pursuant to process of law or by respect of legal self-help, involving monetary damages aggregating more than $500,000.00, unless said seizure or foreclosure is stayed or bonded within thirty (30) days after the occurrence of same; (ix) The voluntary permanent closing of business or ceasing of operations of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors, the result of which would have a Material Adverse Effect; (x) Default by the Borrower, the Partnership Guarantors and/or the Corporate Guarantors in any of the terms or conditions of any agreement (excluding the Loan Documents) covering the payment of borrowed money from the Lender and/or any other creditor (which with respect to any other creditor shall be in an amount involving not less than $500,000.00), which default has been declared by the Lender or said other creditor, and said Debt with respect to any other creditor has been accelerated; 65 (xi) The occurrence of a material adverse change in the business, financial condition, financial performance, properties or operations of the Borrower, the Partnership Guarantors and the Corporate Guarantors taken as a whole; and (xii) The occurrence of a Reportable Event, the result of which would have a Material Adverse Effect. Section 9.02 Rights and Remedies. (i) Acceleration. Upon the occurrence and during the continuance of any Event of Default described in the foregoing Section 9.01(vi) hereof, the Revolving Credit Facility shall automatically and immediately terminate and the unpaid principal amount of and any and all accrued interest on the Revolving Credit Loans and all Reimbursement Obligations shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower, and the obligation of the Lender to make any Revolving Credit Loans or issue any Letters of Credit hereunder shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default described in Section 9.01 above, the Lender may by written notice to the Borrower, (a) declare that the Revolving Credit Facility is terminated, whereupon the obligation of the Lender to make any Revolving Credit Loans or issue any Letters of Credit hereunder shall immediately terminate and/or (b) declare the unpaid principal amount of and any and all accrued and unpaid interest on the Revolving Credit Loans and all Reimbursement Obligations to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower. (ii) Rights Under Loan Documents. Upon the occurrence and during the continuance of any Event of Default, the Lender may take any lawful action against the Borrower to collect the payments then due and thereafter to become due under the Loan Documents, including any rights in law or equity. (iii) Setoff. Upon the occurrence and during the continuance of any Event of Default, without prior notice or other action (any such notice being expressly waived by the Borrower; however the Lender shall give the Borrower notice within three (3) days after the Lender has set off any amounts) the Lender may setoff any money owed by the Lender in any capacity to the Borrower or any Property of the Borrower in the possession of the Lender against any of the monetary obligations of the Borrower to the Lender under the Loan Documents, and the Lender shall be deemed to have exercised such right of setoff and to have made a charge against any such money or property immediately, even though the actual book entries may be made at some time subsequent thereto. 66 Section 9.03 Application of Proceeds. (i) All payments and proceeds received under Section 9.02 of this Loan Agreement shall be applied in the following order of priority: (a) First, to the payment of all reasonable fees, costs and expenses (including reasonable attorney's fees and expenses) incurred by the Lender and/or its agents or representatives in connection with the realization of such payments or proceeds; (b) Next, to the payment in full of all unpaid principal, accrued interest and other sums, if any, due and owing under the Revolving Credit Facility; (c) Next, the balance, if any, or such payments, proceeds, or amounts to the Borrower, or, if otherwise determined by a court of competent jurisdiction, to whomever may be entitled thereto. (ii) If the amount of the proceeds received in Section 9.03(i) above shall be insufficient to satisfy in full the amounts referred to in clauses (a) and (b) above, then the Borrower shall remain and be liable for any such deficiency. Section 9.04 No Notices. In order to entitle the Lender to exercise any remedy available to it under Section 9.02 of this Loan Agreement, it shall not be necessary for the Lender to give any notice, other than such notice as may be required expressly in this Loan Agreement or by applicable law. Section 9.05 Agreement to Pay Attorneys' Fees and Expenses. Upon the occurrence and during the continuance of an Event of Default, as a result of which the Lender shall require and employ attorneys or incur other expenses for the collection of payments due or to become due or the enforcement or performance or observance of any obligation or agreement on the part of the Borrower contained herein, the Borrower shall, on demand, pay to the Lender, the reasonable fees of such attorneys and such other expenses so incurred by them. Section 9.06 No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Loan Agreement should be breached by any party and thereafter waived by the other parties, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. Section 9.07 Failure to Exercise Rights. Nothing herein contained shall impose upon the Lender any obligation to enforce any terms, covenants or conditions contained in this Loan Agreement and the other Loan Documents. Failure of the Lender, in any one or more instances, to insist upon strict performance by the Borrower of any terms, covenants or conditions of this Loan Agreement and the other Loan Documents, shall not be considered or taken as a waiver or relinquishment by the Lender of its right to insist upon and to enforce in the future, by injunction or other appropriate legal or equitable remedy, strict compliance by the Borrower with all the terms, covenants and conditions of this Loan Agreement and the other Loan Documents. The consent of 67 the Lender to any act or omission by the Borrower shall not be construed to be a consent to any other or subsequent act or omission or to waive the requirement for the Lender's consent to be obtained in any future or other instance. Section 9.08 Waiver Of Jury Trial. THE BORROWER AND THE LENDER HEREBY WAIVE ANY AND ALL RIGHTS THAT THEY MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN THE BORROWER, THE LENDER OR THEIR SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS. IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDING. THE BORROWER AND THE LENDER RECOGNIZE THAT ANY DISPUTE ARISING IN CONNECTION WITH THE REVOLVING CREDIT FACILITY IS LIKELY TO BE COMPLEX AND CONSEQUENTLY THEY WISH TO STREAMLINE AND MINIMIZE THE COST OF THE DISPUTE RESOLUTION PROCESS BY AGREEING TO WAIVE THEIR RIGHTS TO A JURY TRIAL. Section 9.09 Remedies Cumulative. No remedy herein conferred upon or reserved to the Lender is intended to be exclusive of any other remedy or remedies; but each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder, or now or hereafter existing at law or in equity or by statute. No express or implied waiver by the Lender of any Event of Default hereunder shall in any way be, or construed to be, a waiver of any future or subsequent Event of Default. No delay or omission to exercise any right or power accruing upon any Event of Default continuing as aforesaid, shall impair any such right or power or shall be construed to be a waiver of any such Event of Default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient. 68 ARTICLE X MISCELLANEOUS Section 10.01 Expenses. (i) Generally. The Borrower agrees upon demand to pay, or reimburse the Lender for, all the Lender's reasonable external legal costs and expenses (but not internal legal costs and expenses) and all internal and external audit, appraisal, valuation and investigation expenses and for all other reasonable out-of-pocket costs and expenses of every type and nature (including, without limitation, the reasonable fees, expenses and disbursements of Reed Smith Shaw & McClay and any other external attorneys retained by the Lender, auditors, accountants, appraisers, insurance and environmental advisers, and other consultants) incurred by the Lender in connection with (a) any amendment waiver or consents required or requested by the Borrower hereunder and (b) the protection, collection or enforcement of any of the Obligations. (ii) After Default. The Borrower further agrees to pay, or reimburse the Lender for all reasonable out-of-pocket costs and expenses, including, without limitation, reasonable external attorneys' fees and disbursements, and costs of settlement incurred by the Lender after the occurrence and during the continuance of an Event of Default (a) in enforcing any Obligation or exercising or enforcing any other right or remedy available by reason of such Event of Default, (b) in connection with any refinancing or restructuring of the credit arrangements provided under this Loan Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding, (c) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding relating to the Borrower and related to or arising out of the transactions contemplated thereby or by any of the Loan Documents and (d) in taking any other action in or with respect to any suit or proceeding (whether in bankruptcy or otherwise). Section 10.02 Indemnity. The Borrower further agrees to defend, protect, indemnify, and hold harmless the Indemnified Parties from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated a party thereto), imposed on, incurred by or asserted against the Indemnified Parties (whether direct, indirect or consequential and whether based on any Federal or state Laws or other statutory regulations, including, without limitation, securities and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise, including any liability and costs under Federal, state or local environmental, health or safety laws, regulations, or common law principles, arising from or in connection with the past, present or future environmental condition of the Property, the presence of asbestos-containing materials at the Property, or the Release or threatened Release of any Environmental Concern Material into the Environment from the Property) in any manner relating to the conduct of the business of the Borrower, its Subsidiaries and/or its Affiliates or the use or intended use of the proceeds of the Loans hereunder (collectively, the "Indemnified Matters"); 69 provided, however, that the Borrower shall not have any obligation to an Indemnified Party hereunder with respect to (a) matters for which such Indemnified Party has been compensated pursuant to or for which an exemption is provided in Section 2.06 and Section 2.07 hereof or any other provision of this Loan Agreement and (b) Indemnified Matters caused by or resulting from the willful misconduct or gross negligence of that Indemnified Party, as determined by a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnified Parties. Section 10.03 Amendments and Waivers. No amendment or modification of any provision of this Loan Agreement shall be effective without the written agreement of the Lender and the Borrower, and no termination or waiver of any provision of this Loan Agreement, or consent to any departure by the Borrower therefrom, shall in any event be effective without the written concurrence of the Lender, which the Lender shall have the right to grant or withhold at its sole discretion. Section 10.04 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not expressly permitted by any of such covenants, the fact that it would be implicitly permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. Section 10.05 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by over-night courier service or United States mail and shall be deemed to have been given when delivered in person or by over-night courier service, upon receipt of a telecopy or telex during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). Notices to the Lender pursuant to Article II hereof shall not be effective until received by the Lender. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 10.05) shall be as set forth below each party's name on the signature pages hereof, or, as to each party, at such other address as may be designated by such party in a written notice to the other party. Section 10.06 Survival of Warranties and Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Loan Agreement and the other Loan Documents. Section 10.07 Payments Set Aside. To the extent that the Borrower makes a payment or payments to the Lender, or the Lender enforces its rights and remedies under the Loan Documents or exercises its right of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, 70 set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, right and remedies therefor (to the extent permissible and practicable under the law and the circumstances), shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 10.08 Severability. In case any provision in or obligation under this Loan Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. Section 10.09 Governing Law. This Loan Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania. Section 10.10 Successors and Assigns. This Loan Agreement and the other Loan Documents shall be binding upon the parties hereto and their respective successors and assigns. The Borrower's duties and Obligations hereunder, may not be assigned without the prior express written consent of the Lender. The Lender shall not sell, transfer or otherwise assign its interest in the Revolving Credit Facility to any other Person without the prior express written consent of the Borrower, except (i) where required by applicable banking Law or a change in banking policy at the Lender resulting in the Lender no longer making loans to customers similar to the Borrower and (ii) where the Lender has been acquired or merged into or with another institutional lender. Section 10.11 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE BORROWER WITH RESPECT TO THIS LOAN AGREEMENT, THE REVOLVING CREDIT NOTE AND THE LETTERS OF CREDIT REIMBURSEMENT AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF PENNSYLVANIA, AND BY EXECUTION AND DELIVERY OF THIS LOAN AGREEMENT, THE BORROWER ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS LOAN AGREEMENT AND THE REVOLVING CREDIT NOTE AND THE LETTER OF CREDIT REIMBURSEMENT AGREEMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. THE BORROWER DESIGNATES AND APPOINTS HANNOCH WEISMAN, A PROFESSIONAL CORPORATION AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY SUCH PERSON TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE 71 AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS NOTICE ADDRESS SPECIFIED ON THE SIGNATURE PAGES HEREOF, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ANY OBJECTION (INCLUDING WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY JURISDICTION SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. Section 10.12 Counterparts; Effectiveness; Inconsistencies. This Loan Agreement and any amendments, waivers, consents, or supplements may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Loan Agreement and each of the other Loan Documents shall be construed to the extent reasonable to be consistent one with the other, but to the extent that the terms and conditions of this Loan Agreement are actually inconsistent with the terms and conditions of any other Loan Documents, this Loan Agreement shall govern. Section 10.13 Entire Agreement. This Loan Agreement, taken together with all of the other Loan Documents and all certificates and other documents delivered by the Borrower or any other Person to the Lender, embody the entire agreement and supersede all prior agreements, written and oral, relating to the subject matter hereof. 72 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be executed and delivered by their proper and duly authorized corporate officers as appropriate, and the Borrower has caused its corporate seal to be hereunto affixed and attested pursuant to the resolution of its Board of Directors, all on the day and year first hereinabove written. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation, as the Borrower By: /s/ MARK S. NEWMAN /s/ NANCY R. PITEK ------------------------------------ - ------------------------------ Mark S. Newman Nancy R. Pitek President & CEO Secretary Notice Address: 5 Sylvan Way Parsippany, New Jersey 07054 Attn: Nancy R. Pitek Controller, Treasurer and Secretary With a copy to: Hannoch Weisman, A Professional Corporation 4 Becker Farm Road Roseland, New Jersey 07068 Attn: Nina Laserson Dunn, Esq. MELLON BANK, N.A., as the Lender By:/s/ G. RICHARD BERTOLET ------------------------------ G. Richard Bertolet First Vice President 73 Notice Address: Raritan Plaza One - Raritan Center Edison, New Jersey 08837 Attn: Peter Dontas Vice President With a copy to: Reed Smith Shaw & McClay Princeton Forrestal Village 136 Main Street, Suite 250 P.O. Box 7839 Princeton, New Jersey 08543-7839 Attn: Daniel F. Peck, Jr., Esq. 74 EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 List of Eurodollar Affiliates None EXHIBIT "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Form of Notice of Borrowing To: Mellon Bank, N.A. (hereinafter referred to as the "Lender") in its capacity as lender under that certain Revolving Line of Credit Loan Agreement dated May 31, 1996 (hereinafter referred to as the "Loan Agreement") entered into by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower") and the Lender. Terms defined in the Loan Agreement and not otherwise expressly defined herein are used herein as therein defined. Pursuant to Section 2.01(ii) of the Loan Agreement, this Notice of Borrowing in respect of a Revolving Credit Loan (hereinafter referred to as the "Notice") represents the request of the Borrower to borrow a Revolving Credit Loan on __________, 19 (hereinafter referred to as the "Borrowing Date") from the Lender in aggregate principal amount of $__________ as a [Prime Rate Loan] [Eurodollar Rate Loan]. In the event the Borrowing is a Eurodollar Rate Loan then the Borrower requests the following Eurodollar Interest Period: [14] [30] [60] or [90]. Proceeds of such Revolving Credit Loan are to be deposited on the Borrowing Date in the account maintained by the Borrower with the Lender, Account No. __________, in immediately available funds [and immediately thereafter such proceeds shall be wire-transferred to an account maintained with ___________, Account Number: ___________]. The Borrower hereby certifies that (i) the representations and warranties of the Borrower set forth in Sections 4.01 and Section 4.02 of the Loan Agreement and in any other Loan Document (except (a) representations and warranties which expressly speak only as of a different date, and (b) representations and warranties that are subject to change as permitted or contemplated by the Loan Documents) are true and correct in all material respects as of the Borrowing Date; (ii) no Event of Default or Potential Event of Default has occurred and is continuing under the Loan Agreement or any other Loan Document or will result from this proposed Borrowing; and (iii) the Borrower shall have performed in all material respects all agreements contained in and satisfied all conditions under Section 3.02 of the Loan Agreement and the other Loan Documents required to be performed by it on or prior to the Borrowing Date. The Borrower hereby represents and warrants and agrees that the proceeds of the Revolving Credit Loan requested by this Notice shall be used for (a) refinancing existing Consolidated Debt and/or (b) working capital in the ordinary course of the Borrower's and/or its Subsidiaries' and Affiliates' businesses and/or (c) the issuance of Letters of Credit. Dated: _________, 19__ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:________________________________ Name: Title: EXHIBIT "C" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Form of Notice of Conversion/Continuation To: Mellon Bank, N.A. (hereinafter referred to as the "Lender") in its capacity as lender under that certain Revolving Line of Credit Loan Agreement dated May 31, 1996 (hereinafter referred to as the "Loan Agreement") entered into by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower") and the Lender. Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. Pursuant to Section 2.02(iii) of the Loan Agreement, this Notice of Conversion/Continuation (hereinafter referred to as the "Notice") represents the Borrower's election to [insert one of the following"]: * convert an aggregate principal amount of $__________ of Revolving Credit Loans which are Prime Rate Loans to Eurodollar Rate Loans on __________, 19__. [The initial Eurodollar Interest Period for such Eurodollar Rate Loans is required to be a [fourteen] [thirty ] [sixty] or [ninety] day periods.] ** convert an aggregate principal amount of $ of Revolving Credit Loans which are Eurodollar Rate Loans with a current Eurodollar Interest Period ending on __________, 19__, to Prime Rate Loans [on ___________, 19__ [.]*** ***, and continue as Eurodollar Rate Loans an aggregate principal of $___________ of Eurodollar Rate Loans with a current Eurodollar Interest Period ending ____________, 19__. The succeeding Eurodollar Interest Period is requested to be a [fourteen], [thirty], [sixty] or [ninety] day periods. - ---------- * Use if converting Prime Rate Loans to Eurodollar Rate Loans. ** Use if converting Eurodollar Rate Loans to Prime Rate Loans. *** Use if continuing as Eurodollar Rate Loans. The Borrower hereby certifies that no Event of Default or Potential Event of Default has occurred and is continuing under the Loan Agreement. Dated: _________, 19__ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:_______________________________ Name: Title: EXHIBIT "D" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Revolving Line of Credit Note $7,500,000.00 Philadelphia, Pennsylvania May 31, 1996 FOR VALUE RECEIVED, the undersigned, DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware (hereinafter referred to as the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (hereinafter referred to as the "Lender") on or before the Revolving Credit Termination Date, the lesser of (i) the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND AND 00/100 ($7,500,000.00) DOLLARS or (ii) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender to the Borrower pursuant to the Loan Agreement. The Borrower further promises to pay to the order of the Lender interest on the unpaid principal amount of the Revolving Credit Loans from the date outstanding at the interest rate per annum determined pursuant to Section 2.02 of, or as otherwise provided in, the Loan Agreement payable on the dates set forth in Section 2.02(ii) of, or as otherwise provided in, the Loan Agreement. All payments of principal and interest hereunder shall be due and payable to the Lender not later than 2:00 p.m. (Philadelphia, Pennsylvania time), on the day when due, all as more fully set forth in Section 2.05 of the Loan Agreement. Such payments shall be made in U.S. Dollars in immediately available funds without setoff, counterclaim (other than a compulsory counterclaim) or other deduction of any nature. Except as otherwise provided in the Loan Agreement, if any payment of principal or interest hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next following Business Day and such extension of time shall be included in computing interest in connection with such payment. This Revolving Line of Credit Note is the "Revolving Line of Credit Note" referred to in, and is entitled to the benefits of the Revolving Line of Credit Loan Agreement dated May 31, 1996, executed by and between the Borrower and the Lender (as the same may be amended, modified or supplemented from time to time, hereinafter referred to as the "Loan Agreement"), which among other things provides for the acceleration of the maturity hereof upon the occurrence of certain events and for prepayments in certain circumstances and upon certain terms and conditions. Terms defined in the Loan Agreement shall have the same meanings herein. The holder of this Revolving Line of Credit Note is authorized to endorse on the Schedule 1 attached hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof (hereinafter referred to as the "Grid") the date and amount of each Revolving Credit Loan made pursuant to Section 2.01 of the Loan Agreement, and the date and amount of each payment or prepayment of principal thereof, which endorsement shall constitute prima facie evidence of the accuracy of the information endorsed; provided, however, that the failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Revolving Credit Loan. The Borrower hereby expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Revolving Line of Credit Note and the Loan Agreement. This Revolving Line of Credit Note shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the Borrower has caused this Revolving Line of Credit Note to be executed and delivered by its proper and duly Authorized Officer and has caused its corporate seal to be hereunto affixed and attested, pursuant to the resolution of its Board of Directors, all on the day and year first hereinabove written. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation ___________________________ By:_______________________________________ Name: Name: Secretary Title: SCHEDULE 1 TO REVOLVING LINE OF CREDIT NOTE LOANS AND PAYMENTS OF REVOLVING CREDIT LOANS - ------------------------------------------------------------------------------ UNPAID AMOUNT OF PRINCIPAL AMOUNT OF PRINCIPAL BALANCE OF NOTATION DATE LOANS REPAID LOANS MADE BY - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ EXHIBIT "E" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Form of Opinion Letter See attached EXHIBIT "F" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Form of Officer's Certificate This Officer's Certificate of Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Certificate") is delivered to you pursuant to Section 5.02(vii) of the Revolving Line of Credit Loan Agreement dated May 31, 1996 (as may be amended from time to time (hereinafter referred to as the "Loan Agreement"), by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower"), and Mellon Bank, N.A. (hereinafter referred to as the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. 1. I am the duly elected, qualified and acting [Chief Financial Officer], [President] or [Chief Accounting Officer] of the Borrower. 2. I have reviewed and am familiar with the contents of this Certificate. I am providing this certificate solely in my capacity as an officer of the Borrower. The matters set forth herein are true to the best of my knowledge, after diligent inquiry, but I express no personal opinion as to any conclusions of law or other legal matters. 3. I have reviewed the terms of the Loan Agreement and the principal Loan Documents and have made, or caused to be made, under our supervision, a review in reasonable detail of the transactions and condition of the Borrower, its Subsidiaries and its Affiliates during the accounting period covered by the attached financial statements and computations attached hereto as Exhibit "F-1" ("Financial Statements"). Such review did not disclose the existence during or at the end of the accounting period covered by the attached Financial Statements, and I have no knowledge of the existence as of the date of this Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, except as set forth below:* 4. I hereby certify in my capacity as [President or Chief Financial Officer or Chief Accounting Officer] and in my capacity as an Authorized Officer that the Financial Statements attached hereto present fairly the financial position of the Borrower, its Subsidiaries and its Affiliates as of the end of such fiscal period and the results of its operations and the changes in its financial position and cash flows for such fiscal period, all in conformity with Generally Accepted Accounting Principles applied in a manner consistent with that of the most recent audited financial statements furnished to the Lender, subject to normal and recurring year-end audit adjustments. IN WITNESS WHEREOF, I execute this Certificate this ____ day of _____, 19__. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:_____________________________ Name: Title: - ---------- * Describe here (or in a separate attachment to this Certificate) the exceptions, if any, to Paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking and proposes to take with respect to each such condition or event. EXHIBIT "F-1" FORM OF COMPLIANCE CERTIFICATE ---------------------- This Officer's Certificate of Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Certificate") is delivered to you pursuant to Section 5.02(iv) of the Revolving Line of Credit Loan Agreement dated May 31, 1996 (as may be amended from time to time, hereinafter referred to as the "Loan Agreement") by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower"), and Mellon Bank, N.A., (hereinafter referred to as the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. The Borrower hereby delivers to the Lender, together with the financial statements being delivered pursuant to Section 5.02(i) and (iii) of the Loan Agreement, this Certificate for the accounting period from ________________, 19__ to ___________, 19__*. For purposes hereof, section and subsection references herein relate to sections and subsections, respectively, of the Loan Agreement, and amounts or ratios refer to the maximum or minimum amounts or ratios required under the relevant sections of the Loan Agreement. I. NEGATIVE COVENANTS A. CONSOLIDATED DEBT (Section 7.01(vi)) B. LIENS (Section 7.02(ii)(e)) Amount of Purchase Money Liens $________________ Permitted Amount $1,000,000.00 at anytime outstanding - ---------- * Insert dates representing the fiscal period covered by this Certificate. C. LOANS, ADVANCES AND INVESTMENTS (Section 7.03) 1. Subsection 7.03(iv) Aggregate demand advances to officers and employees outstanding at any time during the period covered by this Certificate: $[ ] Outstanding ------------------- Aggregated maximum $250,000.00 at anytime outstanding permitted to officers/employees D. RESTRICTED JUNIOR PAYMENTS (Section 7.04) Actual Amount $ Permitted Amount [$__________] II. FINANCIAL COVENANTS A. MINIMUM CONSOLIDATED QUICK RATIO (Section 8.01) Consolidated Quick Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Quick Ratio __________ to 1.0 Minimum Required Current Ratio 1.0 to 1.0 B. MAXIMUM CONSOLIDATED LEVERAGE RATIO (Section 8.02) Consolidated Leverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Senior Liabilities (exclusive of contingent liabilities) $___________ Actual Consolidated Tangible Net Worth $___________ Actual Consolidated Subordinated Debt $___________ Actual Consolidated Leverage Ratio ___________ to 1.0 Maximum Permitted Consolidated Leverage Ratio 1.0 to 1.0 C. MINIMUM CONSOLIDATED INTEREST COVERAGE RATIO (Section 8.03) Consolidated Interest Coverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Net Income $___________ Actual Interest Expense $___________ Actual Prepaid Subordinated Debt $___________ Actual Consolidated Interest Coverage Ratio ____ to 1.0 Minimum Required Consolidated Interest Ratio 1.75 to 1.0 I hereby certify, in my capacity as an Authorized Officer of the Borrower, that the information set forth above is accurate as of _____________, 19__, to the best of my knowledge after diligent inquiry. Dated:_______________, 19__ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:________________________________ Name: Title: EXHIBIT "G" ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Form of Letter of Credit Reimbursement Agreement See attached SCHEDULE 2.01 ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 List of Subsidiaries and/or Affiliates Who May Borrow and/or have Letters of Credit Issued for their Account All Corporate Guarantors and Partnership Guarantors SCHEDULE 2.01(IV) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Existing Debt to be Refinanced 1. Note Payable to PNC Bank - -------------------------------------------- ---------------------------------- Interest Rate Prime + 0.5.% - -------------------------------------------- ---------------------------------- Amount Borrowed $1,450,000.00 - -------------------------------------------- ---------------------------------- Current Principal Balance $1,147,916.65 ============================================ ================================== Accrued Unpaid Interest thru May 31, 1996 $8,458.33 - -------------------------------------------- ---------------------------------- 2. Demand Line of Credit with Johnstown Bank & Trust Company - -------------------------------------------- ---------------------------------- Interest Rate Prime + 1.0.% - -------------------------------------------- ---------------------------------- Maximum Principal Amount $1,000,000.00 - -------------------------------------------- ---------------------------------- Current Principal Balance $-0- ============================================ ================================== Accrued Unpaid Interest thru May 31, 1996 $4,363.95 - -------------------------------------------- ---------------------------------- 3. Note Payable to Comerica Bank (Equipment Loan) - -------------------------------------------- ---------------------------------- Interest Rate 8.422% - -------------------------------------------- ---------------------------------- Amount Borrowed $212,000.00 - -------------------------------------------- ---------------------------------- Current Principal Balance $164,888.88 ============================================ ================================== Accrued Unpaid Interest thru May 31, 1966 $1,071.83 - -------------------------------------------- ---------------------------------- SCHEDULE 4.01(III) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Existing Issued and Authorized Capital Stock of the Borrower 1. Preferred Stock Par Value: $10.00 per share Authorized: 20,000,000 shares Issued: 0 shares Outstanding: 0 shares 2. Common Stock Par Value: $0.01 per share Authorized: 20,000,000 shares Issued: 5,966,066 shares Outstanding: 5,467,632 shares (498,434 shares held in treasury) 3. Options per 1991 Stock Option Plan Number of Shares Subject to Options: 307,800 shares common stock 4. Options per 1991 Non-Qualified Stock Option Plan Number of Shares Subject to Options: 130,000 shares common stock 5. % Senior Subordinated Convertible Debentures Due 2003 Number of Shares Issuable Upon Conversion: 2,824,858 shares common stock 6. 8.5% Convertible Subordinated Debentures Due 1998 Number of Shares Issuable Upon Conversion: 332,800 shares common stock SCHEDULE 4.01(VII) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Pending Actions, Suits, Proceedings, Governmental Investigations or Arbitrations NONE SCHEDULE 4.01(XV) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Environmental Disclosure NONE SCHEDULE 4.01(XVI) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 ERISA Schedule 4.01 (xx) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 List of Joint Ventures 1. DRS Medical Systems 2. Laurel Technologies Partnership SCHEDULE 4.01(XXI) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Existing Insurance Policies, Programs and Claims See Attached Certificates of Insurance. Also see attached list of claims. SCHEDULE 4.01(XXVII) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Labor Unions/Collective Bargaining Agreements NONE SCHEDULE 6.05 ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Insurance Policies and Programs See attached Certificate of Insurance SCHEDULE 7.01(III) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Permitted Existing Consolidated Debt 1. 9% Senior Subordinated Convertible Debentures due October 1, 2003 Principal amount outstanding:$25,000,000.00 2. 8.5% Convertible Subordinated Debentures due August 1, 1998 Principal amount outstanding:$4,992,000.00 3. Suffolk County Industrial Development Agency 1991 Variable Rate Demand Industrial Development Revenue Refunding Bonds (Photronics Corp. Facility) Principal amount outstanding: $1,695,000.00 4. Covenant and Agreement Not to Compete Dated October 28, 1994 Between Ahead Technology, Inc. and Robert F. Van Houtten Amount outstanding: $369,000.00 ($9,000.00 per month) 5. Assumption and Assignment of License Agreement Dated as of July 7, 1995 Among Carl Zeiss Stiftung, Opto Mechanik, Inc., OMI Acquisition Corp. and Photronics Corp. Amount outstanding: $197,580.00 (varying installments through April 28, 1997) 6. Term Note to Technology Development and Education Corporation Principal amount outstanding: $84,262.00 (monthly installments through March 1, 2000) 7. Term Note to Southern Alleghenies Planning and Development Commission Principal amount outstanding: $63,516.00 (monthly installments through March 1, 2000) 8. Term Note to CIT Group for Equipment Loan Principal amount outstanding as of May 30, 1996 was $22,321.31. 9. The following 4 Letters of Credit (i) Standby Letter of Credit, Letter of Credit, No. T-251275, issued by Chemical Bank for the account of OMI Corp. for the benefit of the Government of Israel Ministry of Defense in the Stated Amount of $1,200,000.00, issued on December 15, 1995 and expiring no later than June 28, 1998. (ii) Irrevocable Letter of Credit, No. PB-284327, issued by Morgan Guaranty Trust Company of New York for the account of Photronics Corp. for the benefit of Manufacturers and Traders Trust Company in the Stated Amount of $2,451,103.00, issued on December 19, 1991 and expiring no later than December 19, 1996. (iii) Irrevocable Standby Letter of Credit, No. 526808, issued by Comerica Bank - California for the account of Precision Echo, Inc.for the benefit of Chung Shan Institute of Science and Technology (Taiwan) in the Stated Amount of $135,000.00, issued on February 2,1995 and expiring no later than July 29, 1996. (iv) Irrevocable Standby Letter of Credit, No. 531883, issued by Comerica Bank - California for the account of Precision Echo, Inc. for the benefit of Chung Shan Institute of Science and Technology (Taiwan) in the Stated Amount of $44,700.00 issued on March 18, 1996 and expiring no later than August 8, 1997. NOTE: All principal amounts are as of May 1, 1996. SCHEDULE 7.03 ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 Existing Loans and Investments I. Loans: 1. Amended and Restated Promissory Note from Mark S. Newman (Chairman of the Board, President and Chief Executive Officer) to the Company, dated as of May 26, 1995; $104,100 principal amount; 8% per annum interest rate 2. Loan Receivable from Paul G. Casner, Jr. (President - DRS Electronic Systems Group); $50,000 current principal balance; no stated interest rate (interest is imputed annually based on Internal Revenue Code and IRS regulations) II. Investments: 1. Excess corporate cash balances are currently invested in the following: (i) The Pierpont Money Market Fund (J.P. Morgan) (ii) Merrill Lynch Institutional Fund SCHEDULE 7.12(I) ATTACHED TO AND MADE A PART OF THAT CERTAIN REVOLVING LINE OF CREDIT LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED MAY 31, 1996 List of Existing Guaranties NONE EX-10.101 4 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER By and Among PTI ACQUISITION CORP., a subsidiary of DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., PACIFIC TECHNOLOGIES, INC., DAVID A. LEEDOM, KAREN A. MASON, ROBERT T. MILLER, CARL S. ITO, and BARRY S. KINDIG DATED: September 30, 1996 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE I............................................................... 1 DEFINITIONS.................................................... 1 ARTICLE II.............................................................. 6 THE MERGER AND PURCHASE OF SHARES.............................. 6 Section 2.1. The Merger...................................... 6 Section 2.2. Conversion of Shares............................ 7 ARTICLE III............................................................. 9 REPRESENTATIONS AND WARRANTIES OF SURVIVING CORPORATION........ 9 Section 3.1. Capitalization.................................. 9 Section 3.2. Corporate Existence............................. 9 Section 3.3. Authority Relative to this Agreement and Transaction Documents....................... 9 Section 3.4. Absence of Subsidiary Liabilities............... 10 Section 3.5. No Litigation................................... 10 Section 3.6. No Brokers, Finders, etc........................ 10 Section 3.7. Acquisition for Investment...................... 10 Section 3.8. Filings with the SEC............................ 10 Section 3.9. Financial Statements............................ 10 Section 3.10. Full Disclosure................................. 11 ARTICLE IV.............................................................. 11 REPRESENTATIONS AND WARRANTIES................................. 11 Section 4.1. Capitalization.................................. 11 Section 4.2. Title to Shares, etc............................ 11 Section 4.3. Corporate Existence............................. 12 Section 4.4. Authority Relative to this Agreement and Transaction Documents........................... 12 Section 4.5. No Litigation................................... 12 Section 4.6. Title to Assets and Real Property............... 13 Page ---- Section 4.7. Compliance with Laws; Permits and Licenses....... 14 Section 4.8. Intellectual Property............................ 14 Section 4.9. Litigation....................................... 15 Section 4.10. Contracts........................................ 15 (a) Material Contracts............................... 15 (b) Government Contracts............................. 16 (i) Government Contracts Compliance......... 16 (ii) Investigation and Claims......................... 17 (iii) No Debarment or Suspension....................... 19 (iv) Test and Inspection Results...................... 19 Section 4.11. Foreign Government Contracts..................... 19 Section 4.12. Labor Union Contracts............................ 19 Section 4.13. Employees, Labor Matters, etc.................... 20 Section 4.14. ERISA............................................ 21 Section 4.15. Brokers' or Finders' Fees, etc................... 22 Section 4.16. Financial Information; Undisclosed Liabilities... 23 Section 4.17. Taxes............................................ 23 Section 4.18. Absence of Changes............................... 25 Section 4.19. Accounts Receivable.............................. 27 Section 4.20. Insurance........................................ 27 Section 4.21. Sufficiency of Assets and Real Property.......... 27 Section 4.22. Foreign Assets................................... 28 Section 4.23. Propriety of Past Payments....................... 28 Section 4.24. Affiliate Transactions........................... 28 Section 4.25. Suppliers and Customer........................... 28 Section 4.26. Environmental Conditions and Governmental Authorizations...................... 29 Section 4.27. Leases of Personal Property...................... 29 Section 4.28. Books and Records................................ 30 Section 4.29. Accounts......................................... 30 Section 4.30. Products Liability............................... 30 Section 4.31. Interest in Competitors.......................... 31 Page ---- Section 4.32. Inventories....................................... 31 Section 4.33. Private Offering.................................. 31 Section 4.34. Subsidiaries...................................... 31 Section 4.35. Full Disclosure................................... 32 Section 4.36. Purchase for investment........................... 32 ARTICLE V................................................................ 32 COVENANTS....................................................... 32 Section 5.1. Covenants of Surviving Corporation................ 32 Section 5.2. Covenants of the Company and the Company's Shareholders............................ 33 Section 5.3. Net Worth Statement; Adjustment to Purchase Price. 36 ARTICLE VI............................................................... 37 CONDITIONS PRECEDENT TO EXECUTION OF THIS AGREEMENT............. 37 Section 6.1. Conditions Precedent to Obligations of Surviving Corporation............................. 37 Section 6.2. Conditions Precedent to Obligations of the Company....................................... 39 ARTICLE VII.............................................................. 41 ADDITIONAL AGREEMENTS.................................................... 41 Section 7.1. Further Assurances................................ 41 Section 7.2. Covenants of Certain of the Company's Shareholders............................ 41 Section 7.3. Remedies.......................................... 42 Section 7.4. Public Disclosure................................. 43 Section 7.5. Limitations on Transfers and Dispositions......... 43 ARTICLE VIII............................................................. 44 INDEMNIFICATION................................................. 44 Section 8.1. Survival of Representations and Warranties........ 44 Section 8.2. Indemnification by the Parties.................... 44 Section 8.3. General Indemnification Provisions................ 44 Section 8.4. Limitations on Indemnification.................... 45 Section 8.5. Shareholders' Representatives..................... 45 ARTICLE IX............................................................... 46 Page ---- TERMINATION.............................................................. 46 Section 9.1. Termination of Agreement......................... 46 Section 9.2. Procedure and Effect of Termination.............. 47 ARTICLE X................................................................ 47 CERTAIN REGISTRATION RIGHTS..................................... 47 10.1. Certain Definitions..................................... 47 10.2. Restrictions On Transfer................................ 49 10.3. Registration Of Securities.............................. 49 10.4. Expenses Of Registration................................ 50 10.5. Registration Procedures................................. 50 10.6. Indemnification......................................... 51 10.7. Information By Holder................................... 53 10.8. Rule 144 Reporting...................................... 53 10.9. Allocation Of Registration Opportunities................ 53 ARTICLE XI............................................................... 54 MISCELLANEOUS................................................... 54 Section 11.1. Taxes........................................... 54 Section 11.2. Expenses........................................ 54 Section 11.3. Consents........................................ 54 Section 11.4. Assignment...................................... 54 Section 11.5. Entire Agreement................................ 54 Section 11.6. Amendment....................................... 55 Section 11.7. Waiver.......................................... 55 Section 11.8. Headings........................................ 55 Section 11.9. Notices......................................... 55 Section 11.10. Law Governing Jurisdiction...................... 57 Section 11.11. Counterparts.................................... 57 Section 11.12. Severability.................................... 57 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER is made as of this 30th day of September, 1996 (the "Agreement") by and among PTI ACQUISITION CORP., a Delaware corporation ("Subsidiary" or the "Surviving Corporation") and a wholly owned subsidiary of DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation ("Parent" or "DRS"), PACIFIC TECHNOLOGIES, INC., a California corporation ("Merging Corporation" or the "Company"), David A. Leedom, an individual, ("Leedom"), Karen A. Mason, an individual ("Mason"), Robert T. Miller, an individual ("Miller"), Carl S. Ito, an individual ("Ito"), and Barry S. Kindig, an individual ("Kindig") (collectively, Miller, Ito and Kindig shall be referred to as the "Minority Shareholders") (collectively, Leedom, Mason and the Minority Shareholders shall be referred to as the "Company's Shareholders"). WHEREAS, the parties hereto desire to adopt a plan of reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; WHEREAS, the parties hereto deem it advisable that the Company be merged into Subsidiary pursuant to this Agreement and in accordance with the applicable statutes of the States of Delaware and California; WHEREAS, the Company's Shareholders are the owners of 3,455 issued and outstanding shares (singularly, a "Share" and collectively the "Shares") of common stock, no par value, of the Company (the "Common Stock"), which Shares represent 100% of the issued and outstanding Common Stock of the Company; WHEREAS, at or prior to the Effective Date (as hereinafter defined), Subsidiary will acquire from the Company's Shareholders all of the Shares necessary to complete the merger provided for herein; and WHEREAS, the principal office of Subsidiary in the State of Delaware is located at 1209 Orange Street, City of Wilmington, County of New Castle, and the name of its resident agent at that address is The Corporation Trust Company. NOW, THEREFORE, the parties agree as follows: ARTICLE DEFINITIONS Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accountant" means Jane Hamel, the certified public accountant of the Company. "Affiliate" means, when used with reference to a specified Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person or (ii) any Person that is an executive officer or director of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity and, (iii) when used with reference to a natural Person, any Person that is related to the specified Person by blood or marriage in the first degree of consanguinity; provided, however, that no natural Person shall be deemed to be controlled by any other Person. "Applicable Law" shall have the meaning specified in Section 4.7(a). "Assets" means all of the assets of the Company, real, personal, tangible, intangible and otherwise, all as more particularly set forth on Schedule 4.6. "Surviving Corporation's Accountants" shall mean KPMG Peat Marwick LLP. "Certificate of Merger" shall have the meaning set forth in Section 6.1. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Pacific Technologies, Inc. together with Subsidiaries thereof, if any, and any partnership Affiliates. "Contracts" means all contracts, subcontracts, agreements, options, guarantees, orders, commitments, undertakings and arrangements, whether written or oral. "Effective Date" shall have the meaning specified in Section 2.1(a). "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), costs and expenses, including costs and expenses of defense of any claim and of any settlement of claims, including, without limitation, reasonable attorneys' fees and consultants' fees, which are incurred at any time as a result of the existence of Hazardous Material upon, about or beneath the Premises or migrating or threatening to migrate to or from the Premises, or arising in any manner whatsoever out of any violation of Environmental Requirements pertaining to the Premises and the activities thereon or to the past, present or future operations of the Company, including without limitation: (i) damages for personal injury, or injury to property or natural resources, including but not limited to claims brought by or on behalf of employees of the Company, occurring upon or off of the Premises, whether foreseeable or unforeseeable, including, without limitation, lost profits, consequential damages, interest and penalties; -2- (ii) diminution in the value of the Premises and damages for the loss of or restriction on the use of or adverse impact on the marketing of rentable or usable space or of any amenity of the real property containing the Premises; (iii) fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs and liabilities (including liabilities to indemnify any Person for costs) incurred in connection with the investigation or remediation of such Hazardous Materials or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remedial, removal, containment, restoration or monitoring work required by any Governmental Authority, or reasonably necessary to make full economic use of the Premises or any other property or otherwise expended in connection with such conditions; and (iv) damages and claims resulting from the off-site disposal of Hazardous Materials which are derived from the use, generation, storage, treatment, transportation or disposal of Hazardous Materials by the Company. "Environmental Requirements" means all Applicable Law relating to the protection of human health or the environment, including, without limitation: (i) all requirements pertaining to reporting, licensing, permitting, investigation or remediation of emissions, discharges, releases or threatened releases of Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; and (ii) all requirements pertaining to the protection of the health and safety of employees or the public. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended (P.L. 93-406). "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time, applied consistently throughout the periods involved. "Governmental Approval" means an authorization, consent, approval, permit, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority, including, without limitation, federal environmental authorities and environmental authorities of the states in which the Company conducts business. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any -3- government authority, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof and any tribunal or arbitrator(s) of competent jurisdiction. "Hazardous Materials" means any chemical substance: (i) the presence of which requires investigation, removal or remediation under any Applicable Law; or (ii) which is or becomes defined as a "hazardous waste" or "hazardous substance" under any Applicable Law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any Governmental Authority or Applicable Law; or (iv) the presence of which causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the Premises or to the health or safety of any Person on or about the Premises; or (v) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without limitation which contains PCBs or asbestos. "IRS" means the United States Internal Revenue Service. "Intellectual Property Rights" means any and all copyrights, trademarks, trademark applications, service marks, service mark applications, licensing agreements and similar Contracts, technology, trade secrets, trade names, division names and other information, property or rights used in or relating to the business or operations of the Company, as more specifically set forth in Schedule 4.8 hereof. "Inventories" means all inventories relating to the business of the Company including, without limitation, all finished goods, work in progress, raw materials, stores, all production, shipping and packaging supplies and all spare parts. "knowledge": In any representation or warranty, words denoting "to the knowledge of the Company and the Shareholders" mean that none of the Company, Leedom, Mason, Miller, Ito and/or Kindig has knowledge which would contradict the relevant representation or warranty. -4- "Liens" has the meaning specified in Section 4.6. "Material Adverse Effect" means an effect which, directly or indirectly, subjects the Company to any liability, damage, deficiency, loss, cost or expense of $25,000 or more or which otherwise has or will have a material adverse effect on the operations, results of operations, prospects or condition (financial or other) of the business of the Company. "Material Contract" shall have the meaning specified in Section 4.10. "Minority Shareholders" shall have the meaning specified in the first paragraph of this Agreement. "Net Worth Statement" shall have the meaning specified in Section 5.3. "Notice" shall have the meaning specified in Section 11.9. "Permitted Liens" shall have the meaning specified in Section 4.6. "Person" means any individual, firm, partnership, corporation, trust, estate, limited liability company, limited liability partnership, or other entity. "Personal Property Leases" shall have the meaning specified in Section 4.27. "Plan(s)" shall have the meaning specified in Section 4.14. "Premises" means those locations owned or leased by the Company or otherwise used thereby for the business operations of the Company. "Return" shall mean all reports, estimates, declarations, information statements and returns due under all foreign, federal, state or local laws or regulations, as appropriate, relating to Taxes. "Securities Act" shall mean the Securities Act of 1933, as amended (15 U.S.C. Section 77a et seq.). "Security Interest" shall have the meaning specified in Section 4.34. "Subsidiary" of any Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other equity having ordinary voting power to elect a majority of the Board of Directors or other managers of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) or other entity is at the time directly or indirectly owned by such Person, by such Person and one or more of such Person's other Subsidiaries or by one or more of such Person's other Subsidiaries. -5- "Taxes" means all federal, state and local taxes, assessments and governmental charges, of any nature, kind or description (including, without limitation, all income taxes, franchise taxes, withholding taxes, estimated taxes, unemployment insurance, social security taxes, payroll taxes, sales and use taxes, excise taxes, occupancy taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation and withholding taxes) and all interest, additions to tax and penalties with respect thereto, whether such interest, additions or penalties arise before or after the Effective Date. "Transaction Documents" shall mean the collective reference to this Agreement and all other agreements and documents to be delivered pursuant hereto or thereto on or before the Effective Date, in each case with such changes as may be agreed among the parties. ARTICLE THE MERGER AND PURCHASE OF SHARES SECTION 2.1. The Merger. Filing of Certificate of Merger. Upon the execution and delivery of this Agreement and the Transaction Documents in the manner set forth in Article VI, the fully executed Certificates of Merger shall be filed by the Subsidiary with the Secretaries of State of the States of Delaware and California. All of the parties to this Agreement agree and covenant to do whatever acts are necessary to ensure that these Certificates of Merger are filed by such Secretaries of State. The date of the later filing of such Certificates of Merger shall be the "Effective Date" referred to in this Agreement. Transfer of Properties and Liabilities. Upon the Effective Date, the separate existence of the Company shall cease; all of the outstanding Shares of Common Stock of the Company shall be exchanged for and converted into the right to receive shares of common stock, $.01 par value, of DRS ("DRS Stock") or cash as hereinafter provided; and upon the filing of the Certificate of Merger with the Secretaries of State for the States of Delaware and California, the Surviving Corporation shall possess all the rights, privileges, immunities, powers, and purposes, and all the property, real and personal, causes of action, and every other asset of the Company, and shall assume and be liable for all the liabilities, obligations and penalties of Company, in accordance with the Delaware General Corporation Law without further act or deed. Notwithstanding the foregoing, but consistent with the Delaware General Corporation Law, all corporate acts, plans, policies, approvals and authorizations of the Company, its Board of Directors, officers and agents, which were valid and effective immediately prior to the Effective Date shall be taken for all purposes as the acts, plans, policies, approvals and authorizations of the Surviving Corporation, consistent, however, with the terms and conditions of this Agreement, including without limitation Article VIII hereof and Section 11.2 hereof. -6- (c) Surviving Corporation. Following the merger, the existence and identity of the Surviving Corporation shall continue unaffected and unimpaired by the merger, with all the rights, privileges, franchises, immunities, and powers previously held by the Subsidiary before the Effective Date as well as those previously held by the Company immediately prior to the Effective Date, and subject to all the duties and liabilities, of a corporation organized under the laws of the State of Delaware. The Certificate of Incorporation and Bylaws of Subsidiary, as in effect immediately prior to the Effective Date, shall continue in full force and effect, and, except as provided in Section 2.1(b), shall not be changed in any manner by the merger. The directors and the officers of Subsidiary immediately prior to the Effective Date shall continue as the directors and officers of the Surviving Corporation. The authorized capital stock of the Subsidiary shall remain unchanged. (d) Name. The name of the Surviving Corporation shall be changed as of the Effective Date to Pacific Technologies, Inc. SECTION 2.2 Conversion of Shares. (a) Conversion. Each Share of Common Stock issued and outstanding immediately prior to the Effective Date (exclusive of Shares, if any, held in the treasury of the Company, which treasury Shares shall be canceled upon the Effective Date) shall, without any action on the part of the Company, Subsidiary, or any holder of such Shares, be converted by the merger into the right to receive DRS Stock or cash as follows:
Cash to be Received in The Company's Shares of Company's Cash to be Shares of DRS Lieu of Frac- Shareholder Common Stock Received Stock to be Received tional Shares - ------------- ------------------ ---------- -------------------- ------------- (Pre-Merger) (Post-Merger) Leedom 2,025 $ -0- 26,752 $10.01 Mason 1,000 $ -0- 13,211 $ 9.20 Miller 250 $ -0- 3,303 $ 8.05 Ito 100 $15,192.42 -0- $ -0- Kindig 80 $12,153.94 -0- $ -0-
The aggregate rights delineated above of the holders of Common Stock to receive DRS Stock or cash shall be referred to herein as the "Merger Consideration." (b) Shares of Subsidiary. None of the issued shares of Subsidiary shall be converted as a result of the merger, but all of such shares shall remain issued shares of capital stock of the Surviving Corporation. (c) Exchange of Certificates; Delivery of Cash. As promptly as practicable after the Effective Date, each holder of an outstanding certificate or certificates that prior thereto represented Shares of the Company's Common Stock shall surrender the same to the Subsidiary, -7- as exchange agent for all such holders (the "Exchange Agent"), and such holders shall be entitled upon such surrender to receive in exchange therefor either certificates representing the number of whole shares of DRS Stock into which the shares theretofore converted and/or cash, as provided above in Section 2.2(a). Adoption of this Agreement by the Company's Shareholders shall constitute ratification of the appointment of the Subsidiary as Exchange Agent. Following the Effective Date and until so surrendered, each outstanding certificate that, prior to the Effective Date, represented Shares of Common Stock, shall be deemed for all corporate purposes to evidence either ownership of the number of whole shares of DRS Stock into which the Shares of Common Stock represented thereby prior to such Effective Date shall have been converted or a right to receive the cash amount set forth in Section 2.2(a) above or both, as specified in Section 2.2(a). No interest shall be payable with respect to the payment of any dividends or with respect to a cash payment. The holder of a fractional share interest, as such, shall only be entitled to receive a cash distribution as provided in Sections 2.2(a) and 2.2(d) and shall not be entitled to any dividends, or to any distribution in the event of a liquidation, or to any voting or other privileges of a shareholder of in respect of such fractional share interest. (d) Fractional Shares. Fractional shares of DRS Stock will not be issued. The Exchange Agent will hold for the account of each holder of a certificate or certificates formerly representing Shares of the Company's Common Stock who would otherwise be entitled to receive a fractional interest in a share of DRS Stock, and upon surrender of such certificate or certificates shall deliver to such holder (together with certificates representing the number of whole shares of DRS Stock to which he may entitled as provided in Section 2.2(a)), a cash distribution in lieu of such fractional share in the amount set forth in Section 2.2(a) above. No interest shall be payable with respect to payment of such cash distribution. Any payment with respect to fractional shares is merely intended to provide a mechanical rounding of, and is not separately bargained-for, consideration. (e)Dissenters' Rights. Any Company Shareholder who shall have delivered a written demand for appraisal of his/her Shares, as provided in Sections 1300 et seq., of the California General Corporation Law (each a "Dissenting Shareholder"), shall not be entitled to DRS Stock or cash pursuant to this Agreement, unless and until the holder thereof shall have failed to perfect or shall have effectively withdrawn or lost such holder's right to dissent from the merger under the California General Corporation Law, and shall be entitled to receive only the payment provided by Sections 1300, et seq., of the California General Corporation Law with respect to such Shares. If any Dissenting Shareholder shall fail to perfect or shall have effectively withdrawn or lost the right to dissent, the Shares held by such Dissenting Shareholder shall thereupon be deemed to have been converted into and to have become exchangeable for, on the Effective Date, the right to receive DRS Stock or cash pursuant to the Agreement. The Company shall give DRS (a) prompt notice of any written demands for appraisal of any Shares, attempted withdrawals of such demands, and any other instruments served pursuant to applicable law received by the Company relating to the Dissenting Shareholder's rights of appraisal, and (b) the opportunity to direct all negotiations and proceedings with respect to demand for appraisal under the California General Corporation Law. The Company shall not, except with the prior written consent of DRS, -8- voluntarily make any payment with respect to any demands for appraisals of Shares, offer to settle or settle any such demands or approve any withdrawal of any such demand. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF SURVIVING CORPORATION Representations and Warranties of Surviving Corporation. Surviving Corporation represents and warrants to the Company and to the Company's Shareholders as follows: SECTION 3.1. Capitalization. The authorized stock of the Surviving Corporation consists of 1,000 shares of common stock, par value .01, of which, on or before the Effective Date, 100 shares will be issued and outstanding. Such shares, all to be held by DRS, will constitute all the issued and outstanding shares of capital stock of the Surviving Corporation and all have been validly authorized and issued, fully paid and nonassessable, and not issued in violation of any preemptive rights or of any federal or state securities law. SECTION 3.2. Corporate Existence. Surviving Corporation is, or on the Effective Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has or will have all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being, or on the Effective Date will be, conducted. Surviving Corporation, is or on the Effective Date will be, duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary. SECTIO 3.3. Authority Relative to this Agreement and Transaction Documents. The execution, delivery and performance by the Surviving Corporation of this Agreement and each Transaction Document to which it is, or on the Effective Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite corporate action, and no other corporate action on the part of the Surviving Corporation is necessary for the execution, delivery and performance by the Surviving Corporation of this Agreement or any Transaction Document to which it is, or on the Effective Date will be, a party and the consummation by the Surviving Corporation of the transactions contemplated hereby and thereby. Neither the execution nor the delivery by the Surviving Corporation of this Agreement or any Transaction Document to which it is, or on the Effective Date will be, a party, nor the consummation by the Surviving Corporation of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by the Surviving Corporation of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) its Certificate of Incorporation or Bylaws or (B) any lease, Contract, instrument, mortgage, deed of trust, deed evidencing or securing indebtedness for borrowed money, financing lease, any law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which the Surviving Corporation is, or on the Effective Date will be, a party or by which it is bound, or (ii) require the Surviving -9- Corporation to obtain the consent, approval, authorization or other order or action of, or filing with, any court, governmental authority or regulatory body. SECTION 3.4. Absence of Subsidiary Liabilities. Prior to the Effective Date, Subsidiary will have engaged only in the transactions contemplated by this Agreement, will have no material liabilities, and will have incurred no obligations except in connection with its performance of the transactions provided for in this Agreement. SECTION 3.5. No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of Surviving Corporation, threatened against or affecting Surviving Corporation that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. SECTION 3.6. No Brokers, Finders, etc. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried on without the participation of any Person acting on behalf of the Surviving Corporation or any Affiliate thereof in such manner as to give rise to any valid claim against the Company's Shareholders or the Company for any brokerage or finder's commission, fee or similar compensation. SECTION 3.7. Acquisition for Investment. The Surviving Corporation is acquiring the Shares solely for investment, with no present intention to resell the Shares. The Surviving Corporation hereby acknowledges that the Shares have not been registered pursuant to the Securities Act, and may not be transferred in the absence of such registration or an exemption therefrom. SECTION 3.8. Filings with the SEC. DRS has made all filings with the SEC that it has been required to make within the past year under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (collectively, the "Public Reports"). None of the Public Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. DRS has delivered to the Company's Shareholders a correct and complete copy of each Public Report as amended to date. SECTION 3.9. Financial Statements. DRS has filed Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 1995, September 30, 1995 and December 31, 1995, and an Annual Report on Form 10-K for the fiscal year ended March 31, 1996. The financial statements included in or incorporated by reference into these Public Reports have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of DRS and its Subsidiaries as of the indicated dates; provided, however, that the interim statements are subject to normal year end adjustments. -10- SECTION 3.10. Full Disclosure. No representation or warranty herein by the Surviving Corporation or any Affiliate thereof, nor any statement or certificate furnished to the Company and/or the Company's Shareholders pursuant hereto or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made and, together with the Schedules attached hereto, not misleading. The Schedules attached hereto completely and correctly present the information required by this Agreement to be set forth therein, do not contain any untrue statement of a material fact and do not omit to state any facts necessary to make the statements contained therein, together with the representations and warranties herein by the Surviving Corporation or any Affiliate thereof, not misleading. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CERTAIN OF THE COMPANY'S SHAREHOLDERS Representations and Warranties of the Company and certain of the Company's Shareholders. The Company and each of Leedom, Mason and Miller jointly and severally represent and warrant to the Surviving Corporation that: SECTION 4.1. Capitalization. The authorized stock of the Company consists of 100,000 shares of Common Stock, of which, as of the date hereof, 3,455 Shares are issued and outstanding. The Shares listed in Section 2.2(a) above constitute all the issued and outstanding shares of capital stock of the Company and have been validly authorized and issued, are fully paid and nonassessable, have not been issued in violation of any preemptive rights or of any federal or state securities law and no personal liability attaches to the ownership thereof. There is no security, option, warrant, right, call, subscription, agreement, commitment or understanding of any nature whatsoever, fixed or contingent, that directly or indirectly (i) calls for the issuance, sale, pledge or other disposition of any shares of capital stock of the Company or any securities convertible into, or other rights to acquire, any shares of capital stock of the Company, or (ii) obligates the Company to grant, offer or enter into any of the foregoing, or (iii) relates to the voting or control of such capital stock, securities or rights, except as set forth on Schedule 4.1 hereto. The Company has not agreed to register any securities under the Securities Act. SECTION 4.2. Title to Shares, etc. Each of the Company's Shareholders owns, beneficially and of record, their respective Shares as set forth in Section 2.2(a) above, free and clear of any Lien or rights of others with respect thereto, and upon the delivery of any payment for such Shares in the manner provided in Article II of this Agreement, the Surviving Corporation will acquire good and marketable title thereto, free and clear of any Lien other than any Lien created by Surviving Corporation. -11- SECTION 4.3. Corporate Existence. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being conducted. The Company is duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary. SECTION 4.4. Authority Relative to this Agreement and Transaction Documents. Each of the Company's Shareholders has the legal capacity to execute and deliver this Agreement and/or the Transaction Documents to which each of them is, or on the Effective Date will be, a party or by which each of them is or will be bound, to perform their respective obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Company of this Agreement and each Transaction Document to which it is, or on the Effective Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite corporate action, and no other corporate action is necessary for the execution, delivery and performance by the Company of this Agreement or any Transaction Document to which it is, or on the Effective Date will be, a party, no other corporate action is necessary for the consummation by the Company of the transactions contemplated hereby and thereby. Neither the execution nor the delivery by the Company and/or the Company's Shareholders of this Agreement, and/or any Transaction Document to which any is, or on the Effective Date will be, a party or parties, nor the consummation by the Company and/or any of the Company's Shareholders of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by the Company and/or any of the Company's Shareholders of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) in respect of the Company, Certificate of Incorporation or Bylaws or (B) any lease, Contract, instrument, mortgage, deed of trust, deed evidencing or securing indebtedness for borrowed money, financing lease, any law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which the Company or any of the Company's Shareholders is, or on the Effective Date will be, a party or by which any is or will be bound, or (ii) require the Company or any of the Company's Shareholders to obtain the consent, approval, authorization or other order or action of, or filing with, any court, governmental authority or regulatory body. This Agreement has been duly executed and delivered by the Company and the Company's Shareholders and, together with each other Transaction Document and other agreement and instrument required to be delivered, is or will be, as the case may be, a legal, valid and binding obligation of each, enforceable against each in accordance with its respective terms. SECTION 4.5. No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of the Company and the Company's Shareholders, threatened against or affecting the Company or any of the Company's Shareholders that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. -12- SECTION 4.6. Title to Assets and Real Property. (a) Schedule 4.6 lists all of the machinery, equipment, Intellectual Property Rights, furniture, fixtures, personalty, and other items constituting the Assets. The Company has good and marketable title to all of the Assets, which are free and clear of all liens (including environmental liens), mortgages, deeds of trust, trust deeds, deeds to secure debt, pledges, encumbrances, defects, security interests, restrictions, conditional and installment sale agreements, options, easements and other legal or equitable encumbrances and claims or charges of any kind (collectively, "Liens"), except as disclosed in Schedule 4.6 (collectively, "Permitted Liens"). (b) Set forth on Schedule 4.6 is a list of all interests in real property owned by or leased to the Company (including all interests in real property used in the business of the Company) and of all options or other contracts to acquire any such interest (collectively, the "Real Property"), specifying the location of each such Real Property and any improvements thereon ("Improvements"), and, as to all Real Property not owned by the Company, a legal description (if available), address and approximate size and boundaries of each leased or subleased premises, the present use to which each of the leased or subleased premises is being put, the name and address of the landlord and, if appropriate, the sublandlord with respect to each lease, a listing of any amendments, modifications, extensions or renewals which comprise a part of each lease, the expiration date of each lease, any renewal or extension right under each lease and the current base fixed annual rent due under each lease. The Company has good and marketable title to all Real Property and Improvements and to all other properties reflected on the Company Balance Sheet or acquired by any of them after the date thereof, and each such property is held free and clear of (i) all leases, licenses and other rights to occupy or use such property and (ii) all Security Interests, rights of way, easements, restrictions, exceptions, variances, reservations, covenants or other title defects or limitations of any kind, except (with respect to all such properties) those set forth on Schedule 4.6 or disclosed on the Company Balance Sheet or the notes thereto, none of which has an adverse effect on such property or its present or contemplated use in the business of such Company. No financing statement under the Uniform Commercial Code with respect to any of the foregoing properties has been filed in any jurisdiction, and the Company has not signed any such financing statement or any security agreement authorizing any secured party thereunder to file any such financing statement, except as set forth on Schedule 4.6 hereto. The present and contemplated use of the Real Property, Improvements and tangible property conforms in all respects with all applicable building, fire, zoning, environmental and other land use, laws, ordinances, rules and regulations, Applicable Law and all necessary occupancy and other certificates and Permits for the occupancy and lawful use thereof have been issued and are presently in full force and effect. All notices of violations of Applicable Law issued by any state, county, municipal or local department having jurisdiction against or affecting any of the Real Property, Improvements or tangible property have been complied with in all respects. No use of the Real Property, Improvements or tangible property is dependent upon the continuance of a nonconforming use or a special permit or license. The Company is not obligated to pay any fee or commission to any broker, finder, consultant or other intermediary as a result of the purchase or leasing of any of the Real Property. -13- SECTION 4.7. Compliance with Laws; Permits and Licenses. (a) Except as disclosed in Schedule 4.7(a), the Company is in substantial compliance with all applicable statutes, orders, rules and regulations promulgated by Governmental Authorities (collectively, "Applicable Law") relating to the operation or conduct of the business of the Company, or the use of the properties of the Company, including, without limitation, any applicable statute, order, rule or regulation relating to (i) wages, hours, hiring, non-discrimination, promotion, retirement, benefits, pensions and working conditions, (ii) health and safety, (iii) zoning and building codes or municipal ordinances, violation of which would interfere with the ability of the Company to operate, (iv) the production, storage, processing, advertising, sale, transportation, distribution, disposal, use and warranty of products of the business of the Company, (v) obligations of the Company to disabled persons, or (vi) trade and antitrust regulations, and the Company has not received any notice of alleged violation of any such statute, order, rule or regulation. Except as disclosed in Schedule 4.7(a), to the knowledge of the Company and the Company's Shareholders, the Company is not in default under or in violation of, any applicable franchise, permit or license, its Certificate of Incorporation or other charter document, Bylaws, any promissory note, indenture or any evidence of indebtedness or security therefor, lease, Contract or any other instrument to which it is a party or by which any of its properties or assets is or may be bound. (b) Schedule 4.7(b) lists all governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority and any pending applications therefor. Except as disclosed in Schedule 4.7(b), such licenses, permits, product registration, authorizations, approvals and indicia of authority are (i) all the governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority necessary to conduct the business of the Company, and (ii) valid and in full force and effect, assuming the related consents referenced in Section 5.2(f) have been obtained prior to the execution of this Agreement. SECTION 4.8. Intellectual Property. (a) Schedule 4.8(a) sets forth a true and complete list of all Intellectual Property Rights of the Company. The Intellectual Property Rights constitute all such property forming a part of the business of the Company and, except as disclosed in Schedule 4.8(a), do not conflict with or infringe on the rights of others. (b) Except as disclosed in Schedule 4.8(b) (i) all the Intellectual Property Rights are owned by or are licensed to the Company under licenses or written agreements; (ii) no claims have been made and are pending or are currently threatened against the Company alleging that any services provided or products manufactured or sold by the Company, or any Intellectual Property Rights are being provided, manufactured, sold or used in violation of any patents or trademarks, or any other rights of any Person (nor is there a basis in fact which could result in such a claim); (iii) the Company has not granted any license to any Person with respect to any Intellectual Property Rights; (iv) no other Person is infringing on any Intellectual Property Rights; (v) all Intellectual Property Rights of the Company are legal, valid and binding, in full force and effect and are freely assignable to the Surviving Corporation, if as and when required; (vi) the Company has duly made punctual payments of all royalties or fees required to be made by it under or in connection with any Intellectual Property Right; and (vii) no event has occurred which (with the passing of time and/or the giving of notice) would result in or permit the -14- termination of any Intellectual Property Right or the acceleration of any obligation thereunder without the consent of the Company. (c) Except as disclosed in Schedule 4.8(c), following the transactions contemplated hereby, the Surviving Corporation shall own or possess adequate and enforceable licenses or other rights to use, without payment of any fee other than as disclosed in Schedule 4.8(c), all of the Intellectual Property Rights. SECTION 4.9. Litigation. Except as disclosed in Schedule 4.9, there is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of the Company and the Company's Shareholders, threatened against or affecting the Company in any court, or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, and neither the Company nor the Company's Shareholders know of any reasonable basis for any such action, lawsuit, claim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations). The Company is not in default, and no condition exists that with notice or the lapse of time or both would constitute a default, with respect to any judgment, order, writ, injunction or decree of any court or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting or relating to the business of the Company. No condemnation proceeding has been commenced or, to the knowledge of the Company and the Company's Shareholders, is threatened to be commenced against any of the Assets or Real Property. SECTION 4.10. Contracts. (a) Material Contracts. Schedule 4.10(a) contains a complete and correct list as of the date hereof of all agreements, contracts and commitments of the following types, written or oral, to which the Company is a party or by which the Company or its properties are bound as of the date hereof: (a) mortgages, indentures, security agreements, letters of credit, loan agreements and other agreements, guaranties and instruments relating to the borrowing of money or extension of credit; (b) employment, consulting, severance or agency agreements; (c) collective bargaining agreements; (d) bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plans, trusts or funds for the benefit of employees, officers, agents and directors (whether or not legally binding); (e) sales agency, manufacturer's representative or distributorship agreements; (f) agreements, orders or commitments for the purchase of raw materials, supplies or finished products exceeding $10,000; (g) agreements, orders or commitments for the sale of its products exceeding $10,000; (h) licenses of patent, copyright, tradenames, trademark, transfer of technology or know how and other intellectual property rights; (i) agreements or commitments for capital expenditures in excess of $10,000 for any single project (it being warranted that all undisclosed agreements or commitments for capital projects do not exceed $15,000 in the aggregate for all projects); (j) brokerage or finder's agreements; (k) joint venture, partnership and development agreements; and (1) other agreements, contracts and commitments which in any case involve payments or receipts of more than $10,000. The -15- Company has delivered to the Surviving Corporation complete and correct copies of all such written agreements, contracts and commitments, together with all amendments thereto, and accurate descriptions of all oral agreements listed in Schedule 4.10(a). No reason exists that would not allow each such oral agreement to become a written agreement, executed by the parties thereto and enforceable against any party to such agreement who fails to execute such agreement. Each such oral agreement is in compliance with the Statute of Frauds of the jurisdiction governing such oral agreement. All such agreements, contracts and commitments governed by this Section 4.10(a) are in full force and effect, are enforceable by the Company against the other parties thereto in accordance with their terms, and, except as disclosed in Schedule 4.10(a), to the knowledge of the Company and the Company's Shareholders, there does not exist thereunder any violation or any default or event or condition or course of dealing which, after notice or lapse of time or both, would constitute a default thereunder on the part of the Company, or any other party thereto or would provide a basis for any creditor of the Company, or any party to such agreements, contracts or commitments, to challenge the extent, validity or priority of the interest of any other party to such agreements, contracts or commitments; to the knowledge of the Company and the Company's Shareholders, consummation of the transactions contemplated under this Agreement and the Transaction Documents shall not give rise to any violation or any default or event or condition which, after notice or lapse of time or both, would constitute a default thereunder on the part of the Company, or any other party thereto or would provide a basis for any creditor of the Company, or any party to such agreements, contracts or commitments to challenge the extent, validity or priority of the interest of any other party to such agreements, contracts or commitments. No agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound, adversely affects or in the future may adversely affect the business of the Company. No agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound, is in conflict, whether by way of violation of any term or condition or by way of default, with any other agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound. All agreements, contracts or commitments with Affiliates of the Company, to which the Company is a party or by which it or any of its properties is bound reflect terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Company has no outstanding powers of attorney, except routine powers of attorney relating to representation before governmental agencies or given in connection with qualification to conduct business in another jurisdiction. (b) Government Contracts. (i) Government Contracts Compliance. The Company is not, and the consummation of this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby will not result, in any violation, breach or default of any term or provision of (i) any contract, subcontract or agreement between the United States Government and the Company and (ii) any bid, proposal or quote submitted to the United States Government by the Company. The Company is not, and the consummation of this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby will not result, in any violation, breach or default of any provision of any federal order, statute, rule or regulation governing any contract, subcontract, bid, proposal, quote, arrangement or transaction of any kind between the -16- United States Government and the Company. The representations in the two immediately preceding sentences are made after consideration of, but are not limited to, the following laws, regulations, standards, and agreements, to the extent, if any, they are applicable to or incorporated into contracts, subcontracts, agreements: (A) The Truth in Negotiations Act of 1962, as amended; (B) The Service Contract Act of 1965, as amended; (C) The Contract Dispute Act of 1978, as amended; (D) The Federal Acquisition Regulations and any applicable agency supplements thereto, as well as applicable predecessor procurement regulations; (E) The Cost Accounting Standards; (F) Agreement with the Contract Audit Agency; (G) Relevant rules and arrangements governing the allowance of costs charged to overhead and general and administrative cost pools allocable to government contracts; (H) The Defense Industrial Security Manual DOD 5220.22-M, the Defense Industrial Security Regulation DOD 5220.22-R and related security regulations; (I) The Procurement Integrity Provisions of the OFPP Act Amendments of 1988, P.L. 100-679, as amended and implemented. (ii) Investigation and Claims. Schedule 4.10(b) sets forth descriptions of all audit reports, final decisions, claims, consent orders in effect, outstanding notices and reports concerning audits, investigations or claims, ongoing government investigations or prosecutions, or internal investigations conducted or initiated by or in respect of the Company and identifies any corrective action, restitution or disciplinary action initiated or taken by or in respect of the Company relating in any sense to the subjects listed below in paragraphs (A) through and including (G). Except as disclosed in Schedule 4.10(b), the Company has never engaged in nor has been charged with, received a claim related to, or been under investigation or conducted or initiated any internal investigation or, to the knowledge of the Company and the Company's Shareholders, has reason to conduct, initiate or report any internal investigation or made a voluntary disclosure, with regard to any of the following: (A) Defective Pricing within the meaning of P.L. 87-653, as amended; -17- (B) Failure to correct accounting, inventory, material requirements planning, or purchasing system deficiencies; (C) Mischarging of direct and/or indirect costs in connection with U.S. Governmental contracts or subcontracts; (D) Delivery to the U.S. Government or to a U.S. Government prime contractor or subcontractor of material, components, items or services that do or did not meet specifications or standards therefor, or delivery to the U.S. Government or a U.S. Government prime contractor or subcontractor of foreign-made material, components or items where domestic-made material, components or items were required; (E) Improper payments or any payments or activities for obtaining non-public source selection information; (F) Unallowable costs, including unallowable direct or indirect costs; (G) Violations of any of the following statutes, as amended, or the regulations promulgated thereunder: (I) False Statements Act (18 U.S.C. 1001), (II) False Claims Act (18 U.S.C. 287), (III) False Claims Act (31 U.S.C. 3729), (IV) Briberies, Gratuities and Conflicts of Interest (18 U.S.C. 201), (V) Anti-Kickback Act (41 U.S.C. 51, 54), (VI) Anti-Kickback Enforcement Act of 1986 (P.L. 99-634), (VII) Arms Export Control Act (22 U.S.C. 277, et seq.), (VIII) Foreign Corrupt Practices Act (15 U.S.C. 78m, 78dd-1, 78ff), (IX) Export Administration Act (P.L. 99-64), -18- (X) War and National Defense Act (18 U.S.C. 793), (XI) Racketeer Influenced Corrupt Organizations Act (18 U.S.C. 1901-68), (XII) Conspiracy to Defraud the Government (18 U.S.C. 371), (XIII) Program Fraud Civil Remedies Act (P.L. 99-509), (XIV) "Revolving Door" Legislation (18 U.S.C. 207, 281(a)(11) and 10 U.S.C. 2397), and (XV) Defense Production Act (50 U.S.C. App. 2061). (iii) No Debarment or Suspension. The Company is not nor has ever been informed that it is or will be subject to any proceeding which could result in or otherwise contemplates debarment or suspension. (iv) Test and Inspection Results. All test and inspection results the Company has provided to any government agency pursuant to any government contract or any subcontract or as a part of the delivery to the government of any article designed, engineered or manufactured by the Company were true, complete and correct. Except as set forth in Schedule 4.10(b), the Company has provided all test and inspection results to government agencies as required by law or pursuant to government contract or subcontracts, or may have been required as part of the delivery of any article designed, engineered or manufactured by the Company. SECTION 4.11. Foreign Government Contracts. To the extent that the Company is party to a prime contract or subcontract with a government other than the U.S. Government (a "Foreign Government Contract"), then: (a) if the Foreign Government Contract incorporates by reference, or is otherwise subject to, any or all of the regulations cited in Section 4.10(b) above (or their foreign equivalents), the representations made in Section 4.10(b) above shall be deemed applicable to such Foreign Government Contract, and (b) if the Foreign Government Contract incorporates by reference or is otherwise subject to other applicable laws ("Foreign Laws") the representations made hereinabove regarding compliance, investigations and claims, debarment or suspension and test and inspection results shall be deemed made in respect of the appropriate Foreign Laws. SECTION 4.12. Labor Union Contracts. The Company is not a party to any collective bargaining or other labor union Contract applicable to persons employed by the Company. There are no unfair labor practice complaints nor are there any current union representation -19- questions involving persons employed in the business of the Company. Except as disclosed on Schedule 4.12, the Company does not know of any current activities or proceedings of any labor union (or representatives thereof) to organize any unorganized employees of the Company and of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any employees of the Company. During the 24-month period preceding the date hereof, there have not been any formally filed grievances involving employees of the Company. SECTION 4.13. Employees, Labor Matters, etc. (a) Schedule 4.13(a) contains a complete and correct list of the names of all directors and officers of the Company. There is no payment that has not been paid for more than 30 days past the date on which such payment became due that is owed by the Company to any of its directors, officers, employees, trustees, agents, brokers, representatives or other personnel, current and former, or any beneficiaries, dependents or survivors of the foregoing (including, without limitation, expense reimbursement and severance payments), in accordance with the terms of their respective employment arrangements or under their employment, severance or agency agreements, if any. (b) Except as set forth in Schedule 4.13(b), there has never been any (i) unfair labor practice complaint against the Company before the National Labor Relations Board; (ii) labor strike, dispute, or work stoppage actually pending or, to the best of the Company's knowledge after reasonable inquiry, threatened against or affecting the Company; (iii) representation petition respecting the employees of the Company filed with the National Labor Relations Board; or (iv) arbitration proceeding arising out of or under collective bargaining agreements pending against the Company. (c) Certain Benefit and Compensation Arrangements: (i) Set forth on Schedule 4.13(c) hereto is a true and complete list of each employee of the Company whose aggregate compensation for the fiscal year ended December 31, 1995 exceeded $50,000 or who is employed as an officer of the Company , as well as any and all agreements, arrangements, commitments or understandings of any kind, whether written or oral, applicable to each (as well as to current and former directors and consultants and former officers of the Company) pursuant to which payments of any kind are required to be made following the date hereof (including, without limitation, any employment, deferred compensation, consulting, severance, termination or supplemental pension payments) (the "Compensation Commitments"). True and complete copies of all of the written Compensation Commitments have been provided to Surviving Corporation together with, where prepared by or for the Company, any valuation, actuarial or accountant's opinion or other financial reports with respect to each Compensation Commitment for the last three years. An accurate and complete written summary has been provided to Surviving Corporation with respect to any Compensation Commitment which is unwritten. -20- (ii) Each Compensation Commitment: (A) since its inception, has been operated in all material respects in accordance with its terms; (B) is not currently under investigation, audit or review by the IRS or any other federal or state agency and no such action is contemplated or under consideration; (C) has no liability for any federal, state, local or foreign Taxes; (D) has no claims subject to dispute or litigation; and (E) has met all applicable requirements, if any, of the Code; SECTION 4.14. ERISA. Schedule 4.14 lists (i) all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical, disability or life insurance, supplemental retirement, or severance benefit plans, programs or arrangements, and all employment, termination, or severance contracts to which the Company is a party, with respect to which the Company has any obligation, or that are maintained, contributed to or sponsored by the Company for the benefit of any current or former employee, officer or director, (ii) each employee benefit plan for which the Company could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated and (iii) any plan in respect of which the Company could incur liability under Section 4212(c) of ERISA (collectively, the "Plans"). (a) Each Plan that is intended to qualify under Section 401(a) of the Code or similar provision of foreign law is so qualified. The Company has performed all obligations required to be performed by it by the terms of the Plans and Applicable Law, rules and regulations. The Company has complied in all material respects with all Applicable Law, rules and regulations relating to each Plan. (b) The Company has not and has no knowledge that any other "party in interest" (as defined in Section 3(14) of ERISA) to any Plan has engaged in any transaction with respect to any Plan in connection with which the Company or any other party in interest could be subjected to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code. (c) No Plan which is a "defined benefit plan" (as defined in Section 3(35) of ERISA) or any trust created under any such Plan has been terminated since September 2, 1974. No material liability to the Pension Benefit Guaranty Corporation (the "PBGC"), other than annual premium payments, has been or is expected by the Company to be -21- incurred by the Company with respect to any Plan. There has been no reportable event (within the meaning of Section 4043 of ERISA), which at the time of such event required notification within 30 days to the PBGC. There has been no other reportable event with respect to any Plan which could result in a liability to the Company as a result thereof. There has been no event or condition which presents a risk of termination of any such Plan by the PBGC. (d) Full payment has been made of all amounts which the Company is required under the terms of each Plan to have paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof or, if later, the most recent date as of which such amount is required to be paid under such Plan (and, with respect to any Plan that is subject to Section 412(m) of the Code, all payments required to be made have been paid on or before each required installment due date (as defined in Section 412(m) of the Code) preceding the date hereof), and, with respect to any Plan, no accumulated funding deficiency (as defined in section 302 of ERISA and Section 412 of the Code), whether or not waived, exists. There has been no failure to make any payment due prior to the date hereof that is or could become a liability of the Company under Section 412(c) of the Code. (e) The present value as of December 31, 1994 of all accrued benefits under all Plans subject to Section 412 of the Code did not, as of such date, exceed the current value of the assets of such Plans allocable to such accrued benefits. The terms "present value," "current value" and "accrued benefit" have the meanings specified in Section 3 of ERISA. (f) No Plan is a "multiemployer plan" (as defined in Sections 3(37) and 4001(3) of ERISA) and the Company has not withdrawn or partially withdrawn from any multiemployer plan under circumstances giving rise to a withdrawal liability under ERISA. (g) Neither the Company nor any corporation, trade or business under common control with the Company (within the meaning of Sections 414(b), (c), (m) or (o) of the Code) has engaged in any transaction since January 1, 1986 described in Section 4069(a) of ERISA. (h) No Plan provides for the payment of any welfare benefit (as described in Section 3(1) of ERISA) to any former or retired employee of the Company or any of its Affiliates, except as may be required by Section 4980B of the Code or Section 601 of ERISA. (i) No Plan provides for the payment of severance benefits upon termination of employment. SECTION 4.15. Brokers' or Finders' Fees, etc. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried on without the participation of any Person acting on behalf of the Company or any of the Company's Shareholders (other than the Company or employees thereof) in such manner as to give rise to any valid claim against the Surviving Corporation or the Company for any brokerage or finder's commission, fee or similar compensation. -22- SECTION 4.16. Financial Information; Undisclosed Liabilities. (a) Attached hereto as Schedule 4.16 is a copy of the balance sheet of the Company (the "Company Balance Sheet") as of June 30, 1996 (the "Balance Sheet Date"). Except as disclosed in Schedule 4.16, the Company Balance Sheet, together with the books and records of the business of the Company, present fairly in accordance with GAAP the financial condition of the business of the Company as of the Balance Sheet Date. (b) The books of account of the Company reflect all items of income and expense and all assets and liabilities of the business of each. (c) The Company has delivered to Surviving Corporation a copy of its balance sheets, together with the notes thereto, as of August 31, 1993, 1994 and 1995 and the related statement of operations and retained earnings and of cash flows for the year then ended. Such financial statements, together with the notes thereto, (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company as of the date thereof, (iii) present fairly the result of operations of the Company for the periods covered by such statements, (iv) have been prepared in accordance with GAAP by the Accountants and (v) include all adjustments that are necessary for a fair presentation of the financial condition of the Company and the results of the Company's business operations for the periods covered by such statements. (d) There are no material liabilities of the Company of any kind whatsoever, whether or not accrued or fixed, absolute or contingent, determined or determinable, known or unknown, other than liabilities (i) reflected on and adequately provided for in the Company's Balance Sheet attached hereto as Schedule 4.16, or (ii) incurred since the Balance Sheet Date in the ordinary course of the operation of the Company's business and not as a result of any violation of law or regulation, or (iii) disclosed in Schedule 4.16. SECTION 4.17. Taxes. (a) Except as disclosed in Schedule 4.17(a), the Company, for any period during all or part of which the tax liability of any other corporation was determined on a combined or consolidated basis with the Company, any such other corporation, have filed timely all federal, state, local and foreign tax returns, reports and declarations required to be filed (or have obtained or timely applied for an extension with respect to such filing) correctly reflecting the Taxes and all other information required to be reported thereon and have paid, or made adequate provision for the payment of, all Taxes which are due pursuant to such returns or pursuant to any assessment received by the Company or any such other corporation. Copies of all tax returns for the fiscal years ended since December 31, 1991 have been furnished to the Surviving Corporation or its representatives and such copies are accurate and complete as of the date hereof. The Company has also furnished to the Surviving Corporation correct and complete copies of all notices and correspondence sent or received since December 31, 1991, by the -23- Company to or from any federal, state, local or foreign tax authorities. The Company has adequately reserved for the payment of all Taxes with respect to periods ended on, prior to or through the Effective Date for which tax returns have not yet been filed. In the ordinary course, the Company makes adequate provision on its books for the payment of all Taxes (including for the current fiscal period) owed by the Company. Except to the extent reserves therefor are reflected on the Company Balance Sheet, the Company is not liable, nor will become liable, for any Taxes for any period ending on, or prior to, the date of the Company Balance Sheet. Except as disclosed in Schedule 4.17(a), the Taxes payable set forth in the Company Balance Sheet are adequate to cover all liabilities for Taxes of the Company with respect to all assets held and activities conducted by the Company on or prior to the Effective Date, other than liabilities for Taxes incurred in the ordinary course of business subsequent to the date of the Company Balance Sheet and permitted by this Agreement. No tax liens have been filed and neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the best knowledge of the Company after reasonable inquiry, threatening to assert against the Company any deficiency or claim for additional Taxes. Except as provided in Schedule 4.17(a), no Return of the Company is currently under audit by the Internal Revenue Service or by the taxing authorities of any other jurisdiction. The Company has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any federal, state or local Tax. Without limiting the foregoing, the Company has no knowledge of any actual claim for any additional Tax to be imposed upon the Company for the periods ending on or prior to the Effective Date in excess of the accruals of the Company set forth in the Company Balance Sheet with respect to Taxes. The federal, state and local tax Returns of the Company have been examined by the appropriate taxing authority, or the statutes of limitations with respect to the relevant income or franchise tax liability have expired, for all tax periods through and including the tax period listed with respect to each such jurisdiction set forth in Schedule 4.17(a). (b) No consent or agreement under Section 341(f) of the Code is in effect with respect to the Company. (c) Except as provided in Schedule 4.17(c), the Company has not (i) agreed to and is not required to make any adjustment under Section 481(a) of the Code or Revenue Procedure 87-32 (or any successor thereto), by reason of a change in method of accounting or otherwise; (ii) ever been included in a combined or consolidated income tax return; (iii) ever owned stock representing 50% or more of the voting power or value of another corporation; (iv) entered into any agreement or arrangement that could result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code; (v) consummated any transaction with another corporation that is owned, directly or indirectly, by the Company on other than an arms-length basis within the meaning of Section 482 of the Code and the regulations thereunder; or (vi) entered into any tax sharing agreements or similar arrangements. (d) Prior to the current year, the Company's taxable year for federal and state income and franchise tax purposes has always been a taxable year beginning September 1 and ending August 31. -24- SECTION 4.18. Absence of Changes. Since December 31, 1995 except as specified in Schedule 4.18 or presented on the Company Balance Sheet, the Company has not: (a) undergone any material adverse change in its condition (financial or other), properties, assets, liabilities, business, operations or prospects, other than changes in the ordinary course of business; (b) declared, set aside, made or paid any dividend or other distribution in respect of its capital stock or otherwise purchased or redeemed, directly or indirectly, any shares of its capital stock; (c) issued or sold any shares of its capital stock of any class or any options, warrants or conversion or other rights to purchase any such shares or any securities convertible into or exchangeable for such shares; (d) incurred any indebtedness for borrowed money, issued or sold any debt securities or prepaid any debt outstanding as of December 31, 1995; (e) mortgaged, pledged or subjected to any Lien any of its properties or assets, tangible or intangible; (f) except in the normal course of business, acquired or disposed of any assets or properties, or entered into any agreement or other arrangement for such acquisition or disposition; (g) forgiven or canceled any debts or claims, or waived any rights; (h) entered into any agreement, commitment or other transaction other than agreements involving an expenditure up to $10,000 or, whether singly or in the aggregate, or entered into any agreement which, pursuant to its terms, is not cancelable without penalty on less than 30 days' notice; (i) paid any bonus to any officer, director or employee or granted to any officer, director or employee any other increase in compensation in any form, or granted any increase in the compensation or benefits of employees or entered into any employment or severance agreement or arrangement with any of officer, director or employee; (j) adopted or amended in any respect, any employment, collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement, trust, fund or arrangement for the benefit of employees (whether or not legally binding); -25- (k) suffered any damage, destruction or loss (whether or not covered by insurance) to any property or assets; (l) suffered any strike or other employment related problem; (m) suffered any loss of employees or customers; (n) amended its certificate of incorporation or bylaws (or comparable documents); (o) changed in any respect its accounting practices, policies or principles; (p) incurred any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise) with respect to the obligations of others; (q) granted any rights or licenses under any of its trademarks, tradenames or patents or entered into any licensing or distributorship agreements; (r) made any changes in policies or practices relating to selling practices, returns, discounts or other terms of sale or accounting therefor; (s) failed to discharge or satisfy any Lien or pay or satisfy any obligation or liability (whether absolute, accrued, contingent or otherwise); (t) defaulted on any obligation; (u) written down the value of any inventory or written off as uncollectible any accounts receivable or any portion thereof not reflected in the Company Balance Sheet; (v) laid off any employees or made any changes in policies of employment; (w) discontinued the sale of any products or product lines or programs; or (x) entered into any agreement or made any commitment (whether or not legally binding) to do any of the foregoing. SECTION 4.19. Accounts Receivable. All accounts receivable reflected on the Company Balance Sheet or arising since the date thereof (subject to the reserve for bad debts reflected on such Company Balance Sheet) are good and have been collected or are collectible, without resort to litigation or extraordinary collection activity, within 60 days of the Effective -26- Date, and are subject to no defenses, set-offs or counterclaims other than normal cash discounts accrued in the ordinary course of business of the Company. Set forth on Schedule 4.19 hereto is a list of all accounts receivable of the Company as of June 30, 1996 showing separately those receivables which as of such date have been outstanding (i) 1 to 29 days, (ii) 30 to 59 days, (iii) 60 to 89 days, (iv) 90 to 119 days and (v) more than 119 days. SECTION 4.20. Insurance. The operations and assets of the Company are covered by valid and currently effective insurance policies issued in favor of the Company. Schedule 4.20 contains a brief description (including the name of the insurer, the type of coverage provided, the amount of the annual premium for the current policy period, the amount of remaining coverage and deductibles and the coverage period) of all policies and contracts of insurance held by the Company and/or the employees currently or previously employed in the business thereof. All premiums due thereon have been paid and, to the knowledge of the Company and the Company's Shareholders, the Company and its Affiliates have complied in all material respects with the provisions of such policies. To the knowledge of the Company or each of the Company's Shareholders, such policies (i) are sufficient for compliance with all requirements of law and are substantially consistent with all (A) Contracts to which the Company is a party and (B) leases, mortgages, deeds of trust and deeds to secure debt to which the Company is a party, (ii) are reasonable in scope and amount, in light of the risks attendant to the businesses and activities in which the Company is or has been engaged and (iii) are comparable to coverage customarily maintained by companies in similar lines of business and in similar localities. There is no material default with respect to any provision contained in any such policy and there has not been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as disclosed in Schedule 4.20, no notice of cancellation or non-renewal with respect to, or disallowance of any claim under, any such policy has been received; neither has the Company been refused insurance with respect to its assets or operations, nor has its coverage been previously canceled or materially limited, by any insurer to which it has applied for such insurance or with which it has held insurance. SECTION 4.21. Sufficiency of Assets and Real Property. (a) The properties owned by or leased to the Company are adequate for the conduct of the business of the Company. Except as disclosed in Schedule 4.21(a), all of the Assets are suitable for the uses in which they are currently employed, are in good operating condition and are free from any defects, except such minor defects as do not interfere with the continued use of such properties and equipment in the conduct of the normal operations of the business of the Company, and the Assets include supplies of spare parts for the equipment and machinery included in the Assets in amounts consistent with past practices. (b) None of the Assets or Real Property is used by the Company or any of its Affiliates in connection with any business or enterprise other than the business of the Company. -27- SECTION 4.22. Foreign Assets. The Assets do not include any interest in any real property or tangible or intangible personal property or other assets located outside the continental limits of the United States of America. SECTION 4.23. Propriety of Past Payments. No funds or assets of the Company have been used for illegal purposes; no unrecorded funds or assets of the Company have been established for any purpose; no accumulation or use of the Company's corporate funds or assets has been made without being properly accounted for in the respective books and records of the Company; all payments by or on behalf of the Company have been duly and properly recorded and accounted for in their respective books and records; no false or artificial entry has been made in the books and records of the Company for any reason; no payment has been made by or on behalf of the Company with the understanding that any part of such payment is to be used for any purpose other than that described in the documents supporting such payment; and the Company has not made, directly or indirectly, any illegal contributions to any political party or candidate, either domestic or foreign. The Company has complied with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder ("FCPA") and, in each case, has not made any payment to or on behalf of any person with respect to which a deduction could be disallowed under Section 162(c) of the Code. Neither the IRS nor any other federal, state, local or foreign government agency or entity has initiated or threatened any investigation of any payment made by the Company of, or alleged to be of, the type described in this Section 4.23 nor is there a basis in fact for such investigation. SECTION 4.24. Affiliate Transactions. Schedule 4.24 contains a complete and correct list of all agreements or arrangements (whether or not written) between the Company and any shareholder, officer, director or employee (or immediate family member thereof) of the Company currently in effect or to be performed in the future. Other than such agreements or arrangements, if any, or as further disclosed on Schedule 4.24, there has been no transaction between the Company and any shareholder, officer, director or employee (or immediate family member of any thereof) of the Company in effect within the five-year period immediately preceding the date hereof which involved payments to, or from, or for the benefit of, any such shareholder, officer, director or employee (or immediate family member of any thereof). Except as set forth in Schedule 4.24, no shareholder, officer, director or employee (or immediate family member of any thereof) of the Company owns directly or indirectly, on an individual or joint basis, greater than a 5% interest in, or serves as an officer, director or employee of, any customer, competitor or supplier of the Company or any person or entity which has a contract or arrangement with the Company. SECTION 4.25. Suppliers and Customer. (a) Except as disclosed on Schedule 4.25(a), none of the suppliers of inventory, equipment or services of the Company will cease to sell such equipment or services thereto as a result of the transactions contemplated by this Agreement. -28- (b) Except as disclosed on Schedule 4.25(b), no single customer of the Company (other than ITEC and Lockheed Martin) accounted for in excess of 10% of the combined gross revenues of the Company for the twelve month period ending June 30, 1996. SECTION 4.26. Environmental Conditions and Governmental Authorizations. Except as specified in Schedule 4.26: (a) All real property owned, leased, occupied or used by the Company is free from contamination from any Hazardous Materials. The Company has not caused or suffered, nor, to the best knowledge of the Company and the Company's Shareholders after reasonable inquiry, has any other party previously involved in operations at any such property caused or suffered, any Environmental Damages. (b) Neither the Company nor any prior owner or occupant of real property owned, leased, occupied or used by the Company has received notice of any alleged violation of Environmental Requirements, or notice of any alleged liability for Environmental Damages, and there exists no writ, injunction, decree, order or judgment outstanding, nor any claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation, pending or threatened, relating to the ownership, use, maintenance or operation of the Premises by any Person, or to alleged violation of Environmental Requirements, or to the suspected presence of Hazardous Material thereon, nor, to the knowledge of the Company and the Company's Shareholders after reasonable inquiry, does there exist any basis for such claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation being instituted or filed. (c) There is not constructed, placed, deposited, stored, disposed of or located on any real property owned, leased, occupied or used by the Company any polychlorinated biphenyls ("PCBs") or transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs, or any asbestos. (d) Neither the Company nor any of the Company's Shareholders has any knowledge of any alleged liability for Environmental Damages of any alleged violation of Environmental Requirements asserted against any of the owners or occupants of any related property located in the vicinity of any of any real property owned, leased, occupied or used by the Company. (e) The Company has in its possession all permits required to operate in compliance with all Applicable Law, and the Company is presently in full and complete compliance with each of such permits. SECTION 4.27. Leases of Personal Property (a) Schedule 4.27(a) correctly describes each lease under which the Company is the lessee of any personal property (collectively, the "Personal Property Leases"). The property described in all of the Personal Property Leases is presently and exclusively used in the business of the Company. The Company has all right, title and interest of the lessee under the terms of all of the Personal Property Leases to which it is a -29- party. Other than any related consents listed in Schedule 4.27(a), no consent is necessary for the assignment of any Personal Property Lease for the consummation of this Agreement or any Transaction Document or the transactions contemplated hereby or thereby. (b) No event has occurred which (with the passage any of time or the giving of notice) would materially impair any right of the Company to exercise and obtain the benefits of any options contained in any Personal Property Lease. There is no substantial default or basis for acceleration or termination, nor has any event occurred which (with the passage of time or the giving of notice) would constitute such a default or result in or permit the acceleration of any Personal Property Lease. SECTION 4.28. Books and Records. The Company has previously furnished to Surviving Corporation true and correct copies of the Certificate of Incorporation (or other charter document), the Bylaws of the Company as in effect on the date hereof and the minute books and stock books of the Company, which are correct and complete as of the date hereof in all respects, and will be correct and complete as of the Effective Date. SECTION 4.29. Accounts. Schedule 4.29 correctly identifies each bank account maintained by or on behalf or for the benefit of the Company and the name of each Person with any power or authority to act with respect thereto. SECTION 4.30. Products Liability. (a) Except as disclosed in Schedule 4.30(a) hereto, (i) there is no notice, demand, claim, action, suit, inquiry, hearing, proceeding, notice of violation or investigation of a civil, criminal or administrative nature before any court or governmental or other regulatory or administrative agency, commission or authority against or involving any product, service, substance or material (collectively, a "Product"), or class of claims or lawsuits involving the same or similar Product manufactured, produced, distributed or sold by or on behalf of the Company which is pending, or, to the knowledge of the Company and the Company's Shareholders, threatened, resulting from an alleged defect in design, implementation, manufacture, materials or workmanship of any Product manufactured, produced, distributed or sold by or on behalf of the Company, or any alleged failure to warn, or from any-breach of implied warranties or representations, (ii) there has not been any Occurrence (as defined in Section 4.30(b)), and (iii) there has not been, nor is there under consideration or investigation by the Company, any Product recall, rework, retrofit or post-sale warning conducted by or on behalf of the Company concerning any products manufactured, produced, distributed or sold by or on behalf of the Company or any product recall conducted by or on behalf of any entity as a result of any alleged defect in any Product supplied by the Company. (b) For purposes of this Section 4.30, the term "Occurrence" shall mean any accident, happening or event which takes place at any time before the Effective Date which is caused or allegedly caused by any alleged hazard or alleged defect in manufacture, design, materials or workmanship, including, without limitation, any alleged failure to warn or any -30- breach of express or implied warranties or representations with respect to, or any such accident, happening or event otherwise involving a Product (including any parts or components) manufactured, produced, distributed or sold by or on behalf of the Company which is likely to result in a claim or loss. SECTION 4.31. Interest in Competitors. Except as disclosed on Schedule 4.31, neither the Company's Shareholders, nor the Company, nor any of its officers, directors, shareholders or employees, has any interest, either by way of contract or by way of investment or otherwise, directly or indirectly, in any person that provides any services or designs, produces or sells any product or product lines or engages in any activity similar to or competitive with any activity currently proposed to be conducted by the Company. SECTION 4.32. Inventories. The values at which inventories are carried on the Company Balance Sheet reflect the normal inventory valuation policies of the Company, and such values (including the calculation of any LIFO reserve) are in conformity with GAAP consistently applied. All inventories reflected on the Company Balance Sheet or arising since the date thereof are currently marketable and can be anticipated to be sold at normal mark-ups within days after the date hereof in the ordinary course of business (subject to the reserve for obsolete, off-grade or slow-moving items that is set forth on such Company Balance Sheet), except for spare parts inventory which inventory is good and usable. SECTION 4.33. Private Offering. Neither the Company, nor the Company's Shareholders nor anyone acting on their behalf, has sold or has offered any of the Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than DRS and/or Surviving Corporation. Neither the Company, nor the Company's Shareholders nor anyone acting on their behalf shall offer any of the Shares for issue or sale to, or solicit any offer to acquire any of the same from, anyone so as to bring the offer and sale of such Shares within the provisions of Section 5 of the Securities Act. SECTION 4.34. Subsidiaries. Set forth on Schedule 4.34 is a true and complete list of any and all Subsidiaries of the Company and partnerships and joint ventures in which the Company participates, stating, with respect to each, its jurisdiction of organization or incorporation, capitalization, equity ownership and jurisdictions in which it is qualified to do business. Each is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own, lease and operate the properties and assets used in its business and to carry on its business as now being conducted, and is duly qualified to do business and in good standing as a foreign entity in each jurisdiction where each qualification is required. All of the outstanding shares of capital stock of the Subsidiaries have been validly authorized and issued, are fully paid and non-assessable, have not been issued in violation of any preemptive rights or of any federal or state securities law, and are owned by the Company of record and beneficially free and clear of any security interest, pledge, lien, charge, claim, option, equity, right, restriction on transfer or encumbrance of any nature whatsoever ("Security Interest"). Except as set forth on Schedule 4.34 hereto, the Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in any corporation, partnership, joint -31- venture or other person, nor has any right, agreement or commitment to purchase any such interest. The Company has previously delivered to Surviving Corporation complete and correct copies of the charter and by-laws (including comparable governing instruments with different names) of each of the Subsidiaries, as amended and presently in effect. SECTION 4.35. Full Disclosure. No representation or warranty herein by the Company, the Company's Shareholders or any Affiliate thereof, nor any statement or certificate furnished to DRS and/or Surviving Corporation pursuant hereto or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made and, together with the Schedules attached hereto, not misleading. The Schedules attached hereto completely and correctly present the information required by this Agreement to be set forth therein, do not contain any untrue statement of a material fact and do not omit to state any facts necessary to make the statements contained therein, together with the representations and warranties herein by the Company, the Company's Shareholders or any Affiliates thereof, not misleading. SECTION 4.36. Purchase for investment. The Company's Shareholders are purchasing the DRS Shares solely for investment, with no present intention to sell the DRS Shares. The Company's Shareholders hereby acknowledge that the DRS Shares have not been registered pursuant to the Securities Act of 1933, as amended, and may not be transferred in the absence of such registration or an exemption therefrom under such Act. ARTICLE V. COVENANTS SECTION 5.1. Covenants of Surviving Corporation. Surviving Corporation covenants with the Company that: (a) Compliance with Laws. Surviving Corporation is and will continue to be in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. Surviving Corporation will not take or omit to take any action which would result in the inaccuracy on the Effective Date of any of their representations and warranties (including any and all Schedules thereto) contained in Article III. It is expressly understood by the Company that a change in control of Surviving Corporation, whether by merger, acquisition, share exchange, sale or pledge of stock or otherwise, shall not by such change of control alone constitute a breach of any representation or warranty or otherwise breach this Agreement. -32- SECTION 5.2. Covenants of the Company and the Company's Shareholders. The Company and the Company's Shareholders covenant with DRS and Surviving Corporation that: (a) Compliance with Laws. The Company is and will continue to be in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. The Company and/or the Company's Shareholders will not take or omit to take (or cause to be taken or omitted) any action which would result in the inaccuracy on the Effective Date of any of the representations and warranties (including any and all Schedules thereto) contained in Article IV; (c) No Shop. Until the earlier of the termination of this Agreement in accordance with its terms or the Effective Date, neither the Company nor the Company's Shareholders, or any of them, shall directly or indirectly, through any Affiliate, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets or stock of the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated any existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Surviving Corporation promptly of any such proposal or offer, or any inquiry or contract with any Person with respect thereto, is made and shall, in any such notice to Surviving Corporation, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact; (d) Access to Information; Confidentiality. (i) From the date hereof to the Effective Date, upon reasonable notice to and with the prior consent of Leedom at his sole discretion, the Company shall and shall cause any Affiliates, employees, auditors and agents of the Company to, afford the officers, employees and agents of DRS and Surviving Corporation access during or outside of regular business hours to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company, and shall make available to DRS and Surviving Corporation all financial, operating and other data and information as DRS and Surviving Corporation, through their officers, employees or agents, may reasonably request; (ii) All information obtained by DRS and Surviving Corporation pursuant to this Section 5.2 shall be kept confidential pursuant to that certain confidentiality agreement entered into by the Company and the Surviving Corporation and dated May 7, 1996; and; -33- (iii) No investigation or knowledge of any matter or condition by DRS, the Surviving Corporation or the employees, agents or representatives of either shall affect any representation or warranty or any condition to their obligations or any right to terminate this Agreement; (e) Conduct of Business. Between the date hereof and the Effective Date, without the consent of Surviving Corporation and except as contemplated by the Transaction Documents, the Company shall: (i) conduct its business only in the usual, regular and ordinary course of business consistent with past practice; (ii) refrain from declaring any dividend or making any other distribution to the shareholders of the Company; and (iii) except either in the usual, regular and ordinary course of business and consistent with past practice or as necessary to comply with the provisions of this Agreement, refrain from: (A) making any purchases, sales, transfers, or leases of any Assets or Real Property or mortgaging, pledging or otherwise creating a security interest in, or any encumbrance of, any of the Assets or Real Property (other than Permitted Liens); (B) entering into any Contract, license, or lease in relation to the business of the Company or taking any other action which would, if entered into or taken on the date hereof, be required to be disclosed on a Schedule to this Agreement; (C) making any change in the compensation or benefits payable or to become payable to any employee or making any new bonus payment or arrangement or benefit to or with any such employee; (D) making any changes in the customary methods of operation of the business of the Company, including marketing, selling and pricing practices and policy; and (E) taking any other action which would have a negative impact on the business of the Company or on the prospects of the business of the Company; (iv) use all reasonable efforts to preserve its business organization intact, to keep its insurance policies intact, to keep available the services of its present employees and officers, and to preserve the relationships with and the goodwill of all suppliers, customers, sales representatives and others having business relations with the Company; -34- (v) maintain the Premises and all of the other properties used in the operation of its business in customary repair, order and condition, reasonable wear and tear excepted, and perform all of its obligations under any leases; (vi) maintain its books, accounts and records in connection with its business in the usual manner on a basis consistent with past practices; (vii) refrain from amending, modifying in any material respect or consenting to the termination of any Contract or the Company's material rights with respect thereto; (viii) except in the ordinary course of business, refrain from increasing the total number of employees employed in connection with its business; and (ix) refrain from agreeing, whether in writing or otherwise, to do any of the foregoing; (f) Third Party Consents; Further Actions. (i) The Company shall use its best efforts to obtain at the earliest practicable date after the date hereof, and, in any event, prior to the Effective Date, all necessary consents to the transactions contemplated by this Agreement or any Transaction Document from parties to Contracts and Governmental Authorities; (ii) The Company shall use its best efforts to obtain, and to assist Surviving Corporation in obtaining, all waivers, licenses, authorizations, qualifications, orders, permits, consents and approvals required to be obtained by it or them and to effect, and to assist Surviving Corporation in effecting, all registrations, filings and notices with or to third parties or governmental or public bodies or authorities required to be made which are necessary or desirable in connection with the transactions contemplated by this Agreement or any Transaction Documents; (iii) The Company and the Company's Shareholders who are signatories to the Agreement shall have obtained by power of attorney or otherwise the consent of all of the Company's Shareholders to enter into this Agreement and to consummate the transactions contemplated hereby and hereunder. Further, any and all shareholder agreements, voting trusts, proxies and/or plans which may have the effect of impairing or prohibiting the transactions contemplated hereby (or which may be otherwise inconsistent with such transactions) shall have been canceled or rendered null and void; (g) Renewal of Permits. The Company shall take such steps as are customary in the industry to file any necessary applications for the renewals of all licenses and permits referred to in Section 4.26 including, without limitation, Environmental Permits, if any such license or permit is required to be obtained prior to the Execution of this Agreement; -35- (h) Powers of Attorney. Upon the Execution of this Agreement, the Company shall revoke all powers of attorney relating to the its business and operations; (i) Notification of Certain Matters. The Company shall give prompt notice to Surviving Corporation of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate and (ii) any failure of the Company to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; (j) Disclosure Schedules. Concurrently with the date hereof, the Company has delivered to Surviving Corporation complete Schedules to this Agreement and the Transaction Documents which are to be provided by the Company together with any supporting documentation which Surviving Corporation may reasonably request and, within seven business days after receipt of such Schedules and supporting documentation either (i) Surviving Corporation will accept such Schedules in which case they shall become a part of this Agreement and the appropriate Transaction Documents, (ii) the parties hereto will agree upon mutually acceptable revisions to such Schedules in which case such revised Schedules shall become a part of this Agreement and the appropriate Transaction Documents or (iii) Surviving Corporation will terminate this Agreement pursuant to Article IX hereof. SECTION 5.3. Net Worth Statement; Adjustment to Purchase Price. Prior to execution of this Agreement, the Company and its Accountant have prepared (and Surviving Corporation has reviewed) the Company Balance Sheet as at June 30, 1996 in accordance with GAAP (except as otherwise stated herein), and, based on the Company Balance Sheet, have prepared a statement of net worth (the "Net Worth Statement") which reflects agreed-upon adjustments to the net worth of the Company as reported on the Company Balance Sheet. The Net Worth Statement constitutes the basis upon which the Merger Consideration has been determined. -36- ARTICLE VI. CONDITIONS PRECEDENT TO EXECUTION OF THIS AGREEMENT SECTION 6.1. Conditions Precedent to Obligations of Surviving Corporation. The obligation of Surviving Corporation to perform its obligations hereunder and under the Transaction Documents is subject to the satisfaction or waiver of the conditions precedent that: (a) Documents. Surviving Corporation shall have received on or before the Effective Date of this Agreement the following, in form and substance satisfactory to Surviving Corporation, all of which shall be held in escrow with Hannoch Weisman, a Professional Corporation, pursuant to the Escrow Agreement (as defined below) until the Effective Date: (i) Two (2) executed Certificates of Merger, in the form attached hereto as Exhibit A ("Certificate of Merger"); (ii) A fully executed Joint Unanimous Written Consent of the Board of Directors and the Shareholders of Pacific Technologies, Inc., in the form attached hereto as Exhibit B; (iii) A signed opinion of counsel to the Company and the Company's Shareholders, in the form attached hereto as Exhibit C; (iv) A Certificate of the Company, signed on behalf of the Company by the President or a Vice President and the Secretary or any Assistant Secretary, certifying fulfillment of the conditions specified in subsections (c) and (d) below; (v) A Tax Clearance Certificate from the California Franchise Tax Board; (vi) Resignations of all directors and officers of the Company which resignations shall have been requested by the Surviving Corporation effective as of the Effective Date; (vii) The statement of each of the Company's Shareholders, as contemplated under Section 1.1445-2(b)(2)(i) of the Treasury Regulations, to the effect that such Shareholder is not a foreign person within the meaning of the Code and applicable Treasury Regulations; (viii) A certificate from the Landlord stating that the Company's lease, described in Schedule 4.6, is in full force and effect; -37- (ix) the Accountant's letter with respect to the Company Balance Sheet including an opinion with respect to the Financial Statements (against which letter the Accountant shall not be indemnified by the Company); (x) Executed Escrow Agreement by and among the Company, the Company's Shareholders, the Subsidiary and Hannoch Weisman, a Professional Corporation, as Escrow Agent (the "Escrow Agreement"); and (xi) all opinions, certificates and other instruments and documents required to be delivered by the Company and the Company's Shareholders upon execution of this Agreement or otherwise required in connection herewith; (b) Satisfactory Completion of Due Diligence. The Surviving Corporation shall have completed its due diligence inquiry in accordance with the provisions of Section 5.2(d). The Surviving Corporation shall have been satisfied that The Company's Shareholders and the Company have complied with all covenants and conditions set forth in Section 5.2 and Section 6.1, and that all representations and warranties contained in Article IV remain true and accurate. In the event that any of the provisions contained in this Section 6.1 have not been satisfied in the opinion of the Surviving Corporation, Surviving Corporation shall be relieved of all obligations under this Agreement, including the obligation to consummate the transactions contemplated hereunder. (c) Representations and Warranties. The representations and warranties of the Company and the Company's Shareholders contained in this Agreement, as modified by any Schedules delivered by the Company pursuant to Section 5.2(j) hereof, shall be true and correct in all respects on the date hereof and as of the Effective Date with the same effect as though such representations and warranties had been made or given again at and as of the Effective Date, except for any representation and warranty expressly stated to have been made or given as of a specified date, which, at the Effective Date, shall be true and correct in all respects as of the date expressly stated. (d) Performance. The Company and the Company's Shareholders shall have performed and complied in all respects with all of their respective agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by them prior to or at the Effective Date. (e) No Material Adverse Effect. Since the date of the Company Balance Sheet there shall not have occurred an event or condition which has resulted or which reasonably may be expected to result in a Material Adverse Effect. (f) Net Worth. The Surviving Corporation shall have received from the Company a Net Worth Statement, in a form satisfactory to Surviving Corporation evidencing that the net worth as of June 30, 1996 is not less than $524,898.00. -38- (g) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions contemplated by this Agreement and the Transaction Documents shall have been obtained prior to Execution of this Agreement. (h) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either Surviving Corporation, the Company or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. (i) Licenses; Permits. All operating licenses and permits necessary for the operation of the businesses of the Company as conducted on the Effective Date (including, without limitation, Environmental Permits) shall have been obtained. (j) Other. Surviving Corporation shall have received such further assurances and documents as it may reasonably request. SECTION 6.2. Conditions Precedent to Obligations of the Company. The obligations of the Company to perform its other obligations hereunder and under the Transaction Documents are subject to satisfaction or waiver of the conditions precedent that: (a) Documents. The Company shall have received on or before the Effective Date the following, in form and substance satisfactory to the Company, all of which shall be held in escrow pursuant to the Escrow Agreement until the Effective Date: (i) Two (2) executed Certificates of Merger; (ii) A fully executed Joint Unanimous Written Consent of the Board of Directors and the Sole Shareholder of PTI Acquisition, Inc., in the form attached hereto as Exhibit D; -39- (iii) A signed opinion by counsel to the Subsidiary, in the form attached hereto as Exhibit E; (iv Acceptance by the Company's Shareholders of offers of employment made to them by the Surviving Corporation; (v) A Certificate of Surviving Corporation, signed on behalf of Surviving Corporation by the President or a Vice President and the Secretary or any Assistant Secretary of Surviving Corporation certifying as to the fulfillment of the conditions specified in subsections (b) and (c) below; (vi) Executed Escrow Agreement; and (vii) all opinions, certificates and other instruments and documents required to be delivered by the Subsidiary upon execution of this Agreement or otherwise required in connection herewith; (b) Representations and Warranties. The representations and warranties of Surviving Corporation contained in this Agreement shall be true and correct in all respects on the date hereof and as of the Effective Date with the same effect as though such representations and warranties had been made or given again at and as of the Effective Date, except for any representation or warranty expressly stated to have been made or given as of a specified date, which, at the Effective Date, shall be true and correct in all respects as of the date expressly stated. (c) Performance. Surviving Corporation shall have performed and complied in all respects with all of its agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by it prior to or on the Effective Date. (d) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from, governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions contemplated by this Agreement and the Transaction Document shall have been obtained prior to the Effective Date; (e) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. -40- (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either Surviving Corporation or the Company or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. ARTICLE VII. ADDITIONAL AGREEMENTS SECTION 7.1. Further Assurances. Following the execution of this Agreement and continuing after the Effective Date, each of the Company's Shareholders and the Company shall, from time to time, execute and deliver such additional instruments, documents, conveyances and assurances as requested by the Surviving Corporation to confirm, assure and further the rights, purposes, effects and obligations set forth herein. SECTION 7.2. Covenants of Certain of the Company's Shareholders. By signing this Agreement, Leedom and Mason each agree that neither such Shareholder nor any of his or her Affiliates will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner, director, officer, employee or otherwise: (i) any business which develops, manufactures and markets and/or sells within the United States any product or service developed, manufactured, marketed and/or sold by the Company (or contemplated to be developed, manufactured, marketed and/or sold by the Company in the reasonably foreseeable future); or (ii) any entity which otherwise competes directly or indirectly with the business of the Company, except that either of them may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. This above-described covenant shall be effective for the period beginning on the Effective Date under this Agreement and ending on the second anniversary of the Effective Date; provided, however, that if the employment of Leedom and/or Mason is terminated by the Surviving Corporation without cause prior to such second anniversary, then such Shareholder(s) terminated without cause shall be relieved of the above-described covenant on the relevant termination date; and, provided further, that if Leedom and/or Mason voluntarily terminate employment with the Surviving Corporation or if the employment of Leedom and/or Mason is terminated by the Surviving Corporation with cause, then the terms of the above-described covenant shall restrict the terminated Shareholder(s) for one year following the termination date or until the second anniversary of the Effective Date, whichever date occurs later. By signing this Agreement, each of the Company's Shareholders agrees that each shall not, directly or indirectly, in any capacity whatsoever: -41- (a) hire or solicit for employment, directly or indirectly, any personnel of the Company in any capacity whatsoever (which shall be deemed to include, without limitation, any existing or prospective employee of the Company or any person who has been such an employee of the Company within one hundred fifty (150) days prior to the Effective Date); (b) attempt directly or indirectly to induce any such Company personnel to leave the employ of, or discontinue such person's business association with, the Company; (c) solicit, directly or indirectly, any client or account or bona fide prospective client or account of the Company; or (d) interfere with the business relationships, contractual or otherwise, between the Company and any of its customers, suppliers or employees. SECTION 7.3. Remedies. (a) Reasonableness of Restraints. Each of the Company's Shareholders hereby acknowledges that: (i) he is fully familiar with the restrictions, restraints and limitations imposed upon him in Section 7.2 hereof (collectively, the "Restraints"); (ii) the Surviving Corporation would not undertake the transactions contemplated hereunder without the imposition of the Restraints and each agreement of the Company's Shareholders herein to abide by such Restraints; (iii) the imposition upon each such Shareholder of the Restraints is necessary for the reasonable, adequate protection of the business of the Company; and (iv) each and every Restraint is reasonable with respect to its subject matter, geographic area and length of time. (b) Injunctive Relief. Each of the Company's Shareholders acknowledges that monetary damages alone will not adequately compensate the Company and/or the Surviving Corporation in the event of a breach or a threatened breach by him of the Restraints and therefore each of the Company's Shareholders hereby agrees that in addition to all remedies available to the Surviving Corporations and/or Company at law or in equity, the Surviving Corporation and/or Company shall be entitled to interim restraints and permanent injunctive relief for the enforcement thereof, and to an accounting and payment over of all receipts realized by such of the Company's Shareholders as a result of such breach. (c) Extension of Period of Restraints. In the event that any of the Company's Shareholders shall be in material violation of any Restraints, then the time limitation therefor shall be extended for a period of time equal to the period of time during which such breach or breaches occurred. In the event the Surviving Corporation and/or the Company shall be required to seek relief in any court or other tribunal, then the Restraints shall be extended for a period of time equal to the pendency of such proceedings, including appeals, and excluding any periods during which the court or other tribunal has ordered the Company's Shareholders to honor the Restraints and such Company's Shareholders have complied with such order. -42- (d) Court Ordered Reduction of Restraints. In the event that any of the restrictions, limitations or restraints contained in this Agreement are deemed to be unreasonable or unenforceable by any court of competent jurisdiction, then each party hereto agrees to submit to such reduction of said restrictions, limitations or restraints as the court shall deem reasonable. SECTION 7.4. Public Disclosure. No party to this Agreement shall make an announcement of this Agreement or the transactions contemplated hereby to the public or any third party (including employees of the Company), other than with the express consent of the Surviving Corporation, on the one hand, and the Company and the Company's Shareholders, on the other hand, or as may be required by applicable laws or regulations. SECTION 7.5. Limitations on Transfers and Dispositions. (a) Each Company Shareholder covenants that following the Effective Date such Company Shareholder will not transfer the shares of DRS Stock, if any, to be received hereunder in violation of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the rules of the SEC promulgated thereunder, including Rule 144 under the Securities Act, and unless and until (i) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement or (ii) (A) such Company Shareholder shall have notified DRS of the proposed disposition and shall have furnished DRS with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by DRS, such Company Shareholder shall have furnished DRS with an opinion of counsel, reasonably satisfactory to DRS and its counsel, that such disposition will not require registration of such shares under the Securities Act. (b) Each Company Shareholder severally agrees that he/she has no plan or present intention to sell, transfer or otherwise dispose of a number of shares of DRS Stock to be received in the merger that would reduce the number of shares of DRS Stock owned by such Company Shareholder to a number of shares having, in the aggregate, a value as of the Effective Date of less than fifty (50) percent of the value of all of the Company Shares held by such Company Shareholder as of the Effective Date. For purposes of the agreement set forth in this Section (b), Dissenting Shareholder Shares, Company Shares exchanged for cash in lieu of fractional shares of DRS Stock and Company Shares sold, exchanged or otherwise disposed of prior to and in anticipation of the merger will be treated as Company Shares held by such Company Shareholder as of the Effective Date. -43- ARTICLE VIII. INDEMNIFICATION SECTION 8.1. Survival of Representations and Warranties. The representations and warranties of the Company and the Company's Shareholders shall survive the Execution of this Agreement and the Effective Date for a period of three years from the Effective Date, provided however, that Representations and Warranties in Section 4.17 shall survive 90 days following expiration of claims pursuant to the statute of limitations in respect of such matters; and provided further that there shall be no temporal limitation of indemnification in respect of Representations and Warranties set forth in Sections 4.1 and 4.2. SECTION 8.2. Indemnification by the Parties. Except as otherwise limited by this Article VIII, each of the Surviving Corporation and its corporate Affiliates, officers, directors, employees, agents, successors and assigns (each an "Indemnified Party") shall be indemnified and held harmless by the Company's Shareholders (each an "Indemnifying Party"), on the one hand, and each of the Company's Shareholders, on the other hand (an "Indemnified Party"), shall be indemnified and held harmless by the Surviving Corporation (an "Indemnifying Party"), for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses and environmental engineering consultants' fees) actually suffered or incurred by the Indemnified Party (hereinafter singularly, a "Loss" or, collectively, "Losses"), actually arising out of or resulting from: (a) the breach of any representation or warranty by the Indemnifying Party contained herein; or (b) the breach of any covenant or agreement by the Indemnifying Party contained herein. SECTION 8.3. General Indemnification Provisions. An Indemnified Party shall promptly give the Indemnifying Party written notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, stating the amount of the Loss, if known, and method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. The obligations and liabilities of an Indemnifying Party under this Article with respect to Losses arising from claims of any third party that are subject to the indemnification provided for in this Article ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall promptly give the Indemnifying Party written notice of such Third Party Claim and shall permit the Indemnifying Party, at its option, to participate in the defense of such Third Party Claim by counsel of its own choice and at its expense. If, however, the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such -44- Third Party Claims (subject to the limitations set forth herein), then the Indemnifying Party shall be entitled, at its option, to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives prompt notice of intention to do so to the Indemnified Party. In the event the Indemnifying Party exercises its right to undertake the defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to it all such witnesses, records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim, except the settlement thereof which involves the payment of money only and for which the Indemnified Party is totally indemnified by the Indemnifying Party, may be settled by the Indemnifying Party without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld). Similarly, no Third Party Claim which is being defended in good faith by the Indemnifying Party shall be settled by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld). SECTION 8.4. Limitations on Indemnification. (a) Participation in indemnification. Notwithstanding anything in this Agreement to the contrary, Leedom and Mason shall be jointly and severally liable for the totality of indemnification obligations incurred under this Agreement; Miller, on the other hand, shall be severally liable for the pro rata share of such liability attributable to him on the basis of his percentage of Share ownership immediately prior to the Effective Date; and Ito and Kindig shall not be liable for Losses as indemnitors hereunder. (b) Upper Limit to Indemnification. Regardless of the totality of indemnification obligations incurred under this Agreement, Leedom, Mason and/or Miller shall not be required to indemnify Surviving Corporation and/or its Affiliates in an aggregate amount greater than $524,898.00. (c) Insubstantial matters. In an effort to avoid disputes over numerous small items, Surviving Corporation and the Company's Shareholders agree that the Company and the Company's Shareholders shall not be liable for Losses hereunder until the total of all such Losses equals or exceeds $15,000 (the "Basket"); provided, however, that once such Losses exceed the Basket, the Company and the Company's Shareholders shall be liable for all Losses including the first $15,000 of such Losses in the Basket. SECTION 8.5. Shareholders' Representatives. In connection with the procedures set forth in Section 8.3 (General Indemnification Provisions only), the Minority Shareholders confirm and agree that they will be represented by Leedom and Mason jointly as -45- Minority Shareholders' representatives (the "Shareholders' Representatives") appointed and acting pursuant hereto and empowered by each Minority Shareholder to give and receive notices and communications; to compromise, defend, participate in the defense of, release and prosecute claims; to admit liability; to consent to the entry of any judgment; to negotiate, agree to and enter into any settlement; to demand arbitration and comply with awards of arbitrators and courts; and to take any and all actions necessary or appropriate in the judgment of the Shareholders' Representatives for the accomplishment of any of the foregoing. A decision by both of the Shareholders' Representatives shall constitute a decision of all of the Company's Shareholders, and shall be final, binding and conclusive on all of them, and Buyer may rely on any act, decision, notice, consent or instruction of both of the Shareholders' Representatives as being the act, decision, notice, consent or instruction of each and all of the Company's Shareholders; provided, however, that if, for any reason, Leedom and Mason cannot or have not acted in concert, then the Company's Shareholders empower Leedom to act on their behalf and Buyer may rely on such act of Leedom. ARTICLE IX. TERMINATION SECTION 9.1. Termination of Agreement. This Agreement may be terminated and the merger contemplated in Article II may be abandoned at any time prior to the Effective Date: (a) By mutual written consent of the parties hereto; or (b) By the Subsidiary if the Effective Date shall not have occurred on or before October 15, 1996 unless a delay in the Effective Date occurs solely by reason of a delay in obtaining the required tax clearance certificate from the Franchise Tax Board of the State of California, in which case the Agreement shall continue until such Tax Clearance is obtained (subject to clauses (c) and (d) below); or (c) By the Subsidiary if the board of directors of the Subsidiary at any time determines in its business judgment that this Agreement is no longer in the best interests of the Subsidiary or its shareholders by reason of a material adverse change in the business or prospects of the Company or by reason of a delay in the Effective Date beyond December 1, 1996 for any reason whatsoever; or (d) By the Subsidiary if, at any time in the course of the Subsidiary's legal, accounting, financial, operational or environmental due diligence investigation as to the business of the Company and the liabilities thereof (whether disclosed, undisclosed, direct, indirect, absolute, contingent, secured, unsecured, accrued or otherwise, whether known or unknown) including, without limitation, the Subsidiary's continuing review of the Schedules delivered by the Company and any other materials delivered to Subsidiary, whether prior or subsequent to the date hereof, it shall have become aware of any facts or circumstances that -46- adversely affect the basis upon which Subsidiary determined to enter into the transactions contemplated hereby; or (e) By any party hereto if a court of competent jurisdiction (whether federal, state or foreign) or any governmental body or agency (whether federal, state or foreign) shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or any Transaction Document, and such order, decree, ruling or other action shall have become final and nonappealable. SECTION 9.2. Procedure and Effect of Termination. In the event of termination of this Agreement and abandonment of the merger pursuant to Section 9.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made and this Agreement shall forthwith become void and there shall be no liability on the part of the parties hereto (or their respective officers, directors or affiliates), except nothing herein shall relieve either party from liability for any willful breach hereof and except that the provisions of the Confidentiality Agreement entered into by the Company and DRS on May 7, 1996 and the provisions of Section 11.2 dealing with payment of expenses shall survive such termination. The parties shall consult with each other before any public announcement of the termination, or of discussions regarding the termination, of this Agreement is made. ARTICLE X. CERTAIN REGISTRATION RIGHTS 10.1. Certain Definitions. As used in this Section, the following terms shall have the meanings set forth below: (a) Commission shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) Exchange Act shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) Holder shall mean each person who holds, pursuant to this Agreement, Registrable Securities acquired in the merger. (d) Other Shares shall mean shares of DRS Stock with registration rights other than the Registrable Securities. -47- (e) Other Stockholders shall mean persons other than Holders who, by virtue of agreements with DRS, are entitled to include their securities in certain registrations hereunder. (f) Registrable Securities shall mean: (i) Merger Consideration in the form of stock; and (ii) any shares issued as a dividend or other distribution with respect to or in exchange for or in replacement of said Merger Consideration; provided, however, that Registrable Securities shall not include any such shares which have previously been registered or which have been sold to the public, or which have been sold in a private transaction. (g) The terms Register, Registered and Registration shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. (h) Registration Expenses shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, printing expenses, escrow fees, fees and disbursements of counsel for DRS, and expenses of any regular or special audits and/or "cold comfort" letters incident to or required by any such registration, but shall not include Selling Expenses. (i) Restricted Securities shall mean any Registrable Securities required to bear the legend set forth in Section 10.2(b) hereof. (j) Rule 144 shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (k) Rule 145 shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (i) Securities Act shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (m) Selling Expenses shall mean all underwriting discounts, selling commissions, stock transfer taxes and federal and state registration, qualification and filing fees applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder. -48- 10.2. Restrictions On Transfer. (a) Each Holder agrees not to make any disposition of all or any portion of the Registrable Securities unless and until the transferee has agreed in writing for the benefit of DRS to be bound by this Section 10.2, provided and to the extent such Section is then applicable and: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) Such Holder shall have: (A) notified DRS of the proposed disposition and shall have furnished DRS with a detailed statement of the circumstances surrounding the proposed disposition; and (B) if reasonably requested by DRS, furnished DRS with an opinion of counsel, reasonably satisfactory to the DRS, that such disposition will not require registration of such shares under the Securities Act. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR UNLESS DRS HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO DRS AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. 10.3. Registration Of Securities. (a) For so long as the Holders' ability to transfer Registrable Securities is restricted by the holding period imposed on such Holders by Rule 144, if DRS shall determine to register any of its securities either for its own account or the account of Other Stockholders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form that does not contemplate secondary sales, DRS will: (i) Promptly give to each Holder written notice thereof; and (ii) Use its reasonable best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting -49- involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by DRS within twenty (20) days after the written notice from DRS described in Section 10.3(a)(i) is mailed or delivered by DRS. Such written request may specify all or a part of a Holder's Registrable Securities. (b) Underwriting. If the registration of which DRS gives notice is for a registered public offering involving an underwriting, DRS shall so advise the Holders as a part of the written notice given pursuant to Section 10.3(a)(i). In such event, the right of any Holder to registration pursuant to this Section shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with DRS and the Other Stockholders distributing their securities through such underwriting) enter into an underwriting agreement approved by DRS and with the representative of the underwriter or underwriters selected by DRS. (c) Procedures. Notwithstanding any other provision of this Section, if the representative of the underwriters advises DRS in writing that market factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting, DRS shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to DRS and thereafter as set forth in Section 10.9. If any Holder does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from DRS or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of market factors, DRS shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requested additional inclusion in accordance with Section 10.9 hereof. 10.3. Expenses Of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 10.3 hereof shall be borne by DRS; all Selling Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 10.3 hereof shall be borne by the Holder(s) of Registrable Shares participating in such registration, qualification or compliance. 10.5 Registration Procedures. In the case of each registration effected by DRS pursuant to this Agreement, DRS will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, DRS will use its reasonable best efforts to: -50- (a) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of securities covered by such registration statement; (b) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (c) Cause all such Registrable Securities registered pursuant hereunder to be listed on the American Stock Exchange or on each securities exchange on which similar securities issued by DRS are then listed; and (d) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 10.6. Indemnification. (a) DRS will indemnify each Holder, each of their legal counsel, and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all claims, losses, damages, and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular, or other document or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability, or action, provided that DRS will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission (or alleged untrue statement or omission) based upon information furnished to DRS by such Holder or underwriter. The obligations of DRS hereunder shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of DRS (which consent shall not been unreasonably withheld). (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify DRS, each of its directors, officers, partners, legal counsel, and accountants and each underwriter, if any, of DRS' securities covered by such a registration statement, each person who controls DRS or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and Other Stockholder, and each of their officers, directors, and partners, and -51- each person controlling such Holder or Other Stockholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse DRS and such Holders, Other Stockholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with information furnished to DRS by such Holder. The obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 10.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such a claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact -52- or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 10.7. Information By Holder. Each Holder of Registrable Securities shall furnish to DRS such information regarding such Holder and the distribution proposed by such Holder as DRS may reasonably request in writing and/or as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Agreement. 10.8. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public with registration, DRS agrees to use its reasonable best efforts to: (a) Make and keep public information regarding DRS available as those terms are understood and defined in Rule 144 under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of DRS under the Securities Act; (c) So long as a Holder owns any Restricted Securities, furnish to the Holder forthwith upon written request a written statement by DRS as to its compliance with the reporting requirements of Rule 144, a copy of the most recent annual or quarterly report of DRS, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 10.9. Allocation Of Registration Opportunities. In any circumstance in which all of the Registrable Securities and Other Shares requested to be included in a registration on behalf of the Holders or Other Stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and Other Stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares held by such Holders and Other Stockholders; provided, however, that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or Other Stockholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, the remaining portion of his allocation shall be reallocated among those requesting Holders and Other Stockholders whose allocations did not satisfy their requests pro rata on the basis of -53- the number of shares of Registrable Securities and Other Shares held by such Holders and Other Stockholders, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and Other Stockholders have been so allocated. ARTICLE XI. MISCELLANEOUS SECTION 11.1. Taxes. Each party shall pay any and all stamp and other taxes payable or determined to be payable by it in connection with the execution and delivery of this Agreement and the other documents to be delivered by it hereunder, and agrees to save the other party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION 11.2. Expenses. Whether or not the transactions contemplated in this Agreement are consummated, the Subsidiary shall pay its own expenses incident to this Agreement and the Transaction Documents and in preparing to consummate the transactions provided for herein and therein. If the transactions contemplated by this Agreement are not consummated, the Company and the Company's Shareholders shall pay their aggregate expenses incident to this Agreement and the Transaction Documents and in preparing to consummate the transactions provided for herein and therein. If the transactions contemplated by this Agreement are consummated, unless otherwise agreed, the Company's Shareholders shall pay both the Company's and the Company's Shareholders expenses incident to this Agreement and the Transaction Documents and in preparing to consummate the transactions provided for herein and therein. SECTION 11.3. Consents. Whenever this Agreement requires or permits consents by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements specified in Section 11.9. SECTION 11.4. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations herein shall be assigned by either party without the prior written consent of the other party; provided, however, that Surviving Corporation can assign its obligations hereunder to a corporate Affiliate thereof. SECTION 11.5. Entire Agreement. This Agreement, the other documents referred to herein or delivered pursuant hereto which form a part hereof and other writings of even date herewith, together with the Transaction Documents and other writings referred to therein or delivered pursuant thereto, contain the entire understanding of the parties with respect to the subject matter hereof. This Agreement supersedes all prior agreements with respect to the -54- subject matter hereof, including that Nonbinding Letter of Intent dated March 25, 1996, but not including that Confidentiality Agreement dated May 7, 1996. SECTION 11.6. Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 11.7. Waiver. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefit thereof only by a written instrument signed by the party granting such waiver, but the failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of or estoppel with respect to said compliance and such failure shall not operate as a waiver of or estoppel with respect to any subsequent or other failure. SECTION 11.8. Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.9. Notices. All notices, claims, certificates, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given when personally delivered, telexed, sent by facsimile transmission (with telephone confirmation) or on the date of receipt or refusal indicated on the return receipt if mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: (a) If to Surviving Corporation: PTI ACQUISITION CORP. c/o Mr. Paul Casner 200 Professional Drive Gaithersburg, Maryland, 20879 with a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, NJ 07068-3788 Attn.: Nina Laserson Dunn, Esq. -55- (b) If to the Company: Pacific Technologies, Inc. 2535 Camino Del Rio South Suite 300 San Diego, CA 92108 Attn.: Mr. David A. Leedom with a copy to: Sparber, Ferguson, Ponder & Ryan A Professional Law Corporation Imperial Bank Tower 701 "B" Street, Tenth Floor San Diego, California 92101-8103 Attn.: Richard E. Sparber, Esq. (c) If to any of the Company's Shareholders, to the address(es) so set forth below: To Leedom: Mr. David A. Leedom 1217 Via Ramon Escondido, California 92025 To Mason: Ms. Karen A. Mason 6085 Henderson Drive La Mesa, California 92042 To Miller: Mr. Robert T. Miller 2972 Crane St. Lemon Grove, California 92045 To Ito: Mr. Carl S. Ito 5864 Carnegie Street San Diego, California 92122 To Kindig: Mr. Barry S. Kindig 13090 Wimberly Square, #55 San Diego, California 92128 -56- each with a copy to Sparber, Ferguson, Ponder & Ryan at the address set forth in (b) above or to such other address as the person to whom notice is to be given may have previously furnished to the other in writing in the manner set forth above. SECTION 11.10. Law Governing Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. SURVIVING CORPORATION AND THE COMPANY HEREBY CONSENT TO AND GRANT ANY COURT OF THE STATE OF CALIFORNIA JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF ANY SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN SUCH MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. SECTION 11.11. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which when taken together shall constitute one and the same agreement. SECTION 11.12. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. -57- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their respective duly authorized signatories as of the date first above written. ATTEST: PACIFIC TECHNOLOGIES, INC. By: /s/ ROBERT T. MILLER By: /s/ DAVID A. LEEDOM ---------------------------- ------------------------------- Robert T. Miller David A. Leedom Title: Secretary Its: President ATTEST: PTI ACQUISITION CORP. By: /s/ TERRENCE L. DeROSA By: /s/ PAUL G. CASNER, JR. ---------------------------- ------------------------------- Terrence L. DeRosa Paul G. Casner, Jr. Title: Secretary Its: President WITNESS: - -- /s/ DAVID A. LEEDOM - -------------------------------- ----------------------------------- David A. Leedom - -- /s/ KAREN A. MASON - -------------------------------- ----------------------------------- Karen A. Mason - -- /s/ ROBERT T. MILLER - -------------------------------- ----------------------------------- Robert T. Miller - -- /s/ CARL S. ITO - -------------------------------- ----------------------------------- Carl S. Ito - -- /s/ BARRY S. KINDIG - -------------------------------- ----------------------------------- Barry S. Kindig -58- EX-10.102 5 ASSET PURCHASE AGREEMENT - -------------------------------------------------------------------------------- ASSET PURCHASE AGREEMENT By and among AHEAD TECHNOLOGY, INC., NORTRONICS ACQUISITION CORPORATION, NORTRONICS COMPANY, INC., ALAN KRONFELD, THOMAS PHILIPICH AND ROBERT LISTON DATED: as of October 22, 1996 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- ARTICLE I................................................................. 1 DEFINITIONS............................................................... 1 ARTICLE II................................................................ 9 PURCHASE AND SALE OF ASSETS............................................... 9 Section 2.1. Purchase and Sale of the Assets...................... 9 Section 2.2. Closing; Deliveries.................................. 9 Section 2.3. Assumption of Liabilities............................ 10 Section 2.4. Exclusion of Liabilities............................. 10 ARTICLE III............................................................... 11 REPRESENTATIONS AND WARRANTIES OF BUYER AND AHEAD......................... 11 Section 3.1. Corporate Existence.................................. 11 Section 3.2. Authority Relative to this Agreement and Transaction Documents.................. 11 Section 3.3. No Litigation........................................ 12 Section 3.4. No Brokers, Finders, etc............................. 12 ARTICLE IV................................................................ 12 REPRESENTATIONS AND WARRANTIES............................................ 12 Section 4.1. Corporate Existence.................................. 12 Section 4.2. Authority Relative to this Agreement and Transaction Documents.................. 12 Section 4.3. No Litigation........................................ 13 Section 4.4. Title to Assets and Real Property.................... 13 Section 4.5. Compliance with Laws; Permits and Licenses........... 14 Section 4.6. Intellectual Property................................ 15 Section 4.7. Litigation........................................... 15 Section 4.8. Contracts............................................ 16 (a) Material Contracts................................... 16 (b) Government Contracts................................. 17 PAGE ---- (i) Government Contracts Compliance................. 17 (ii) Investigation and Claims........................ 18 (iii) No Debarment or Suspension...................... 19 (iv) Test and Inspection............................. 19 Section 4.9. Foreign Government Contracts......................... 20 Section 4.10. Labor Union Contracts................................ 20 Section 4.11. Employees, Labor Matters, etc........................ 20 Section 4.12. ERISA................................................ 21 Section 4.13. Brokers' or Finders' Fees, etc....................... 23 Section 4.14. Financial Information; Undisclosed Liabilities....... 23 Section 4.15. Taxes................................................ 24 Section 4.16. Absence of Changes................................... 25 Section 4.17. Accounts Receivable.................................. 27 Section 4.18. Insurance............................................ 27 Section 4.19. Sufficiency of Assets and Real Property.............. 27 Section 4.20. Foreign Assets....................................... 28 Section 4.21. Propriety of Past Payments........................... 28 Section 4.22. Affiliate Transactions............................... 28 Section 4.23. Suppliers and Customer............................... 29 Section 4.24. Environmental Conditions and Governmental Authorizations.......................... 29 Section 4.25. Leases of Personal Property.......................... 30 Section 4.26. Books and Records.................................... 30 Section 4.27. Accounts............................................. 30 Section 4.28. Products Liability................................... 30 Section 4.29. Interest in Competitors.............................. 31 Section 4.30. Inventories.......................................... 31 Section 4.31. Joint Ventures....................................... 31 Section 4.32. Full Disclosure...................................... 32 ARTICLE V................................................................. 32 COVENANTS................................................................. 32 PAGE ---- Section 5.1. Covenants of Buyer.................................... 32 (a) Compliance with Laws.................................. 32 (b) Maintain Accuracy of Representations.................. 32 (c) Consents and Permits.................................. 33 Section 5.2. Covenants of the Company.............................. 33 (a) Compliance with Laws.................................. 33 (b) Maintain Accuracy of Representations.................. 33 (c) No Shop............................................... 33 (d) Access to Information; Confidentiality................ 33 (e) Conduct of Business................................... 34 (f) Third Party Consents; Further Actions................. 35 (g) Renewal of Permits.................................... 35 (h) Powers of Attorney.................................... 35 (i) Notification of Certain Matters....................... 35 (j) Disclosure Schedules.................................. 36 Section 5.3. Closing Conditions.................................... 36 Section 5.4. Net Worth Statements; Adjustment to Purchase Price.... 36 ARTICLE VI................................................................ 36 CONDITIONS PRECEDENT TO THE CLOSING....................................... 36 Section 6.1. Conditions Precedent to Obligations of Buyer......... 36 (a) Tender of All Assets................................. 36 (b) Documents............................................ 37 (c) Satisfactory Completion of Due Diligence............. 38 (d) Representations and Warranties....................... 38 (e) Performance.......................................... 38 (f) No Material Adverse Change........................... 38 (g) Net Worth............................................ 38 (h) Consents, etc........................................ 38 (i) No Proceeding or Litigation.......................... 39 (j) Licenses; Permits.................................... 39 (k) Release of Lien, etc................................. 39 (l) Other................................................ 39 PAGE ---- (m) Availability of Certain Employees..................... 39 Section 6.2. Conditions Precedent to Obligations of the Company............................ 39 (a) Documents............................................. 39 (b) Representations and Warranties........................ 40 (c) Performance........................................... 40 (d) Consents, etc......................................... 40 (e) No Proceeding or Litigation........................... 41 (f) Assumption of Lease................................... 41 (g) Other................................................. 41 (h) Payments.............................................. 41 ARTICLE VII............................................................... 41 ADDITIONAL AGREEMENTS..................................................... 41 Section 7.1 Bulk Transfer Laws.................................... 41 Section 7.2. Covenant of Seller and Certain Shareholder/Employees................................. 41 Section 7.3. Remedies.............................................. 42 (a) Reasonableness of Restraints.......................... 42 (b) Injunctive Relief..................................... 43 (c) Extension of Period of Restraints..................... 43 (d) Court Ordered Reduction of Restraints................. 43 Section 7.4. Further Assurances.................................... 43 Section 7.5. Tax Payment........................................... 43 ARTICLE VIII.............................................................. 43 INDEMNIFICATION........................................................... 44 Section 8.1. Survival of Representations and Warranties............ 44 Section 8.2. Indemnification by the Parties........................ 44 Section 8.3. General Indemnification Provisions.................... 44 Section 8.4. Limitations........................................... 45 Section 8.5. Effect of Due Diligence on Indemnification............ 45 Section 8.6. Effect and Conditions................................. 46 ARTICLE IX................................................................ 46 TERMINATION............................................................... 46 PAGE ---- Section 9.1. Termination of Agreement............................. 46 Section 9.2. Procedure and Effect of Termination.................. 47 ARTICLE X................................................................. 47 RESOLUTIONS OF DISPUTES................................................... 47 Section 10.1. Dispute Defined...................................... 47 Section 10.2. Dispute Resolution Procedures........................ 47 Section 10.3. Provisional Remedies................................. 48 Section 10.4. Tolling Statute of Limitations....................... 48 Section 10.5. Performance to Continue.............................. 48 Section 10.6. Extension of Deadlines............................... 48 Section 10.7. Enforcement.......................................... 48 Section 10.8. Costs................................................ 49 Section 10.9. Replacement.......................................... 49 ARTICLE XI................................................................ 49 MISCELLANEOUS............................................................. 49 Section 11.1. Taxes................................................ 49 Section 11.2. Expenses............................................. 49 Section 11.3. Consents............................................. 49 Section 11.4. Assignment........................................... 49 Section 11.5. Entire Agreement..................................... 50 Section 11.6. Amendment............................................ 50 Section 11.7. Waiver............................................... 50 Section 11.8. Headings............................................. 50 Section 11.9. Notices.............................................. 50 Section 11.10. Law Governing........................................ 51 Section 11.11. Counterparts......................................... 51 Section 11.12. Severability......................................... 51 Section 11.13. No Third Party Beneficiaries......................... 53 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is made as of October 22, 1996 ("AGREEMENT") by and between AHEAD TECHNOLOGY, INC., a Delaware corporation ("Ahead"), NORTRONICS ACQUISITION CORPORATION, a Delaware corporation and subsidiary of Ahead ("BUYER"), NORTRONICS COMPANY, INC., a Minnesota corporation (the "SELLER" or the "COMPANY"), ALAN KRONFELD, THOMAS PHILIPICH and ROBERT LISTON. W I T N E S S E T H: WHEREAS, the Company desires to sell or transfer to the Buyer and the Buyer desires to purchase all of the Assets from the Company on the terms and conditions and for the consideration hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements and on the terms and conditions contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accountants" means Froehling, Anderson, Plowman & Egnell, Ltd., the independent public accountants of the Company. "Affiliate" means, when used with reference to a specified Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person or (ii) any Person that is an executive officer or director of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity and, (iii) when used with reference to a natural Person, any Person that is related to the specified Person by blood or marriage in the first degree of consanguinity; provided, however, that no natural Person shall be deemed to be controlled by any other Person. "Applicable Law" shall have the meaning specified in Section 4.5(a). "Assets" shall mean all of the assets of the Company as reflected on the Company's Balance Sheet or used in the business of the Company, as said assets may change as permitted by this Agreement in the ordinary course of business from the date hereof through the Closing Date, including the following: (i) Machinery and Equipment. All right, title and interest in and to all machinery and equipment, patterns, furniture, furnishings, fixtures, plant and office equipment, leasehold improvements, vehicles, supplies and tools and dies of Seller including, without limitation, those listed on Schedule 4.4 hereto. (ii) Inventory and Receivables. All inventory of raw materials, work-in-process and finished products of Seller. (iii) Contracts and Commitments. All right, title and interest of Seller in and to the agreements, contracts, commitments and leases of real and personal property and purchase or sale orders of Seller including, without limitation, those listed on Schedules 4.8(a) and 4.8(b) hereto; provided that to the extent the assignment of any agreement, contract, lease or purchase or sale order requires the consent of the other party thereto, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof, but the Buyer and the Seller agree that Buyer and Seller will use their best efforts to obtain the written consent of the other parties to such agreements, contracts, leases and purchase and sale orders to the assignment thereof to the Buyer as soon as practicable, and if such consent is not obtained, then Buyer and Seller will cooperate in any reasonable arrangements (including, but not limited to, subcontracting, sublicensing or subleasing) designed to provide for the Buyer the benefits -- subject to Buyer, to the extent it receives the benefits, performing or providing for the performance of any related obligations associated with receiving such benefits such as but not limited to paying for the same -- under all such agreements, contracts, leases and purchase and sale orders, including enforcement for the benefit of the Buyer, of any and all rights thereof against any other parties thereto arising out of the breach or cancellation thereof by any other party thereto. (iv) Books and Records. (A) All books and records, including but not limited to, all correspondence, books, files, documents, sales literature, customer lists, customer records, engineering drawings and records, research and development records, operating 2 records, records with respect to intellectual property and other records of Seller, but excluding Seller's minute books, stock records and records relating to taxes, to which tax records Buyer shall be afforded reasonable access upon its request. (B) The records relating to the Real Property which are in Seller's possession or control, including but not limited to all design drawings, surveys, back title information, plot plans, building systems drawings for heating, ventilation and air conditioning and the correspondence files from the Seller's engineering department. (C) After the Closing, the Buyer shall give the Seller and its representatives reasonable access (including without limitation for the purposes of preparing tax returns and responding to any inquiries from tax authorities) to the aforesaid books and records and the Buyer shall give the Seller written notice prior to the removal or destruction of such books and records. The notice prior to removal shall contain the new location where the books and records are to be stored, and shall be given so as to provide the Seller sufficient time to copy the documents to be removed if the Seller chooses. The Buyer shall, in the event of a decision to destroy the books and records, give the Seller the books and records if so requested by the Seller. (v) Intellectual Property. All right, title and interest of Seller in and to all patents, patent applications, trademarks, trademark rights, trade names, trade name rights, service marks, copyrights, know how, trade secrets, confidential and proprietary information, processes, technologies and methods of Seller including, without limitation, those listed on Schedule 4.6 hereto, and the goodwill relating to the foregoing. The Seller shall transfer the patents, patent applications and trademarks referred to in this subparagraph (v) by executing and delivering to the Buyer at the Closing the assignments referred to in Section 6.1(b). (vi) Permits. All Federal, state, regional and local permits, licenses, certificates, approvals and similar authorizations of Seller to the extent they are assignable or transferable. To the extent that any permit, license, certificate, approval or other authorization is not assignable or transferable, the Seller shall use its best efforts and will cooperate with the Buyer in order for the Buyer to obtain such 3 permit license, certificate, approval or authorization as soon as possible. (vii) Software. All right, title and interest of the Seller in and to the computer software programs of Seller. (viii) Cash on Hand, Etc. All right, title and interest of the Seller in and to cash on hand, petty cash and travel and other advances of Seller. "Assumed Liabilities" shall mean all of those and only those liabilities expressly assumed pursuant to Section 2.3. "Best Efforts" shall mean diligent efforts to obtain a specified result, but shall not be deemed to require the payment of any amounts to any third party as such (other than fees required to obtain any necessary permit or similar consent, with fees required to obtain business or operating permits issued to Buyer to be the responsibility of Buyer and fees charged by other parties to contracts for consents to be split equally by the Buyer and Seller; provided, however, that Buyer's portion of such fees for consents shall not exceed $2,000 and that any amount in excess of that shall be the subject of a separate agreement). "Buyer's Accountants" shall mean KPMG Peat Marwick LLP. "Closing" shall have the meaning specified in Section 2.2. "Closing Date" shall have the meaning specified in Section 2.2. "Code" means the Internal Revenue Code of 1986, as amended. "Contracts" means all contracts, subcontracts, agreements, options, guarantees, orders, commitments, undertakings and arrangements, whether written or oral. "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), costs and expenses, including costs and expenses of defense of any claim and of any settlement of claims, including, without limitation, reasonable attorneys' fees and consultants' fees, which are incurred at any time as a result of the existence of Hazardous Material upon, about or beneath the Premises or migrating or threatening to migrate to or from the Premises, or arising in any manner whatsoever out of any violation of Environmental Requirements pertaining to the Premises and/or the activities thereon by the Company or to the past, present or future operations of the Company, including without limitation: (i) damages for personal injury, or injury to property or natural resources, including but not limited to claims brought by or on behalf of employees of the Company, occurring upon or off of the Premises, whether foreseeable or unforeseeable, including, without limitation interest and penalties; 4 (ii) diminution in the value of the Premises and damages for the loss of or restriction on the use of or adverse impact on the marketing of rentable or usable space or of any amenity of the real property containing the Premises; (iii) reasonable fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs and liabilities (including liabilities to indemnify any Person for costs) incurred in connection with the investigation or remediation of such Hazardous Materials or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remedial, removal, containment, restoration or monitoring work required by any Governmental Authority, or reasonably necessary to make full economic use of the Premises or any other property or otherwise expended in connection with such conditions; and (iv) damages and claims resulting from the off-site disposal of Hazardous Materials which derived from the use, generation, storage, treatment, transportation or disposal of Hazardous Materials by the Company. "Environmental Requirements" means all Applicable Law relating to the protection of human health or the environment, including, without limitation: (i) all requirements pertaining to reporting, licensing, permitting, investigation or remediation of emissions, discharges, releases or threatened releases of Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; and (ii) all requirements pertaining to the protection of the health and safety of employees or the public. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended (P.L. 93-406). "Escrow Agent" means a commercial bank in Minnesota to be selected by the parties hereto. "Escrow Agreement" means the agreement by and among the Buyer, the Company and the Escrow Agent pursuant to which $200,000 of the Purchase Price shall be held for one year following the Closing Date in order to support the indemnification obligations of the Company and the Shareholders. "Excluded Liabilities" means all liabilities, obligations and commitments of the Company or relating to the Assets which are not expressly denominated as Assumed Liabilities including, without limitation, those Excluded Liabilities delineated in Section 2.4. 5 "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time, applied consistently throughout the periods involved. "Governmental Approval" means an authorization, consent, approval, permit, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority, including, without limitation, federal environmental authorities and environmental authorities of the states in which the Company conducts business. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any government authority, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof and any tribunal or arbitrator(s) of competent jurisdiction. "Hazardous Materials" means any chemical substance: (i) the presence of which requires investigation, removal or remediation under any Applicable Law; or (ii) which is defined as a "hazardous waste" or "hazardous substance" under any Applicable Law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is regulated by any Governmental Authority or Applicable Law; or (iv) the presence of which causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the Premises or to the health or safety of any Person on or about the Premises; or (v) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without limitation which contains PCBs or asbestos. "IRS" means the United States Internal Revenue Service. "Improvements" has the meaning specified in Section 4.4. 6 "Intellectual Property Rights" means any and all trademarks, trademark applications, service marks, service mark applications, licensing agreements and similar Contracts, technology, trade secrets, trade names, division names, registered copyrights and other information, property or rights used in the business or operations of the Company, as more specifically set forth in Schedule 4.6 hereof. "Inventories" means all inventories of the Company including, without limitation, all finished goods, work in progress, raw materials, stores, all production, shipping and packaging supplies and all spare parts. "knowledge", as may be used herein, shall mean actual or constructive knowledge; "to the knowledge of the Company" means the actual or constructive knowledge of any or all officers and directors of the Company including, without limitation, Alan Schwartzman. "Landlord" means Applied Magnetics Corporation. "Liens" has the meaning specified in Section 4.4. "Material Adverse Effect" means an effect which, directly or indirectly, subjects the Company to any liability, damage, deficiency, loss, cost or expense of $25,000 or more or which otherwise has or will have a material adverse effect on the operations, results of operations, prospects or condition (financial or other) of the business of the Company. "Material Contract" shall have the meaning specified in Section 4.8. "Notice" shall have the meaning specified in Section 11.9. "Permitted Liens" shall have the meaning specified in Section 4.4. "Person" means any individual, firm, partnership, corporation, trust, estate, limited liability company, limited liability partnership, or other entity. "Personal Property Leases" shall have the meaning specified in Section 4.25. "Plan(s)" shall have the meaning specified in Section 4.12. "Preliminary Net Worth Statement" shall have the meaning specified in Section 5.4. "Premises" means those locations owned or leased by the Company or otherwise occupied thereby for the business operations of the Company, including the facilities located at: (i) 145 South Third Street, Dassel, Minnesota 55325; (ii) 1000 Superior Boulevard, Wayzata, Minnesota 55391; and (iii) 533 Atlantic Avenue, Dassel, Minnesota 55325. 7 "Real Property" has the meaning specified in Section 4.4. "Return" shall mean all reports, estimates, declarations, information statements and returns due under all foreign, federal, state or local laws or regulations, as appropriate, relating to Taxes. "Securities Act" shall mean the Securities Act of 1933, as amended (15 U.S.C. Section 77a et seq.). "Security Interest" shall have the meaning specified in Section 4.31. "Shareholders" shall mean Alan Kronfeld, Thomas Philipich, Robert Liston, James Tusing and Howard Page, which persons in the aggregate own one hundred percent (100%) of the issued and outstanding stock of the Company. "Subsidiary" of any Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other equity having ordinary voting power to elect a majority of the Board of Directors or other managers of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) or other entity is at the time directly or indirectly owned by such Person, by such Person and one or more of such Person's other subsidiaries or by one or more of such Person's other subsidiaries. "Taxes" means all federal, state and local taxes, assessments and governmental charges, of any nature, kind or description (including, without limitation, all income taxes, franchise taxes, withholding taxes, estimated taxes, unemployment insurance, social security taxes, payroll taxes, sales and use taxes, excise taxes, occupancy taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation and withholding taxes) and all interest, additions to tax and penalties with respect thereto, whether such interest, additions or penalties arise before or after the Closing Date. "Transaction Documents" shall mean the collective reference to this Agreement, and all other agreements and documents to be delivered pursuant hereto on the Closing Date, in each case with such changes as may be agreed among the parties. 8 ARTICLE II. PURCHASE AND SALE OF ASSETS SECTION 2.1 Purchase and Sale of the Assets. (a) Subject to the terms and conditions hereof, the Seller will sell, transfer, convey, assign and deliver all of the Assets to the Buyer and the Buyer will purchase all of the Assets from the Seller for a purchase price equal to TWO MILLION FOUR HUNDRED THOUSAND DOLLARS ($2,400,000) (the "PURCHASE PRICE"), reduced by the amount of any payment of deferred compensation obligations made by the Company prior to the Closing Date, subject to adjustment as set forth in Section 5.4 below, and payable as set forth in Section 2.1(b). (b) The parties agree to allocate the aggregate of the Purchase Price (as may be adjusted pursuant to Section 5.4) among the respective Assets. The parties shall prepare an allocation schedule in accordance with Section 1060 of the Code, and the parties shall cooperate with each other and provide such information as either of them shall reasonably request. The parties shall each report the federal, state, local and other Tax consequences of the purchase and sale contemplated hereby in a manner consistent with such allocation schedule. SECTION 2.2 Closing; Deliveries. (a) Subject to the conditions set forth in this Agreement, the purchase and sale of the Assets pursuant to this Agreement (the "Closing") shall take place at the offices of Gray, Plant, Mooty, Mooty & Bennett, P.A. at 9:00 a.m. on October 22, 1996, or at such other time as the Company and the Buyer may agree to in writing (the "Closing Date"). Provided the Closing occurs as provided herein, the benefits (and liabilities as limited by this Agreement) of the business and operations conducted with the Assets shall be conducted for the benefit of and be the responsibility of the Buyer from and after June 29th, 1996. However, the parties further agree that the Company's transfer of the Assets to the Buyer will take place on the Closing Date. The parties agree that the Buyer shall (and the Seller shall not) report the income from the operations of the business conducted with the Assets from June 29th, 1996 to the Closing Date on its income tax returns. (b) At the Closing: (i) the Seller shall deliver to the Buyer: (A) free and clear of any Lien, all of the Assets by delivery of instruments of conveyance and such other documents, certificates and opinions as are specified herein. 9 (B) all opinions, certificates and other instruments and documents required to be delivered by the Company and the Shareholders at or prior to the Closing or otherwise required in connection herewith; (ii) Buyer shall deliver to the Company: (A) subject to paragraph 2.1(a) above, cash by wire from transfer or certified check in the amount of $2,200,000; (B) all opinions, certificates and other instruments and documents required to be delivered by Buyer at or prior to the Closing or otherwise required in connection herewith; and (iii) Buyer shall deliver to the Escrow Agent $200,000, representing the remainder of the Purchase Price, to be held by the Escrow Agent and distributed in accordance with the terms of the Escrow Agreement. SECTION 2.3. Assumption of Liabilities. Subject to the terms and conditions set forth herein, at the Closing, Buyer will assume and Buyer and Ahead agree to pay or satisfy all of (and only) the following liabilities relating to the Assets and existing at or arising after the Closing Date (collectively, the "Assumed Liabilities"): (a) all liabilities, obligations and commitments set forth on Schedule 2.3 hereto relating exclusively to the Assets that are (a) reflected on the Company's Balance Sheet, or (b) incurred after the Balance Sheet Date, defined in Section 4.14 below, in the ordinary course of business consistent with past practice and in accordance with the terms of this Agreement. Schedule 2.3 contains a detailed listing of all accounts payable as of the latest practicable date prior to the Closing Date; (b) all liabilities, obligations and commitments arising out of the agreements, contracts and commitments, if any, assigned to Buyer pursuant to the Assignment of Contracts, for the period subsequent to June 29, 1996, but not including any liabilities in respect of any breach thereof occurring prior to the Closing Date. SECTION 2.4. Exclusion of Liabilities. In furtherance and not in limitation of Section 2.3 above, the following liabilities shall be Excluded Liabilities and shall not be assumed by the Buyer: (a) that certain obligation of the Company to Applied Magnetics Corporation, which obligation has been satisfied by the Corporation; (b) any and all obligation for deferred compensation owed by the Company to its officers and other employees (the "Deferred Compensation Obligation"), which Deferred Compensation Obligation may be satisfied by the Company on or before the Closing Date; 10 (c) accrued income taxes relating to periods prior to the Effective Date; (d) accrued sales and use taxes relating to periods prior to the Effective Date; and (e) accrued payroll and related costs relating to periods prior to the Effective Date such as accrued vacation obligations. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER AND AHEAD Representations and Warranties of Buyer and Ahead. Buyer and Ahead represent and warrant to the Company as follows: SECTION 3.1. Corporate Existence. Buyer is, or on the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has or will have all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being, or on the Closing Date will be, conducted. Buyer, is or on the Closing Date will be, duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary. SECTION 3.2. Authority Relative to this Agreement and Transaction Documents. The execution, delivery and performance by the Buyer of this Agreement and each Transaction Document to which it is, or on the Closing Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite corporate action, and no other corporate action on the part of the Buyer is necessary for the execution, delivery and performance by the Buyer of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party and the consummation by the Buyer of the transactions contemplated hereby and thereby. Neither the execution nor the delivery by the Buyer of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party, nor the consummation by the Buyer of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by the Buyer of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) its Certificate of Incorporation or Bylaws or (B) any lease, Contract, instrument, mortgage, deed of trust, deed evidencing or securing indebtedness for borrowed money, financing lease, any law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which the Buyer is, or on the Closing Date will be, a party or by which it is bound, or (ii) require the Buyer to obtain the consent, approval, authorization or other order or action of, or filing with, any court, governmental authority or regulatory body. 11 SECTION 3.3. No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of Buyer, threatened against or affecting Buyer that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. SECTION 3.4. No Brokers, Finders, etc. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried on without the participation of any Person acting on behalf of the Buyer (other than the employees or agents of the Buyer) in such manner as to give rise to any valid claim against the Shareholders or the Company for any brokerage or finder's commission, fee or similar compensation. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS Representations and Warranties of the Company and the Shareholders. The Company and the Shareholders jointly and severally represent and warrant to the Buyer that: SECTION 4.1. Corporate Existence. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and has all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being conducted. The Company is duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary, and the failure to be so qualified would have a material adverse effect. SECTION 4.2. Authority Relative to this Agreement and Transaction Documents. The execution, delivery and performance by the Company of this Agreement and each Transaction Document to which it is, or on the Closing Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite corporate action, and no other corporate action is necessary for the execution, delivery and performance by the Company of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party, and the consummation by the Company of the transactions contemplated hereby and thereby. Neither the execution nor the delivery by the Company of this Agreement, and/or any Transaction Document to which it is, or on the Closing Date will be, a party, nor the consummation by the Company of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by the Company of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) the Articles of Incorporation or Bylaws of the Company or (B) except as set forth on Schedule 4.2, any lease, Contract, instrument, mortgage, deed of trust, deed evidencing or securing indebtedness for borrowed money, financing lease, any 12 law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which the Company is, or on the Closing Date will be, a party or by which it is or will be bound, or (ii) require the Company to obtain the consent, approval, authorization or other order or action of, or filing with, any court, governmental authority or regulatory body. This Agreement has been duly executed and delivered by the Company and, together with each other Transaction Document and other agreement and instrument required to be delivered by the Company, is or will be, as the case may be, a legal, valid and binding obligation thereof, enforceable in accordance with its respective terms. SECTION 4.3. No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of the Company, threatened against or affecting the Company that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. SECTION 4.4. Title to Assets and Real Property. (a) Schedule 4.4 lists all of the machinery, equipment, Intellectual Property Rights, furniture, fixtures, personalty, and other items constituting the Assets. The Company has good and marketable title to all of the Assets, which are free and clear of all liens (including environmental liens), mortgages, deeds of trust, trust deeds, deeds to secure debt, pledges, encumbrances, defects, security interests, restrictions, conditional and installment sale agreements, options, easements and other legal or equitable encumbrances and claims or charges of any kind (collectively, "Liens"), except as disclosed in Schedule 4.4 (collectively, "Permitted Liens"). (b) Set forth on Schedule 4.4 is a list of all interests in real property owned by or leased to the Company (including all interests in real property used in the business of the Company) and of all options or other contracts to acquire any such interest (collectively, the "Real Property"), specifying the location of each such Real Property and any improvements thereon ("Improvements"), and, as to all Real Property not owned by the Company, a legal description (if available), address and approximate size and boundaries of each leased or subleased premises, the present use to which each of the leased or subleased premises is being put, the name and address of the landlord and, if appropriate, the sublandlord with respect to each lease, a listing of any amendments, modifications, extensions or renewals which comprise a part of each lease, the expiration date of each lease, any renewal or extension right under each lease and the current base fixed annual rent due under each lease. The Company has the unrestricted right to use in accordance with the terms of its leases and in accordance with Applicable Law all Real Property and Improvements, and each such property is held free and clear of (i) all subleases, licenses and other rights to occupy or use such property and (ii) all Security Interests, rights of way, easements, restrictions, exceptions, variances, reservations, covenants or other title defects or limitations of any kind, except (with respect to all such properties) those set forth on Schedule 4.4 or disclosed on the Company Balance Sheet or the notes thereto, none of which disclosed defects or limitations, except as specified on Schedule 4.4(b), has an adverse effect on such property, its present use or, to the knowledge of the Company, any contemplated increase in the capacity of the business conducted with the Assets (provided that such increase in capacity takes place within the confines of 13 the existing building). No financing statement under the Uniform Commercial Code with the Company as debtor with respect to any of the foregoing properties has been filed in any jurisdiction, and the Company has not signed any such financing statement or any security agreement authorizing any secured party thereunder to file any such financing statement, except as set forth on Schedule 4.4 hereto. The present and contemplated use of the Real Property, Improvements and tangible property conforms in all material respects with all applicable building, fire, zoning, environmental and other land use, laws, ordinances, rules and regulations, Applicable Law and all necessary occupancy and other certificates and Permits for the occupancy and lawful use thereof have been issued and are presently in full force and effect. All notices of violations of Applicable Law issued to the Company by any state, county, municipal or local department having jurisdiction against or affecting any of the Real Property, Improvements or tangible property have been complied with in all material respects. To the knowledge of the Company, no use of the Real Property, Improvements or tangible property is dependent upon the continuance of a nonconforming use or a special permit or license. The Company is not obligated to pay any fee or commission to any broker, finder, consultant or other intermediary as a result of the purchase or leasing of any of the Real Property. SECTION 4.5. Compliance with Laws; Permits and Licenses. (a) Except as disclosed in Schedule 4.5(a), to its knowledge, the Company is in compliance in all respects with all applicable statutes, orders, rules and regulations promulgated by Governmental Authorities (collectively, "Applicable Law") relating to the operation or conduct of the business of the Company, or the use of the properties of the Company, including, without limitation, any applicable statute, order, rule or regulation relating to (i) wages, hours, hiring, non-discrimination, promotion, retirement, benefits, pensions and working conditions, (ii) health and safety, (iii) zoning and building codes or municipal ordinances, violation of which would interfere with the ability of the Company to operate, (iv) the production, storage, processing, advertising, sale, transportation, distribution, disposal, use and warranty of products of the business of the Company (v) obligations of the Company to disabled persons, or (vi) trade and antitrust regulations, and the Company has not received any notice of alleged violation of any such statute, order, rule or regulation. The transactions contemplated by this agreement will not result in any violation described in clauses (i) through (v) above. Except as disclosed in Schedule 4.5(a), the Company is not in default under or in violation of, any applicable franchise, permit or license, its Articles of Incorporation or other charter document, Bylaws, any promissory note, indenture or any evidence of indebtedness or security therefor, lease, Contract or any other instrument to which it is a party or by which it or any of its properties or assets is or may be bound. (b) Schedule 4.5(b) lists all governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority and any pending applications therefor. Except as disclosed in Schedule 4.5(b), such licenses, permits, product registration, authorizations, approvals and indicia of authority are (i) to the knowledge of the Company, all the governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority necessary to conduct the business of the Company, and (ii) valid and in full force and effect, assuming the related consents referenced in Section 5.2(f) have been obtained prior to the Closing. 14 SECTION 4.6. Intellectual Property. (a) Schedule 4.6(a) sets forth a true and complete list of all Intellectual Property Rights of the Company. The Intellectual Property Rights constitute all such material property forming a part of the business of the Company and, except as disclosed in Schedule 4.6(a), do not conflict with or infringe on the rights of others. (b) Except as disclosed in Schedule 4.6(b) (i) all the Intellectual Property Rights are owned by or are licensed to the Company under licenses or written agreements; (ii) no claims have been made and are pending or, to the knowledge of the Company, are threatened against the Company alleging that any services provided or products manufactured or sold by the Company, or any Intellectual Property Rights are being provided, manufactured, sold or used in violation of any patents or trademarks, or any other rights of any Person (nor, to the knowledge of the Company, is there a basis in fact which could result in such a claim); (iii) the Company has not granted any license to any Person with respect to any Intellectual Property Rights; (iv) to the knowledge of the Company, no other Person is infringing on any Intellectual Property Rights; (v) all Intellectual Property Rights of the Company are legal, valid and binding, in full force and effect and are freely assignable to the Buyer, if as and when required; (vi) the Company has duly made punctual payments of all royalties or fees required to be made by it under or in connection with any Intellectual Property Right; and (vii) to the knowledge of the Company, no event has occurred which (with the passing of time and/or the giving of notice) would result in or permit the termination of any Intellectual Property Right or the acceleration of any obligation thereunder without the consent of the Company. (c) Except as disclosed in Schedule 4.6(c), following the transactions contemplated hereby, the Buyer shall own or possess adequate and enforceable licenses or other rights to use as the Company has in the past, without payment of any fee other than as disclosed in Schedule 4.6(c), all of the Intellectual Property Rights. SECTION 4.7. Litigation. Except as disclosed in Schedule 4.7, there is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of the Company, threatened against or affecting the Company in any court, or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, and the Company does not know of any reasonable basis for any such action, lawsuit, claim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations). The Company is not in default, and no condition exists that with notice or the lapse of time or both would constitute a default, with respect to any judgment, order, writ, injunction or decree of any court or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting or relating to the business of the Company. No condemnation proceeding has been commenced or, to the knowledge of the Company, is threatened to be commenced against any of the Assets or Real Property. 15 SECTION 4.8. Contracts. (a) Material Contracts. Schedule 4.8(a) contains a complete and correct list as of the date hereof of all agreements, contracts and commitments of the following types, written or material oral, to which the Company is a party or by which the Company or its properties are bound as of the date hereof: (a) mortgages, indentures, security agreements, letters of credit, loan agreements and other agreements, guaranties and instruments relating to the borrowing of money or extension of credit; (b) employment, consulting, severance or agency agreements; (c) collective bargaining agreements; (d) bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plans, trusts or funds for the benefit of employees, officers, agents and directors (whether or not legally binding); (e) sales agency, manufacturer's representative or distributorship agreements; (f) agreements, orders or commitments for the purchase of raw materials, supplies or finished products exceeding $5,000; (g) agreements, orders or commitments for the sale of its products exceeding $5,000; (h) licenses of patent, copyright, tradenames, trademark, transfer of technology or know how and other intellectual property rights; (i) agreements or commitments for capital expenditures in excess of $7,500 for any single project (it being warranted that all undisclosed agreements or commitments for capital projects do not exceed $15,000 in the aggregate for all projects); (j) brokerage or finder's agreements; (k) joint venture, partnership and development agreements; and (1) other agreements, contracts and commitments which in any case involve payments or receipts of more than $5,000. The Company has delivered to the Buyer complete and correct copies of all such written agreements, contracts and commitments, together with all amendments thereto, and accurate descriptions of all oral agreements listed in Schedule 4.8(a). Except as set forth in Schedule 4.8(a), all such agreements, contracts and commitments governed by this Section 4.8(a) are in full force and effect, are enforceable by the Company, against the other parties thereto in accordance with their terms and there does not exist thereunder any violation or any default or event or condition or course of dealing which, after notice or lapse of time or both, would constitute a default thereunder on the part of the Company, or, to the knowledge of the Company, any other party thereto or would provide a basis for any creditor of the Company, or, to the knowledge of the Company, any party to such agreements, contracts or commitments, to challenge the extent, validity or priority of the interest of any other party to such agreements, contracts or commitments; except as set forth in Schedule 4.8(a), consummation of the transactions contemplated under this Agreement and the Transaction Documents shall not give rise to any violation or any default or event or condition which, after notice or lapse of time or both, would constitute a default thereunder on the part of the Company or any other party thereto. To the knowledge of the Company, no agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound, has a Material Adverse Effect on the business of the Company. No agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound, is in conflict, whether by way of violation of any term or condition or by way of default, with any other agreement, contract or commitment to which the Company is a party, or by which it or any of its properties is bound. All agreements, contracts or commitments with Affiliates of the Company to which the Company is a party or by which it or any of its properties is bound reflect terms no less favorable to the Company than could be obtained from unaffiliated third parties. Except as set forth on Schedule 4.8(a) The Company has no outstanding powers of 16 attorney, except routine powers of attorney relating to representation before governmental agencies or given in connection with qualification to conduct business in another jurisdiction. (b) Government Contracts. (i) Government Contracts Compliance. The Company is not in, nor will the consummation of this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby result in, any violation, breach or default of any term or provision of (i) any contract, subcontract or agreement between the United States Government and the Company and (ii) any bid, proposal or quote submitted to the United States Government by the Company. The Company is not, nor will the consummation of this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby result in, any violation, breach or default of any provision of any federal order, statute, rule or regulation governing any contract, subcontract, bid, proposal, quote, arrangement or transaction of any kind between the United States Government and the Company. The representations in the two immediately preceding sentences are made after consideration of, but are not limited to, the following laws, regulations, standards, and agreements, to the extent, if any, they are applicable to or incorporated into contracts, subcontracts, agreements: (A) The Truth in Negotiations Act of 1962, as amended; (B) The Service Contract Act of 1965, as amended; (C) The Contract Dispute Act of 1978, as amended; (D) The Federal Acquisition Regulations and any applicable agency supplements thereto, as well as applicable predecessor procurement regulations; (E) The Cost Accounting Standards; (F) Agreement with the Contract Audit Agency; (G) Relevant rules and arrangements governing the allowance of costs charged to overhead and general and administrative cost pools allocable to government contracts; (H) The Defense Industrial Security Manual DoD 5220.22-M, the Defense Industrial Security Regulation DoD 5220.22-R and related security regulations; (I) The Procurement Integrity Provisions of the OFPP Act Amendments of 1988, P.L. 100-679, as amended and implemented. 17 (ii) Investigation and Claims. Schedule 4.8(b) sets forth descriptions of all audit reports, final decisions, claims, consent orders in effect, outstanding Forms 1, ongoing government investigations or prosecutions, or internal investigations conducted or initiated by or in respect of the Company and identifies any corrective action, restitution or disciplinary action initiated or taken by or in respect of the Company relating in any sense to the subjects listed below in paragraphs (A) through and including (G). Except as disclosed in Schedule 4.8(b), the Company has not engaged in nor has been charged with, received a claim related to, or been under investigation or conducted or initiated any internal investigation or has reason to conduct, initiate or report any internal investigation or made a voluntary disclosure, with regard to any of the following since November 6, 1991: (A) Defective Pricing within the meaning of P.L. 87-653, as amended; (B) Failure to correct accounting, inventory, material requirements planning, or purchasing system deficiencies; (C) Mischarging of direct and/or indirect costs in connection with U.S. Governmental contracts or subcontracts; (D) Delivery to the U.S. Government or to a U.S. Government prime contractor or subcontractor of material, components, items or services that do or did not meet specifications or standards therefor, or delivery to the U.S. Government or a U.S. Government prime contractor or subcontractor of foreign-made material, components or items where domestic-made material, components or items were required; (E) Improper payments or any payments or activities for obtaining non-public source selection information; (F) Unallowable costs, including unallowable direct or indirect costs; (G) Violations of any of the following statutes, as amended, or the regulations promulgated thereunder: (I) False Statements Act (18 U.S.C. 1001), (II) False Claims Act (18 U.S.C. 287), (III) False Claims Act (31 U.S.C. 3729), (IV) Briberies, Gratuities and Conflicts of Interest (18 U.S.C. 201), 18 (V) Anti-Kickback Act (41 U.S.C. 51, 54), (VI) Anti-Kickback Enforcement Act of 1986 (P.L. 99-634), (VII) Arms Export Control Act (22 U.S.C. 277, et seq.), (VIII) Foreign Corrupt Practices Act (15 U.S.C. 78m, 78dd-1, 78ff), (IX) Export Administration Act (P.L. 99-64), (X) War and National Defense Act (18 U.S.C. 793), (XI) Racketeer Influenced Corrupt Organizations Act (18 U.S.C. 1901-68), (XII) Conspiracy to Defraud the Government (18 U.S.C. 371), (XIII) Program Fraud Civil Remedies Act (P.L. 99-509), (XIV) "Revolving Door" Legislation (18 U.S.C. 207, 281(a)(11) and 10 U.S.C. 2397), and (XV) Defense Production Act (50 U.S.C. App. 2061). (iii) No Debarment or Suspension. The Company is not nor has ever been informed that it is or will be subject to any proceeding which could result in or otherwise contemplates debarment or suspension. (iv) Test and Inspection. All test and inspection results of the Company have provided to any government agency pursuant to any government contract or any subcontract or as a part of the delivery to the government of any article designed, engineered or manufactured by the Company were true, complete and correct. Except as set forth in Schedule 4.8(b), the Company has provided all test and inspection results to government agencies as required by law or pursuant to government contracts or subcontracts, or may have been required as part of the delivery of any article designed, engineered or manufactured by the Company. 19 SECTION 4.9. Foreign Government Contracts. To the extent that the Company is party to a prime contract or subcontract with a government other than the U.S. Government (a "Foreign Government Contract"), then: (a) if the Foreign Government Contract incorporates by reference, or is otherwise subject to, any or all of the regulations cited in Section 4.8(b) above (or their foreign equivalents), the representations made in Section 4.8(b) above shall be deemed applicable to such Foreign Government Contract, and (b) if the Foreign Government Contract incorporates by reference or is otherwise subject to other applicable laws ("Foreign Laws") the representations made hereinabove regarding compliance, investigations and claims, debarment or suspension and test and inspection results shall be deemed made in respect of the appropriate Foreign Laws. SECTION 4.10. Labor Union Contracts. The Company is not a party to any collective bargaining or other labor union Contract applicable to persons employed by the Company. There are no unfair labor practice complaints nor are there any current union representation questions involving persons employed in the business of the Company. Except as disclosed on Schedule 4.10, the Company does not know of any current activities or proceedings of any labor union (or representatives thereof) to organize any unorganized employees of the Company or of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any employees of the Company. Except as set forth on Schedule 4.10, during the 24-month period preceding the date hereof, there have not been any formally filed grievances involving employees of the Company. SECTION 4.11. Employees, Labor Matters, etc. (a) Schedule 4.11(a) contains a complete and correct list of the names of all directors and officers of the Company. There is no payment that has not been paid for more than 30 days past the date on which such payment became due that is owed by the Company to any of its directors, officers, employees, trustees, agents, brokers, representatives or other personnel, current and former, or any beneficiaries, dependents or survivors of the foregoing (including, without limitation, expense reimbursement and severance payments), in accordance with the terms of their respective employment arrangements or under their employment, severance or agency agreements, if any. (b) Except as set forth in Schedule 4.11(b), there has not been since November 6, 1991 any (i) unfair labor practice complaint against the Company before the National Labor Relations Board; (ii) labor strike, dispute, or work stoppage actually pending or, to the knowledge of the Company after due inquiry, threatened against or affecting the Company; (iii) representation petition respecting the employees of the Company filed with the National Labor Relations Board; or (iv) arbitration proceeding arising out of or under collective bargaining agreements pending against the Company. (c) Certain Benefit and Compensation Arrangements: 20 (i) Set forth on Schedule 4.11(c) hereto is a true and complete list of each employee of the Company whose aggregate compensation for the fiscal year ended September 30, 1995 exceeded $40,000 or who is employed as a manager or supervisor, as well as any and all agreements, arrangements, commitments or understandings of any kind, whether written or material oral, applicable to each (as well as to current and former directors and consultants and former officers of the Company) pursuant to which payments of any kind are required to be made following the date hereof (including, without limitation, any employment, deferred compensation, consulting, severance, termination or supplemental pension payments) (the "Compensation Commitments"). True and complete copies of all of the written Compensation Commitments have been provided to Buyer together with, where prepared by or for the Company, any valuation, actuarial or accountant's opinion or other financial reports with respect to each Compensation Commitment for the last three years. An accurate and complete written summary has been provided to Buyer with respect to any Compensation Commitment which is unwritten. (ii) Each Compensation Commitment: (A) since its inception, has been operated by the Company in all material respects in accordance with its terms; (B) is not currently under investigation, audit or review by the IRS or any other federal or state agency and, to the knowledge of the Company, no such action is contemplated or under consideration; (C) has no liability for any federal, state, local or foreign Taxes except for those Taxes routinely imposed in connection with ordinary course compensation of employees; (D) has no claims subject to dispute or litigation; and (E) has met all applicable requirements, if any, of the Code; SECTION 4.12. ERISA. Schedule 4.12 lists (i) all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical, disability or life insurance, supplemental retirement, or severance benefit plans, programs or arrangements, and all employment, termination, or severance contracts to which the Company is a party, with respect to which the Company has any obligation, or that are maintained, contributed to or sponsored by the Company for the benefit of any current or former employee, officer or director, (ii) each employee benefit plan for which the Company could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated and (iii) any plan in respect of which the Company could incur liability under Section 4212(c) of ERISA (collectively, the "Plans"). The parties hereto 21 acknowledge and agree that the Company maintains a 401(k) plan which plan (and the assets of which) shall not be transferred to or assumed by the Buyer. (a) Each Plan that is intended to qualify under Section 401(a) of the Code or similar provision of foreign law is so qualified. The Company has performed all obligations required to be performed by it by the terms of the Plans and Applicable Law, rules and regulations. The Company has complied in all material respects with all Applicable Law, rules and regulations relating to each Plan. (b) The Company has not and has no knowledge that any other "party in interest" (as defined in Section 3(14) of ERISA) to any Plan has engaged in any transaction with respect to any Plan in connection with which the Company or any other party in interest could be subjected to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code. (c) No Plan which is a "defined benefit plan" (as defined in Section 3(35) of ERISA) or any trust created under any such Plan has been terminated since September 2, 1974. No material liability to the Pension Benefit Guaranty Corporation (the "PBGC"), other than annual premium payments, has been or is expected by the Company to be incurred by the Company with respect to any Plan. There has been no reportable event (within the meaning of Section 4043 of ERISA), which at the time of such event required notification within 30 days to the PBGC. There has been no other reportable event with respect to any Plan which could result in a liability to the Company as a result thereof. There has been no event or condition which presents a risk of termination of any such Plan by the PBGC. (d) Full payment has been made of all amounts which the Company is required under the terms of each Plan to have paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof or, if later, the most recent date as of which such amount is required to be paid under such Plan (and, with respect to any Plan that is subject to Section 412(m) of the Code, all payments required to be made have been paid on or before each required installment due date (as defined in Section 412(m) of the Code) preceding the date hereof), and, with respect to any Plan, no accumulated funding deficiency (as defined in section 302 of ERISA and Section 412 of the Code), whether or not waived, exists. There has been no failure to make any payment due prior to the date hereof that is or could become a liability of the Company under Section 412(c) of the Code. (e) The present value as of December 31, 1994 of all accrued benefits under all Plans subject to Section 412 of the Code did not, as of such date, exceed the current value of the assets of such Plans allocable to such accrued benefits. The terms "present value," "current value" and "accrued benefit" have the meanings specified in Section 3 of ERISA. (f) No Plan is a "multiemployer plan" (as defined in Sections 3(37) and 4001(3) of ERISA) and the Company has not withdrawn or partially withdrawn from any multiemployer plan under circumstances giving rise to a withdrawal liability under ERISA. 22 (g) Neither the Company nor any corporation, trade or business under common control with the Company (within the meaning of Sections 414(b), (c), (m) or (o) of the Code) has engaged in any transaction since January 1, 1986 described in Section 4069(a) of ERISA. (h) No Plan provides for the payment of any welfare benefit (as described in Section 3(1) of ERISA) to any former or retired employee of the Company or any of its Affiliates, except as may be required by Section 4980B of the Code or Section 601 of ERISA. (i) Except as set forth in Schedule 4.12(i), no Plan provides for the payment of severance benefits upon termination of employment. SECTION 4.13. Brokers' or Finders' Fees, etc.. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried on without the participation of any Person acting on behalf of the Company (other than the Company or employees thereof) in such manner as to give rise to any valid claim by such Person against the Buyer or the Company for any brokerage or finder's commission, fee or similar compensation. SECTION 4.14. Financial Information; Undisclosed Liabilities. (a) Attached hereto as Schedule 4.14 is a copy of the balance sheet of the Company (the "Company's Balance Sheet") as of June 29, 1996 (the "Balance Sheet Date"). The Company's Balance Sheet, together with the books and records of the business of the Company, present fairly in accordance with GAAP the financial condition of the business of the Company as of the Balance Sheet Date. (b) The books of account of the Company reflect all items of income and expense and all assets and liabilities of the business of the Company in accordance with GAAP. (c) The Company has delivered to Buyer a copy of its balance sheets, together with the notes thereto, as of September 30, 1993, 1994 and 1995 and the related statement of operations and retained earnings and of cash flows for the year then ended. Such financial statements, together with the notes thereto, (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company as of the date thereof, (iii) present fairly the result of operations of the Company for the periods covered by such statements, (iv) have been prepared in accordance with GAAP by the Accountants and (v) include all adjustments that are necessary for a fair presentation of the financial condition of the Company and the results of the Company's business operations for the periods covered by such statements. (d) To the knowledge of the Company, there are no material liabilities of the Company of any kind whatsoever, whether or not accrued or fixed, absolute or contingent, determined or determinable, known or unknown, other than liabilities (i) reflected on and 23 adequately provided for in the Company's Balance Sheet attached hereto as Schedule 4.14, or (ii) incurred since the Balance Sheet Date in the ordinary course of the operation of the Company's business and not as a result of any violation of law or regulation, or (iii) disclosed in Schedule 4.14. (e) Prior to the date hereof, the Company has satisfied in full its obligation to Applied Magnetics Corporation, which obligation was reflected on the Company's Balance Sheet as a liability of $659,230.00 (the "AMC Obligation"). SECTION 4.15. Taxes. (a) Except as disclosed in Schedule 4.15(a), The Company and, for any period during all or part of which the tax liability of any other corporation was determined on a combined or consolidated basis with the Company, any such other corporation, have filed timely all federal, state, local and foreign tax returns, reports and declarations required to be filed (or have obtained or timely applied for an extension with respect to such filing) correctly reflecting the Taxes and all other information required to be reported thereon and have paid, or made adequate provision for the payment of, all Taxes which are due pursuant to such returns or pursuant to any assessment received by the Company or any such other corporation. Copies of all tax returns for the fiscal years ended since September 30, 1992 have been furnished to the Buyer or its representatives and such copies are accurate and complete as of the date hereof. The Company has also furnished to the Buyer correct and complete copies of all notices and correspondence sent or received since November 6, 1991, by the Company to or from any federal, state, local or foreign tax authorities. The Company has adequately reserved for the payment of all Taxes with respect to periods ended on, prior to or through the Closing Date for which tax returns have not yet been filed. In the ordinary course, the Company makes adequate provision on its books for the payment of all Taxes (including for the current fiscal period) owed by the Company. Except to the extent reserves therefor are reflected on the Company's Balance Sheet, the Company is not liable, nor will become liable, for any Taxes for any period ending on or, prior to the date of the Company's Balance Sheet. Except as disclosed in Schedule 4.15(a), the Taxes payable set forth in the Company Balance Sheet are adequate to cover all liabilities for Taxes of the Company with respect to all assets held and activities conducted by the Company on or prior to the Closing Date, other than liabilities for Taxes incurred in the ordinary course of business subsequent to the date of the Company Balance Sheet and permitted by this Agreement. No tax liens have been filed and neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the best knowledge of the Company after due inquiry, threatening to assert against the Company any deficiency or claim for additional Taxes. Except as provided in Schedule 4.15(a), no Return of the Company is currently under audit by the Internal Revenue Service or by the taxing authorities of any other jurisdiction. The Company has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any federal, state or local Tax. (b) The Company's taxable year for federal and state income and franchise tax purposes has, since November 6, 1991, been a taxable year ending in September. 24 SECTION 4.16. Absence of Changes. Except as reflected on the Company's Balance Sheet or specified in Schedule 4.16, the Company has not: (a) since September 30, 1995, undergone any material adverse change in its condition (financial or other), properties, assets, liabilities, business, operations or prospects, other than changes in the ordinary course of business; (b) since September 30, 1995, declared, set aside, made or paid any dividend or other distribution in respect of its capital stock or otherwise purchased or redeemed, directly or indirectly, any shares of its capital stock; (c) since September 30, 1995, issued or sold any shares of its capital stock of any class or any options, warrants or conversion or other rights to purchase any such shares or any securities convertible into or exchangeable for such shares; (d) since June 30, 1996, incurred any indebtedness for borrowed money, issued or sold any debt securities or prepaid any debt outstanding as of the Balance Sheet Date; (e) since June 30, 1996, mortgaged, pledged or subjected to any Lien any of its properties or assets, tangible or intangible; (f) since June 30, 1996, other than the sale of inventory and the collection of accounts receivable in the ordinary course of business, acquired or disposed of any assets or properties, or entered into any agreement or other arrangement for such acquisition or disposition; (g) since June 30, 1996, forgiven or canceled any debts or claims, or waived any rights; (h) since June 30, 1996, entered into any agreement, commitment or other transaction other than agreements involving an expenditure up to $5,000 whether singly or in the aggregate, or entered into any similarly material agreement which, pursuant to its terms, is not cancelable without penalty on less than 30 days' notice; (i) since September 30, 1995, paid any bonus to any officer or director, or since June 30, 1996, granted to any officer, director or employee any other increase in compensation outside the ordinary course of business in any form, or granted any increase in the compensation or benefits of employees outside the ordinary course of business or entered into any employment or severance agreement or arrangement with any of officer, director or employee; (j) since June 30, 1996, adopted or amended in any respect, any employment, collective bargaining, bonus, profit-sharing, compensation, stock option, pension, 25 retirement, deferred compensation or other plan, agreement, trust, fund or arrangement for the benefit of employees (whether or not legally binding); (k) since June 30, 1996, suffered any damage, destruction or loss (whether or not covered by insurance) to any property or assets; (l) since September 30, 1995, suffered any strike or other employment related problem; (m) since September 30, 1995, suffered any loss of employees or customers outside the ordinary course of business; (n) since September 30, 1995, amended its certificate of incorporation or bylaws (or comparable documents); (o) since June 30, 1996, changed in any respect its accounting practices, policies or principles; (p) since June 30, 1996, incurred any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise) with respect to the obligations of others; (q) since June 30, 1996, granted any rights or licenses under any of its trademarks, tradenames or patents or entered into any licensing or distributorship agreements; (r) since June 30, 1996, made any changes in policies or practices relating to selling practices, returns, discounts or other terms of sale or accounting therefor; (s) since September 30, 1995, failed to discharge or satisfy any Lien or pay or satisfy any obligation or liability when due (whether absolute, accrued, contingent or otherwise); (t) since September 30, 1995, defaulted on any obligation; (u) since June 30, 1996, written down the value of any inventory or written off as uncollectible any accounts receivable or any portion thereof not reflected in the Company Balance Sheet; (v) since June 30, 1996, laid off any employees or made any changes in policies of employment; (w) since June 30, 1996, discontinued the sale of any products or product lines or programs; or 26 (x) entered into any agreement or made any commitment (whether or not legally binding) to do any of the foregoing. SECTION 4.17. Accounts Receivable. Except as disclosed on Schedule 4.17, all accounts receivable reflected on the Company Balance Sheet (subject to the reserve for bad debts reflected on such Company Balance Sheet) are: (i) good and have been collected or are collectible, without resort to litigation or extraordinary collection activity, within 90 days of the Closing Date, and are subject to no defenses, set-offs or counterclaims other than normal cash discounts accrued in the ordinary course of business of the Company, or (ii) have been adequately reserved against, with such reserves reflected on the Company Balance Sheet. Set forth on Schedule 4.17 hereto is a list of all accounts receivable of the Company as of the latest practicable date prior to the Closing Date showing separately those receivables which as of such date have been outstanding (i) 1 to 29 days, (ii) 30 to 59 days, (iii) 60 to 89 days, (iv) 90 to 119 days and (v) more than 119 days. Except as disclosed on Schedule 4.17, all accounts receivable are bona fide, have arisen in the ordinary course of the Company's business, to the knowledge of the Company, are good and collectible and subject to no defenses, set-offs or counterclaims. SECTION 4.18. Insurance. The operations and assets of the Company are covered by valid and currently effective insurance policies issued in favor of the Company. Schedule 4.18 contains a list and brief description (including the name of the insurer, the type of coverage provided, the amount of the annual premium for the current policy period, the amount of remaining coverage and deductibles and the coverage period) of all policies and contracts of insurance held by the Company. All premiums due thereon have been paid when due, and the Company and its Affiliates have complied in all material respects with the provisions of such policies. Such policies (i) are sufficient for compliance with all requirements of law and are substantially consistent with all (A) Contracts to which the Company is a party and (B) leases, mortgages, deeds of trust, trust deeds and deeds to secure debt to which the Company is a party, and (ii) to the knowledge of the Company, are reasonable in scope and amount, in light of the risks attendant to the businesses and activities in which the Company is or has been engaged. There is no default with respect to any provision contained in any such policy and there has not been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as disclosed in Schedule 4.18, no notice of cancellation or non-renewal with respect to, or disallowance of any claim under, any such policy has been received; neither has the Company been refused insurance with respect to its assets or operations, nor has its coverage been previously canceled or materially limited, by any insurer to which it has applied for such insurance or with which it has held insurance. SECTION 4.19. Sufficiency of Assets and Real Property. (a) The Assets comprise all of those assets necessary or sufficient to conduct the business of the Company as currently conducted. The properties owned by or leased to the Company are adequate for the conduct of the business of the Company. Except as disclosed in Schedule 4.19(a), all of the Assets are suitable for the uses in which they are currently employed, are in good operating condition and are free from any defects, except such minor 27 defects as do not interfere with the continued use of such properties and equipment in the conduct of the normal operations of the business of the Company and except for normal maintenance and routine repair requirements, and the Assets include supplies of spare parts for the equipment and machinery included in the Assets in amounts consistent with past practices. (b) None of the Assets or Real Property is used by the Company or any of its Affiliates in connection with any business or enterprise other than the business of the Company. SECTION 4.20. Foreign Assets. The Assets do not include any interest in any real property or tangible or intangible personal property or other assets located outside the continental limits of the United States of America except that the Company ships inventory to and has receivables owed by customers outside of the United States of America. SECTION 4.21. Propriety of Past Payments. No funds or assets of the Company have been used for illegal purposes; no unrecorded funds or assets of the Company have been established for any purpose; no accumulation or use of the Company's corporate funds or assets has been made without being properly accounted for in the books and records of the Company; all payments by or on behalf of the Company have been duly and properly recorded and accounted for in their respective books and records; no false or artificial entry has been made in the books and records of the Company for any reason; no payment has been made by or on behalf of the Company with the understanding that any part of such payment is to be used for any purpose other than that described in the documents supporting such payment; and the Company has not made, directly or indirectly, any illegal contributions to any political party or candidate, either domestic or foreign. The Company has complied with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder ("FCPA") and has not made any payment to or on behalf of any person with respect to which a deduction could be disallowed under Section 162(c) of the Code. Neither the IRS nor any other federal, state, local or foreign government agency or entity has initiated or threatened any investigation of any payment made by the Company of, or alleged to be of, the type described in this Section 4.21 nor is there a basis in fact for such investigation. SECTION 4.22. Affiliate Transactions. Schedule 4.22 contains a complete and correct list of all agreements or arrangements (whether or not written) between the Company and any shareholder, officer, director or employee (or immediate family member thereof) of the Company currently in effect or to be performed in the future. Other than such agreements or arrangements, if any, or as further disclosed on Schedule 4.22, there has been no transaction between the Company and any shareholder, officer, director or, to the knowledge of the Company, employee (or immediate family member of any thereof) of the Company in effect within the three-year period immediately preceding the date hereof which involved payments to, or from, or for the benefit of, any such shareholder, officer, director or employee (or immediate family member of any thereof) with the exception of proper reimbursement of expenses incurred in the ordinary course of business. Except as set forth in Schedule 4.22, no shareholder, officer, director or employee (or immediate family member of any thereof) of the Company owns directly or 28 indirectly, on an individual or joint basis, greater than a 5% interest in, or serves as an officer, director or employee of, any customer, competitor or supplier of the Company or any person or entity which has a contract or arrangement with the Company. SECTION 4.23. Suppliers and Customer. (a) Except as disclosed on Schedule 4.23(a), to the knowledge of the Company, none of the suppliers of inventory, equipment or services to the Company will cease to sell such equipment or services thereto as a result of the transactions contemplated by this Agreement. (b) Except as disclosed on Schedule 4.23(b), no single customer of the Company accounted for in excess of 5% of the combined gross revenues of the Company for the twelve month period ending June 29, 1996. SECTION 4.24. Environmental Conditions and Governmental Authorizations. Except as specified in Schedule 4.24: (a) All real property owned, leased or occupied by the Company is free from contamination from any Hazardous Materials. The Company has not caused or suffered, nor, to the knowledge of the Company, has any other party previously involved in operations at any such property caused or suffered, any Environmental Damages. (b) Neither the Company nor, to the knowledge of the Company after due inquiry, any prior owner or occupant of real property owned, leased, occupied or used by the Company has received notice of any alleged violation of Environmental Requirements, or notice of any alleged liability for Environmental Damages, and there exists no writ, injunction, decree, order or judgment outstanding, nor any claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation, pending or, to the knowledge of the Company, threatened, relating to the ownership, use, maintenance or operation of the Premises by any Person, or to alleged violation of Environmental Requirements, or to the suspected presence of Hazardous Material thereon (other than in compliance with Applicable Laws), nor does there exist any basis for such claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation being instituted or filed. (c) There is not constructed, placed, deposited, stored, disposed of or located on any real property owned, leased, occupied or used by the Company any polychlorinated biphenyls ("PCBs") or transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs, or any asbestos. (d) The Company has no knowledge of any alleged liability for Environmental Damages of any alleged violation of Environmental Requirements asserted against any of the owners or occupants of any related property located in the vicinity of any of any real property owned, leased, occupied or used by the Company. 29 (e) The Company has in its possession all permits required to operate in compliance with all Environmental Requirements, and the Company is presently in full and complete compliance with each of such permits. SECTION 4.25. Leases of Personal Property (a) Schedule 4.25(a) correctly describes each lease under which the Company is the lessee of any personal property (collectively, the "Personal Property Leases"). The property described in all of the Personal Property Leases is presently and exclusively used in the business of the Company. The Company has all right, title and interest of the lessee under the terms of all of the Personal Property Leases to which it is a party. Other than any related consents listed in Schedule 4.25(a), no consent is necessary for the assignment of any Personal Property Lease for the consummation of this Agreement or any Transaction Document or the transactions contemplated hereby or thereby. (b) No event has occurred (to the knowledge of the Company with respect to events occurring by or with respect to the other parties to such Leases) which (with the passage of time or the giving of notice) would materially impair any right of the Company to exercise and obtain the benefits of any options contained in any Personal Property Lease. There is no substantial default by the Company or basis for acceleration or termination, nor has any event occurred which (with the passage of time or the giving of notice) would constitute such a default or result in or permit the acceleration of any Personal Property Lease. SECTION 4.26. Books and Records. The Company has previously furnished to Buyer true and correct copies of the Articles of Incorporation and, the Bylaws of the Company as in effect on the date hereof and has made available the minute books and stock books of the Company which are correct and complete as of the date hereof in all respects, and will be correct and complete at the Closing. SECTION 4.27. Accounts. Schedule 4.27 correctly identifies each bank account maintained by or on behalf or for the benefit of the Company and the name of each Person with any power or authority to act with respect thereto. SECTION 4.28. Products Liability. (a) Except as disclosed in Schedule 4.28(a) hereto, (i) there is no notice, demand, claim, action, suit, inquiry, hearing, proceeding, notice of violation or investigation of a civil, criminal or administrative nature before any court or governmental or other regulatory or administrative agency, commission or authority against or involving any product, service, substance or material (collectively, a "Product"), or class of claims or lawsuits involving the same or similar Product manufactured, produced, distributed, performed or sold by or on behalf of the Company which is pending or, to the knowledge of the Company, threatened, resulting from an alleged defect in design, implementation, manufacture, materials or workmanship of any Product manufactured, produced, distributed, performed or sold by or on behalf of the Company, or any alleged failure to warn, or from any breach of implied warranties or representations, (ii) there has not been any Occurrence (as defined in Section 4.28(b)), and (iii) there has not been, nor is there 30 under consideration or investigation by the Company, any Product recall, rework, retrofit or post-sale warning conducted by or on behalf of the Company concerning any products manufactured, produced, distributed, performed or sold by or on behalf of the Company or any product recall conducted by or on behalf of any entity as a result of any alleged defect in any Product supplied by the Company (b) For purposes of this Section 4.28, the term "Occurrence" shall mean any accident, happening or event which takes place at any time before the Closing Date which is caused or allegedly caused by any alleged hazard or alleged defect in manufacture, design, materials or workmanship, including, without limitation, any alleged failure to warn or any breach of express or implied warranties or representations with respect to, or any such accident, happening or event otherwise involving a Product (including any parts or components) manufactured, produced, distributed or sold by or on behalf of the Company which is likely to result in a claim or loss. SECTION 4.29. Interest in Competitors. Except as disclosed on Schedule 4.29, neither the Company, nor any of its officers, directors, shareholders or, to the knowledge of the Company, employees, has any interest, either by way of contract or by way of investment or otherwise, directly or indirectly, in any person that provides any services or designs, produces or sells any product or product lines or engages in any activity similar to or competitive with any activity currently proposed to be conducted by the Company, excluding, however, for these purposes ownership of one percent (1%) or less of the stock of any publicly traded entity. SECTION 4.30. Inventories. The values at which inventories are carried on the Company Balance Sheet of the Company reflect the normal inventory valuation policies of the Company, and such values (including the calculation of any LIFO reserve) are in conformity with GAAP consistently applied. All inventories reflected on the Company Balance Sheet of the Company or arising since the date thereof and reflected on interim financial statements of the Company are: (i) currently marketable and can be anticipated to be sold in the ordinary course of business, or (ii) have been adequately reserved against, with such reserves reflected on the Company Balance Sheet (and/or the interim financial statements of the Company), except for spare parts inventory which inventory is good and usable. SECTION 4.31. Joint Ventures. Set forth on Schedule 4.31 is a true and complete list of any and all partnerships and joint ventures in which the Company participates, stating, with respect to each, its jurisdiction of incorporation, capitalization, equity ownership and jurisdictions in which each is qualified to do business. Each is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation or incorporation, as the case may be, has the power and authority to own, lease and operate the properties and assets used in its business and to carry on its business as now being conducted, and is duly qualified to do business and in good standing as a foreign corporation or entity, as the case may be, in each jurisdiction where qualification is required. All of the outstanding shares of capital stock of each corporate entity listed on Schedule 4.31 have been validly authorized and issued, are fully paid and non-assessable, have not been issued in violation of any preemptive rights or of any federal or 31 state securities law, and are owned by the Company of record and beneficially free and clear of any security interest, pledge, lien, charge, claim, option, equity, right, restriction on transfer or encumbrance of any nature whatsoever ("Security Interest"). Except as set forth on Schedule 4.31 hereto, the Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in any corporation, partnership, joint venture or other Person, nor has any right, agreement or commitment to purchase any such interest. The Company has previously delivered to Buyer complete and correct copies of the charter and by-laws (including comparable governing instruments with different names) of each of the entities listed on Schedule 4.31, as amended and presently in effect. SECTION 4.32. Full Disclosure. No representation or warranty herein by the Company, the Shareholders or any Affiliate thereof, nor any statement or certificate furnished to Buyer pursuant hereto or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact, or, to the knowledge of the Company, omits to state a fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made and, together with the Schedules attached hereto, not misleading. The Schedules attached hereto completely and correctly present the information required by this Agreement to be set forth therein, do not contain any untrue statement of a fact and do not, to the knowledge of the Company, omit to state any facts necessary to make the statements contained therein, together with the representations and warranties herein by the Company, the Shareholders or any Affiliates thereof, not misleading. The representations and warranties made in this Section 4.32 are in addition to, and not in limitation of, the more particular representations and warranties contained elsewhere in this ARTICLE IV. ARTICLE V. COVENANTS SECTION 5.1. Covenants of Buyer. Buyer covenants with the Company that: (a) Compliance with Laws. Buyer is and will continue to be in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. Buyer will not take or omit to take any action which would result in the inaccuracy on the Closing Date of any of their representations and warranties (including any and all Schedules thereto) contained in Article III. It is expressly understood by the Company that a change in control of Buyer, whether by merger, acquisition, share exchange, sale or pledge of stock or otherwise, shall not by such change of control alone constitute a breach of any representation or warranty or otherwise breach this Agreement. 32 (c) Consents and Permits. Buyer shall use its best efforts to cooperate with the Company in obtaining consents, waivers, licenses, authorizations and the like required in connection with the transactions contemplated by this Agreement or any Transaction Document. SECTION 5.2. Covenants of the Company. The Company and the Shareholders covenant with Buyer that: (a) Compliance with Laws. The Company is and will continue to be in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. The Company will not take or omit to take (or cause to be taken or omitted) any action which would result in the inaccuracy on the Closing Date of any of the representations and warranties (including any and all Schedules thereto) contained in Article IV; (c) No Shop. Until the earlier of the termination of this Agreement in accordance with its terms or the Closing, neither the Company nor the Shareholders, or any of them, shall directly or indirectly, through any Affiliate, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets or stock of the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated any existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Buyer promptly of any such proposal or offer, or any inquiry or contract with any Person with respect thereto, is made and shall, in any such notice to Buyer, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact; (d) Access to Information; Confidentiality. (i) From the date hereof to the Closing Date, the Company shall and shall cause any Affiliates, employees, auditors and agents of the Company to, afford the officers, employees and agents of Buyer access during regular business hours to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company, and shall make available to Buyer all financial, operating and other data and information as Buyer, through its officers, employees or agents, may reasonably request; (ii) All information obtained by Buyer pursuant to this Section 5.2 shall be kept confidential pursuant to that certain confidentiality agreement entered into by the Company and the Buyer and dated March 20, 1996; and; 33 (iii) No investigation or knowledge of any matter or condition by the Buyer or the employees, agents or representatives of Buyer shall affect any representation or warranty or any condition to its obligations or any right to terminate this Agreement; (e) Conduct of Business. Between the date hereof and the Closing Date, without the consent of Buyer, not to be unreasonably withheld or delayed, and except as contemplated by the Transaction Documents, the Company shall: (i) conduct its business only in the usual, regular and ordinary course of business consistent with past practice; (ii) refrain from declaring any dividend or making any other distribution to the shareholders of the Company; and (iii) except either in the usual, regular and ordinary course of business and consistent with past practice or as necessary to comply with the provisions of this Agreement, refrain from: (A) making any purchases, sales, transfers, or leases of any Assets or Real Property or mortgaging, pledging or otherwise creating a security interest in, or any encumbrance of, any of the Assets or Real Property (other than Permitted Liens); (B) entering into any Contract, license, or lease in relation to the business of the Company or taking any other action which would, if entered into or taken on the date hereof, be required to be disclosed on a Schedule to this Agreement; (C) making any change in the compensation or benefits payable or to become payable to any employee or making any new bonus payment or arrangement or benefit to or with any such employee; (D) making any changes in the customary methods of operation of the business of the Company, including marketing, selling and pricing practices and policy; and (E) taking any other action which would have a negative impact on the business of the Company or on the prospects of the business of the Company; (iv) use all reasonable efforts to preserve its business organization intact, to keep its insurance policies intact, to keep available the services of its present employees and officers, and to preserve the relationships with and the goodwill of all suppliers, customers, sales representatives and others having business relations with the Company; 34 (v) maintain the Premises and all of the other properties used in the operation of its business in customary repair, order and condition, reasonable wear and tear excepted, and perform all of its obligations under any leases; (vi) maintain its books, accounts and records in connection with its business in the usual manner on a basis consistent with past practices; (vii) refrain from amending, modifying in any material respect or consenting to the termination of any Contract or the Company's material rights with respect thereto; (viiii) except in the ordinary course of business, refrain from increasing the total number of employees employed in connection with its business; and (ix) refrain from agreeing, whether in writing or otherwise, to do any of the foregoing; (f) Third Party Consents; Further Actions. (i) The Company shall use its best efforts to obtain at the earliest practicable date after the date hereof, and, in any event, prior to the Closing Date, all necessary consents to the transactions contemplated by this Agreement or any Transaction Document from parties to Contracts and Governmental Authorities; (ii) The Company shall use its best efforts to obtain, and to assist Buyer in obtaining, all waivers, licenses, authorizations, qualifications, orders, permits, consents and approvals required to be obtained by it or them and to effect, and to assist Buyer in effecting, all registrations, filings and notices with or to third parties or governmental or public bodies or authorities required to be made which are necessary or desirable in connection with the transactions contemplated by this Agreement or any Transaction Documents; (g) Renewal of Permits. The Company shall take such steps as are customary in the industry to file any necessary applications for the renewals of all licenses and permits referred to in Section 4.24 including, without limitation, Environmental Permits, if any such license or permit is required to be obtained prior to the Closing; (h) Powers of Attorney. Upon the Closing, the Company shall revoke all powers of attorney relating to its business and operation of the Assets; (i) Notification of Certain Matters. The Company shall give prompt notice to Buyer of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate and (ii) any failure of the Company to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or 35 satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.2(i) shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; (j) Disclosure Schedules. On or before the Closing Date, the Company shall deliver to Buyer complete Schedules to this Agreement and the Transaction Documents which are to be provided by the Company together with any supporting documentation which Buyer may reasonably request and, within ten business days after receipt of such Schedules and supporting documentation either (i) Buyer will accept such Schedules in which case they shall become a part of this Agreement and the appropriate Transaction Documents, or (ii) the parties hereto will agree upon mutually acceptable revisions to such Schedules in which case such revised Schedules shall become a part of this Agreement and the appropriate Transaction Documents. SECTION 5.3. Closing Conditions. Each party agrees to use its best efforts to satisfy the conditions precedent to Closing specified in Article VI. SECTION 5.4. Net Worth Statements; Adjustment to Purchase Price. The Company has prepared and Buyer's Accountants have audited the Company's Balance Sheet in accordance with GAAP, and, based on the Company's Balance Sheet, the Company has prepared and Buyer's Accountants shall audit a statement of net worth (the "Company's Net Worth Statement") which reflects agreed-upon adjustments to the net worth of the Company as reported on the Company's Balance Sheet and which excludes liabilities which are not being assumed by Buyer herewith. To the extent that the Company's Net Worth Statement reflects a net worth of the Company as at June 29, 1996 (the "Effective Net Worth") which is less than $1,530,000, (after taking into account agreed-upon adjustments to the net worth of the Company effected on or prior to the Closing Date) then, subject to Section 6.1 below, for each dollar of such deficit below $1,530,000, the Purchase Price shall be reduced accordingly. Regardless of the net worth of the Company, the parties hereto understand and acknowledge that the cash delivered in respect of the Purchase Price shall be adjusted in order to accommodate the cash reconciliation necessary in order to transfer to Buyer various Company accounts. Such cash reconciliation shall take place as soon as practicable following the Closing Date. ARTICLE VI. CONDITIONS PRECEDENT TO THE CLOSING SECTION 6.1. Conditions Precedent to Obligations of Buyer. The obligation of Buyer to perform its other obligations hereunder and under the Transaction Documents is subject to the satisfaction or waiver of the conditions precedent that: (a) Tender of All Assets. At the Closing, the Seller shall have tendered all of the Assets for purchase as provided in Section 2.2(b)(i). 36 (b) Documents. Buyer shall have received on or before the Closing Date the following, each dated the Closing Date, in form and substance satisfactory to Buyer: (i) Counterparts of each of the following Transaction Documents duly executed and, to the extent appropriate, acknowledged by all appropriate parties other than Buyer and its Affiliates, together with all documents to be delivered to Buyer thereunder on the Closing Date: (1) the Escrow Agreement; (2) Assignments of Intellectual Property; (3) Assignment and Assumption of Leases; (4) Assignments of Contracts; (5) a Bill of Sale; and (6) such other documents and instruments of conveyance as may be reasonably requested by Buyer. (ii) A Certificate of the Company, signed on behalf of the Company by the President or a Vice President and the Secretary or any Assistant Secretary (the statements made in which Certificate shall be true on and as of the Closing Date), certifying fulfillment of the conditions specified in subsections (d) and (e) below; and (iii) copies of resolutions of the board of directors and the shareholders of the Company, certified by the Secretary of the Company, authorizing the execution, delivery and performance of this Agreement and the Transaction Documents and all other documents and instruments to be delivered pursuant hereto and thereto; (iv) Opinion of counsel to the Company, substantially in the form attached as Exhibit D; (v) termination statements on form UCC-3 evidencing the discharge of any and all Liens on the Assets or any part thereof; (vi) Leases. The Company shall obtain a certificate from its landlord(s) stating that all of the Company's leases, listed in Schedule 4.4, are in full force and effect; 37 (vii) Letter of the Company's Accountants. The Buyer shall have received from the Accountants a letter, addressed to it, dated the Closing Date, stating in effect that (a) they are independent public accountants with respect to the Company and (b) they are issuing an unqualified opinion with respect to financial statements as at September 30, 1993, 1994 and 1995, which statements the Accountants audited, and a letter indicating that they have no knowledge which would indicate that the Company's Balance Sheet does not present fairly the financial condition of the Company as at the date indicated. (c) Satisfactory Completion of Due Diligence. The Buyer shall have completed its due diligence inquiry in accordance with the provisions of Section 5.2(d). The Buyer shall have been satisfied that the Company and the Shareholders have complied with all covenants and conditions set forth in Section 5.2 and Section 6.1, and that all representations and warranties contained in Article IV remain true and accurate. In the event that any of the provisions contained in this Section 6.1 have not been satisfied in the opinion of the Buyer, Buyer shall be relieved of all obligations under this Agreement, including the obligation to consummate the transactions contemplated hereunder. (d) Representations and Warranties. The representations and warranties of the Company and the Shareholders contained in this Agreement, as modified by any Schedules delivered by the Company pursuant to Section 5.2(j) hereof, shall be true and correct in all respects on the date hereof and as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date, except for any representation and warranty expressly stated to have been made or given as of a specified date, which, at the Closing Date, shall be true and correct in all respects as of the date expressly stated. (e) Performance. The Company shall have performed and complied in all respects with all of its agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by it prior to or at the Closing Date. (f) No Material Adverse Change. Since the date of the Company Balance Sheet there shall not have occurred an event or condition which has or which reasonably may be expected to adversely affect the Company. (g) Net Worth. The Buyer shall have received from the Company a net worth statement, in a form satisfactory to Buyer evidencing an adjusted net worth as of the Closing Date not less than $1,500,000. (h) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions 38 contemplated by this Agreement and the Transaction Documents shall have been obtained prior to Closing. (i) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either Buyer, the Company or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. (j) Licenses; Permits. All operating licenses and permits necessary for the operation of the businesses of the as conducted on the Closing Date (including, without limitation, Environmental Permits) shall have been obtained. (k) Release of Lien, etc. In connection with its satisfaction of the AMC Obligation, the company shall have obtained the release of any and all released liens, pledges, proxies and encumbrances affecting the Assets or the Company's ability to transfer the Assets to Buyer free and clear of liens, pledges or encumbrances. (l) Other. Buyer shall have received such further assurances and documents as it may reasonably request. (m) Availability of Certain Employees. Pursuant to letters offering employment o Alan Kronfeld, Thomas Philipich and Robert Liston, each of these individuals will be available for employment in accordance with the terms of such letters. Additionally, substantially all of the Company's sales and technical employees will be available for hire by the Buyer. SECTION 6.2. Conditions Precedent to Obligations of the Company. The obligations of the Company to perform its other obligations hereunder and under the Transaction Documents are subject to satisfaction or waiver of the conditions precedent that: (a) Documents. The Company shall have received on or before the Closing Date the following, each dated the Closing Date, in form and substance reasonably satisfactory to the Company: 39 (i) Counterparts of each of the following Transaction Documents duly executed and, to the extent appropriate, acknowledged by all appropriate parties, together with all documents to be delivered thereunder on the Closing Date, all in form and substance reasonably satisfactory to the Company: (1) the Escrow Agreement; (2) Assignments of Intellectual Property; (3) Assignment and Assumption of Leases; and (4) Assignment of Contracts. (ii) A Certificate of Buyer, signed on behalf of Buyer by the President or a Vice President and the Secretary or any Assistant Secretary of Buyer certifying as to the fulfillment of the conditions specified in subsections (b) and (c) below; (iii) copies of resolutions of the board of directors of Buyer, certified by the Secretary of Buyer authorizing the execution, delivery and performance of this Agreement and the Transaction Documents to which each is a party and all other documents and instruments to be delivered pursuant hereto and thereto; (iv) Opinion of counsel to Buyer, substantially in the form attached as Exhibit E. (b) Representations and Warranties. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all respects on the date hereof and as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date, except for any representation or warranty expressly stated to have been made or given as of a specified date, which, at the Closing Date, shall be true and correct in all respects as of the date expressly stated. (c) Performance. Buyer shall have performed and complied in all respects with all of its agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by it prior to or at the Closing Date. (d) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from, governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions contemplated by this Agreement and the Transaction Document shall have been obtained prior to Closing. 40 (e) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either Buyer or the Company or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. (f) Assumption of Lease. The Landlord shall have given its consent to Buyer's assumption of that certain lease dated November 6, 1991 by and between Landlord and the Company, and Buyer shall assume each lease effective the Closing Date. (g) Other. The Company shall have received such further assurances and documents as it may reasonably request. (h) Payments. The payments required by Section 2.2 and 7.2 hereof shall be tendered at Closing. (i) No Known Breach. The Company shall not know of any breach by it of its representations, warranties or other obligations hereunder. ARTICLE VII. ADDITIONAL AGREEMENTS SECTION 7.1. Bulk Transfer Laws. Buyer acknowledges that the Company will not comply with the provisions of any bulk transfer laws of any jurisdiction in connection with the transactions contemplated by this Agreement, and Buyer waives such compliance in consideration of the indemnification of Buyer by the Company and the Shareholders from and against any Loss sustained by Buyer in connection with such noncompliance. SECTION 7.2. Covenant of Seller and Certain Shareholder/Employees. Seller and Alan Kronfeld, Thomas Philipich and Robert Liston each agrees that for the period (the "Term") beginning on the Closing Date under this Agreement and ending on the later of the third 41 anniversary of the Closing Date or the termination of such Shareholders' employment, if that be the case, with the Buyer, neither the Seller nor Alan Kronfeld, Thomas Philipich and/or Robert Liston nor any of their Affiliates will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner, director, officer, employee or otherwise: (i) any business which develops, manufactures and markets and/or sells any product competitive with a product developed, manufactured, marketed and/or sold by the Buyer in connection with the Assets or (ii) any entity which otherwise competes directly or indirectly with the business conducted in connection with the Assets, except that the Seller and Alan Kronfeld, Thomas Philipich and Robert Liston may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. The Seller and each of Alan Kronfeld, Thomas Philipich and Robert Liston additionally agree that during the Term each shall not, directly or indirectly, in any capacity whatsoever: (a) hire or solicit for employment, directly or indirectly, any personnel of the Buyer in any capacity whatsoever (which shall be deemed to include, without limitation, any existing or prospective employee of the Buyer or any person who has been an employee of the Company within one hundred eighty (180) days prior to the Closing Date); (b) attempt directly or indirectly to induce any such personnel to leave the employ of, or discontinue such person's business association with, the Company and/or the Buyer; (c) solicit, directly or indirectly, any client or account or bona fide prospective client or account of the Buyer for business which is directly or indirectly competitive with that of the Buyer; or (d) interfere with, disrupt, or attempt to disrupt, the business relationships, contractual or otherwise, between the Buyer and any of its customers, suppliers or employees. In consideration for the covenants not to compete of Alan Kronfeld, Thomas Philipich and Robert Liston, Buyer shall pay at Closing $420,000 to Alan Kronfeld and $140,000 to each of Thomas Philipich and Robert Liston. SECTION 7.3. Remedies. (a) Reasonableness of Restraints. The Seller and each of Alan Kronfeld, Thomas Philipich and Robert Liston hereby acknowledge that: (i) it or he is fully familiar with the restrictions, restraints and limitations imposed upon him in Section 7.2 hereof (collectively, the "Restraints"); (ii) the Buyer would not undertake the transactions contemplated hereunder without the imposition of the Restraints and their agreement herein to abide by such 42 Restraints; (iii) the imposition of the Restraints is necessary for the reasonable, adequate protection of the business of the Buyer as conducted with the Assets; and (iv) each and every Restraint is reasonable with respect to its subject matter, geographic area and length of time. (b) Injunctive Relief. The Seller and each of Alan Kronfeld, Thomas Philipich and Robert Liston acknowledge that monetary damages alone will not adequately compensate the Buyer in the event of a breach or a threatened breach by him of the Restraints and therefore each hereby agrees that in addition to all remedies available to the Buyer at law or in equity, the Buyer shall be entitled to interim restraints and permanent injunctive relief for the enforcement thereof, and to an accounting and payment over of all receipts realized as a result of such breach. (c) Extension of Period of Restraints. In the event that the Seller or any of Alan Kronfeld, Thomas Philipich and Robert Liston shall be in violation of any Restraints, then the time limitation therefor shall be extended for a period of time equal to the period of time during which such breach or breaches occurred. In the event the Buyer shall be required to seek relief in any court or other tribunal, and Buyer prevails in such proceeding, then the Restraints shall be extended for a period of time equal to the pendency of such proceedings, including appeals, and excluding any periods during which the court or other tribunal has ordered the Seller or any of Alan Kronfeld, Thomas Philipich and Robert Liston to honor the Restraints. (d) Court Ordered Reduction of Restraints. In the event that any of the restrictions, limitations or restraints contained in this Agreement are deemed to be unreasonable or unenforceable by any court of competent jurisdiction, then each party hereto agrees to submit to such reduction of said restrictions, limitations or restraints as the court shall deem reasonable. SECTION 7.4. Further Assurances. Following the Closing Date, the Company shall, from time to time, execute and deliver such additional instruments, documents, conveyances and assurances as reasonably requested by Buyer and prepared at its expense to confirm, assure and further the rights, purposes, effects and obligations set forth herein. SECTION 7.5. Tax Payment. If the Company is required to pay income tax, interest, and/or penalties (the "Tax Payment") upon the income to be reported by Buyer pursuant to Section 2.2(a) as a result of an audit by a taxing authority, the Buyer shall reimburse the Company for the Tax Payment net of the Company's income tax benefit from the Company's payment of the Tax Payment provided that the Company gave prompt notice of such audit to Buyer. The parties agree that the provisions contained in Section 8.3 shall govern the handling of any audit and any refund payments to Company by the Buyer made under this Section 7.5. Subject to the above, the Buyer shall pay the Company within thirty (30) days after the Company provides Buyer with documentation of the payment of such Tax Payment. 43 ARTICLE VIII. INDEMNIFICATION SECTION 8.1. Survival of Representations and Warranties. Except as set forth in Section 8.4(c) below, the representations and warranties of the Company and the Shareholders shall survive the Closing for a period of three years from the Closing Date. SECTION 8.2. Indemnification by the Parties. Except as otherwise limited by this Article VIII, each of the Buyer and its corporate Affiliates, officers, directors, employees, agents, successors and assigns (each an "Indemnified Party") shall be indemnified and held harmless by the Company and Alan Kronfeld, Thomas Philipich and Robert Liston (each an "Indemnifying Party"), on the one hand, and each of the Shareholders and the Company, on the other hand (an "Indemnified Party"), shall be indemnified and held harmless by the Buyer (an "Indemnifying Party"), for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses and environmental engineering consultants' fees) actually suffered or incurred by the Indemnified Party (hereinafter a "Loss"), actually arising out of or resulting from: (a) the breach of any representation or warranty contained herein; or (b) the breach of any covenant or agreement contained herein. SECTION 8.3. General Indemnification Provisions. An Indemnified Party shall promptly give the Indemnifying Party notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, stating the amount of the Loss, if known, and method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. The obligations and liabilities of an Indemnifying Party under this Article with respect to Losses arising from claims of any third party that are subject to the indemnification provided for in this Article ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim and shall permit the Indemnifying Party, at its option, to participate in the defense of such Third Party Claim by counsel of its own choice and at its expense. If, however, the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claims (subject to the limitations set forth herein), then the Indemnifying Party shall be entitled, at its option, to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives prompt notice of intention to do so to the Indemnified Party. In the event the Indemnifying Party exercises its right to undertake the defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the 44 Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to it all such witnesses, records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim, except the settlement thereof which involves the payment of money only and for which the Indemnified Party is totally indemnified by the Indemnifying Party, may be settled by the Indemnifying Party without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld). Similarly, no Third Party Claim which is being defended in good faith by the Indemnifying Party shall be settled by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld). SECTION 8.4. Limitations. All claims for indemnification by Buyer are subject to the following conditions, limitations and restrictions: (a) No claim shall be made by Buyer unless, in the aggregate, claimed amounts exceed $35,000. If indemnifiable Losses exceed $35,000, the Buyer shall receive the entire amount of such Losses, net of the $35,000 deductible amount and subject to subparagraph (b) below; (b) The maximum amount that can be recovered by the Buyer, in the aggregate, for all claims for indemnification shall not exceed $1,600,000; provided, however, that this limitation shall not apply to damages for breach of the representations and warranties set forth in Sections 4.2, 4.4(a), 4.15, and/or 4.12. (c) All claims (except claims relating to representations and warranties set forth in Section 4.4(a) above, which have no temporal limitation; Sections 4.15 and 4.12 above, which shall survive until 90 days following the expiration of the statute of limitations in respect of any relevant claim; and Sections 4.28 and 4.24 above which shall survive for 7 years following the Closing Date) must be made within three years of the Closing Date; provided, however, this time limitation shall not apply to claims for breach of covenants (unrelated to Sections 4.4(a), 4.12, 4.15, 4.24 and 4.28) to be performed after the Closing Date. In the event of a breach of any such covenants, the claim must be made within two years of the occurrence of the breach. For purposes of this subsection a claim shall be deemed made within the applicable time period of the claim is made in good faith and in writing in reasonable detail before the expiration of the applicable time period. Where a claim is thus made, the claim can be pursued until it is finally resolved; (d) In no event shall there be any liability for any consequential damages. SECTION 8.5. Effect of Due Diligence on Indemnification. Buyer shall not be entitled to indemnification from and against the relevant provisions of Sections 4.4(b), 4.5, 4.6, 4.9, 4.14, 4.16, 4.17, 4.18, 4.19, 4.14, 4.23, 4.29 and 4.30 hereunder if, as a consequence of its due diligence review, Buyer had, prior to the Closing Date, actual specific knowledge which was 45 not disclosed to the Company that the relevant provision of any such representation or warranty had, in fact, been breached and that the known breach had, in fact, met the requisite level of materially specified in the relevant representation or warranty; provided, however, that Buyer shall not be required to disclose a breach to the Company if, prior to the Closing Date, the Company discloses the breach to the Buyer. SECTION 8.6. Effect and Conditions. The conditions, limitations and provisions governing indemnification set forth above shall apply to all claims made by Buyer under or in connection with this Agreement regardless of whether such claims are styled as a claim for indemnification hereunder; provided, however, that such limitations shall not apply (i) to any claim by Buyer to the extent that such claim is based upon a knowing or intentional misrepresentation of a material fact by the Company or upon a knowing or intentional omission of a material fact by the Company, and (ii) to any claim by Buyer which arises pursuant to the provisions of any governmental statute or regulation and as a result of a claim by a governmental entity versus Buyer. ARTICLE IX. TERMINATION SECTION 9.1. Termination of Agreement. This Agreement may be terminated at any time prior to the Closing: (a) By mutual written consent of the parties hereto; or (b) By either Buyer or the Company, if the Closing shall not have occurred on or before October 31, 1996; or (c) By any party hereto if a court of competent jurisdiction (whether federal, state or foreign) or any governmental body or agency (whether federal, state or foreign) shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or any Transaction Document, and such order, decree, ruling or other action shall have become final and nonappealable; or (d) At any time before the Closing Date, by Buyer if, at any time in the course of its legal, accounting, financial, operational or environmental due diligence investigation as to the business of the Company and the liabilities thereof (whether disclosed, undisclosed, direct, indirect, absolute, contingent, secured, unsecured, accrued or otherwise, whether known or unknown) including, without limitation, its continuing review of the Schedules delivered by the Company and any other materials delivered to Buyer, whether prior or subsequent to the date hereof, it shall have become aware of any facts or circumstances that adversely affect the basis upon which Buyer determined to enter into the transactions contemplated hereby. 46 SECTION 9.2. Procedure and Effect of Termination. In the event of termination of this Agreement pursuant to Section 9.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made and this Agreement shall forthwith become void and there shall be no liability on the part of the parties hereto (or their respective officers, directors or affiliates), except nothing herein shall relieve either party from liability for any willful breach hereof and except that the provisions of the Confidentiality Agreement entered into by the Company and the Buyer on March 20, 1996 and the provisions of Section 11.2 dealing with payment of expenses shall survive such termination. The parties shall consult with each other before any public announcement of the termination, or of discussions regarding the termination, of this Agreement is made. ARTICLE X. RESOLUTIONS OF DISPUTES SECTION 10.1. Dispute Defined. As used in this Agreement, "Dispute" shall mean any dispute or disagreement between the Buyer, on the one hand, and the Company and its Shareholders, on the other hand, concerning the interpretation of this Agreement, the validity of this Agreement, any breach or alleged breach by any party under this Agreement or any other matter relating in any way to this Agreement. SECTION 10.2. Dispute Resolution Procedures. (a) If a Dispute arises, the parties shall follow the procedures specified in this Article X. The parties shall promptly attempt to resolve any Dispute by negotiations between themselves. Either the Buyer, on the one hand, or the Company and its Shareholders, on the other hand, may give the other party(ies) written notice of any Dispute not resolved in the normal course of business. The parties shall meet at a mutually acceptable time and place within 15 calendar days after delivery of such notice, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the Dispute. If the Dispute has not been resolved by the parties within 30 calendar days of the disputing party's notice, or if the parties fail to meet within such 15 calendar days, either party may initiate mediation as provided in Section 10.2.(a)of this Agreement. If a negotiator intends to be accompanied at a meeting by legal counsel, the other negotiator shall be given at least three business days' notice of such intention and may also be accompanied by legal counsel. (b) If the Dispute is not resolved by negotiation pursuant to Section 10.2(a), the parties shall attempt in good faith to resolve any such Dispute by nonbinding mediation. Either the Buyer on the one hand, or the Company and its Shareholders, on the other hand, may initiate a nonbinding mediation proceeding by a request in writing to the other party or parties (the "Mediation Request"), and all disputing parties will then be obligated to engage in a mediation. The proceeding will be conducted in accordance with the then current Center for Public 47 Resources ("CPR") Model Procedure for Mediation of Business Disputes, with the following exceptions: (i) if the parties have not agreed within 30 calendar days of the Mediation Request on the selection of a mediator willing to serve, CPR, upon the request of either party, shall appoint a member of the CPR Panels of Neutrals as the mediator; and (ii) efforts to reach a settlement will continue until the conclusion of the proceedings, which shall be deemed to occur upon the earliest of the date that: (A) a written settlement is reached, or (B) the mediator concludes and informs the parties in writing that further efforts would not be useful, or (C) the parties agree in writing that an impasse has been reached, or (D) a period of 60 calendar days has passed since the Mediation Request and none of the events specified in the foregoing clauses (A) (B) or (C) has occurred. No party may withdraw before the conclusion of the proceeding. (iii) If a Dispute is not resolved by negotiation pursuant to Section 10.2(a) of this Agreement or by mediation pursuant to Section 10.2(b) of this Agreement, within 100 calendar days after initiation of the negotiation process pursuant to Section 10.2(a), such Dispute and any other claims arising out of or relating to this Agreement may be heard, adjudicated and determined in an action or proceeding filed in any state or federal court specified in Section 11.10. SECTION 10.3. Provisional Remedies. At any time during the procedures specified in Section 10.2(a) and 10.2(b) of this Agreement, a party may seek a preliminary injunction or other provisional judicial relief if in its judgment such action is necessary to avoid irreparable damage or to preserve the status quo. Despite such action, the parties will continue to participate in good faith in the procedures specified in Section 10.2(a) and 10.2(b). SECTION 10.4. Tolling Statute of Limitations. All applicable statutes of limitation and defenses based upon the passage of time shall be tolled while the procedures specified in Sections 10.2(a) and 10.2(b) of this Agreement are pending. The parties will take such action, if any, as is required to effectuate such tolling. SECTION 10.5. Performance to Continue. Each party shall continue to perform its or his obligations under this Agreement pending final resolution of any Dispute. SECTION 10.6. Extension of Deadlines. All deadlines specified in this Article may be extended by mutual agreement between the parties. SECTION 10.7. Enforcement. The parties regard the obligations in this Article to constitute an essential provision of this Agreement and one that is legally binding on them. In case of a violation of the obligations in this Article by either the Buyer, on the one hand, or the Company and/or its Shareholders, on the other hand, the other party may bring an action to seek enforcement of such obligations in any state or federal court specified in Section 11.10. 48 SECTION 10.8. Costs. The parties shall pay their own costs, fees, and expenses incurred in connection with the application of the provisions of Section 10.2(a) and 10.2(b) of this Agreement. In addition, the fees and expenses of CPR and the mediator in connection with the application of the provisions of Section 10.2(b) of this Agreement shall be borne 50% by the Buyer, on the one hand, and 50% by the Company and its Shareholders, on the other hand. SECTION 10.9. Replacement. If CPR is no longer in business or is unable or refuses or declines to act or to continue to act under Section 10.2(b) of this Agreement for any reason, then the functions specified in Section 10.2(b) to be performed by CPR shall be performed by another Person engaged in a business equivalent to that conducted by CPR as is agreed to by the parties (the "Replacement"). If the parties cannot agree on the identity of the Replacement within 10 calendar days after a Request, the Replacement shall be selected by the Chief Judge of a United States District Court upon application. If a Replacement is selected by either means, Section 10.2(b) shall be deemed appropriately amended to refer to such Replacement. ARTICLE XI. MISCELLANEOUS SECTION 11.1. Taxes. Each party shall pay any and all stamp and other taxes payable or determined to be payable by it in connection with the execution and delivery of this Agreement and the other documents to be delivered by it hereunder, and agrees to save the other party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION 11.2. Expenses. Whether or not the transactions contemplated in this Agreement are consummated, Buyer, on the one hand, and the Company and the Shareholders, on the other hand, shall each pay its own expenses incident to this Agreement and the Transaction Documents and in preparing to consummate the transactions provided for herein and therein. SECTION 11.3. Consents. Whenever this Agreement requires or permits consents by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements specified in Section 11.7. SECTION 11.4. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations herein shall be assigned by either party without the prior written consent of the other party; provided, however, that (a) Buyer can assign its obligations hereunder 49 to a corporate Affiliate thereof, and (b) in the event of its liquidation and as a part thereof, the Company can assign its rights, interests and obligations under this Agreement to its shareholders or to an entity owned by such shareholders. SECTION 11.5. Entire Agreement. This Agreement, the other documents referred to herein or delivered pursuant hereto which form a part hereof and other writings of even date herewith, together with the Transaction Documents and other writings referred to therein or delivered pursuant thereto, contain the entire understanding of the parties with respect to the subject matter hereof. This Agreement supersedes all prior agreements with respect to the subject matter hereof, including that Nonbinding Letter of Intent dated July 10, 1996, but not including that Confidentiality Agreement dated March 20, 1996. SECTION 11.6. Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 11.7. Waiver. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefit thereof only by a written instrument signed by the party granting such waiver, but the failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of or estoppel with respect to said compliance and such failure shall not operate as a waiver of or estoppel with respect to any subsequent or other failure. SECTION 11.8. Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.9. Notices. All notices, claims, certificates, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given when personally delivered, telexed, sent by facsimile transmission (with telephone confirmation) or on the date of receipt or refusal indicated on the return receipt if mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: (a) If to Buyer: Diagnostic/Retrieval Systems, Inc. Media Technology Group 3105 Patrick Henry Drive Santa Clara, CA 95054 Attn: Stuart F. Platt 50 with a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, NJ 07068-3788 Attn: Nina Laserson Dunn, Esq. (b) If to the Company or the Shareholders: Nortronics Company, Inc. 1000 Superior Boulevard Wayzata, MN 55325 Attn: Mr. Alan C. Kronfeld with a copy to: Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, MN 55402-3796 Attn: John E. Brower, Esq. or to such other address as the person to whom notice is to be given may have previously furnished to the other in writing in the manner set forth above. SECTION 11.10. LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. BUYER AND THE COMPANY HEREBY AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN SUCH MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. SECTION 11.11. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which when taken together shall constitute one and the same agreement. SECTION 11.12. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other 51 conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. [THIS SPACE INTENTIONALLY LEFT BLANK] 52 SECTION 11.13. No Third Party Beneficiaries. Nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto and their respective heirs, successors and permitted assigns. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their respective duly authorized signatories as of the date first above written. ATTEST: NORTRONICS COMPANY, INC. By: /s/ ROBERT A. LISTON By: /s/ ALAN C. KRONFELD ------------------------------ ------------------------------- Robert A. Liston Alan C. Kronfeld Title: Assistant Secretary Its: President ATTEST: NORTRONICS ACQUISITION CORPORATION By: /s/ NINA LASERSON DUNN By: /s/ STEPHEN K. CONLISK ------------------------------ ---------------------------------- Nina Laserson Dunn Stephen K. Conlisk Title: Assistant Secretary Its: Vice President ATTEST: AHEAD TECHNOLOGY, INC. By: /s/ NINA LASERSON DUNN By: /s/ STEPHEN K. CONLISK ------------------------------- ---------------------------------- Nina Laserson Dunn Stephen K. Conlisk Title: Assistant Secretary Its: Vice President WITNESS: /s/ J. C. BROWN /s/ ALAN KRONFELD - ------------------------------------ -------------------------------------- J. C. Brown Alan Kronfeld /s/ J. C. BROWN /s/ THOMAS PHILIPICH - ------------------------------------ -------------------------------------- J. C. Brown Thomas Philipich /s/ J. C. BROWN /s/ ROBERT LISTON - ------------------------------------ -------------------------------------- J. C. Brown Robert Liston - ------------------------------------ -------------------------------------- EX-10.103 6 AMENDMENT AND MODIFICATION AGREEMENT - -------------------------------------------------------------------------------- FIRST AMENDMENT AND MODIFICATION AGREEMENT by and among DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., as the Borrower AND LAUREL TECHNOLOGIES PARTNERSHIP T/A LAUREL TECHNOLOGIES, DRS MEDICAL SYSTEMS, TECHNOLOGY APPLICATIONS & SERVICE COMPANY, PHOTRONICS CORP., PRECISION ECHO, INC., AHEAD TECHNOLOGY, INC., OMI ACQUISITION CORP. (ALSO DOING BUSINESS AS OMI CORP.), DRS SYSTEMS MANAGEMENT CORPORATION, AHEAD TECHNOLOGY ACQUISITION CORPORATION, DRS/MS, INC. AND (ALSO DOING BUSINESS AS MEC TECHNOLOGY), DRS/MS, INC., AHEAD WISCONSIN ACQUISITION CORP. (ALSO DOING BUSINESS AS VIKRON TECHNOLOGY), NORTRONICS ACQUISITION CORPORATION (ALSO DOING BUSINESS AS NORTRONICS, INC.) AND PACIFIC TECHNOLOGIES, INC. collectively as the Guarantors AND MELLON BANK, N.A., as the Lender Dated: As of December 6, 1996 - -------------------------------------------------------------------------------- FIRST AMENDMENT AND MODIFICATION AGREEMENT THIS FIRST AMENDMENT AND MODIFICATION AGREEMENT (hereinafter referred to as the "First Amendment"), is made as of this 6th day of Octoday of December, 1996, by and among DIAGNOSTIC/RETRIEVAL 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 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as the "Borrower"), AND LAUREL TECHNOLOGIES PARTNERSHIP T/A 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 referred to as "Laurel Technologies Partnership"), AND DRS MEDICAL SYSTEMS, a general partnership duly organized, validly existing and in good standing under the laws of the State of New Jersey, having its principal office located at 138 Bauer Drive, Oakland, New Jersey 07436 (hereinafter referred to as "DRS Medical Systems" and hereinafter Laurel Technologies Partnership and DRS Medical Systems shall collectively be referred to as the "Partnership Guarantors"), AND TECHNOLOGY APPLICATIONS & SERVICE COMPANY, 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 "Technology Applications & Service Company"), AND PHOTRONICS CORP., 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 270 Motor Parkway, Hauppauge, New York 11788 (hereinafter referred to as "Photronics Corp."), AND 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 1 Patrick Henry Drive, Santa Clara, California 95054 (hereinafter referred to as "Precision Echo, Inc."), AND 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 "Ahead Technology, Inc."), AND OMI ACQUISITION CORP. (ALSO DOING BUSINESS AS OMI CORP.), a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 270 Motor Parkway, Hauppauge, New York 11788 (hereinafter referred to as "OMI Acquisition Corp."), 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 138 Bauer Drive, Oakland, New Jersey 07436 (hereinafter referred to as "DRS Systems Management Corp."), AND AHEAD TECHNOLOGY ACQUISITION CORPORATION (ALSO DOING BUSINESS AS MEC), 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 "Ahead Technology Acquisition Corp."), 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 138 Bauer Drive, Oakland, New Jersey 07436 (hereinafter referred to as "DRS/MS, Inc." and hereinafter Technology Applications & Service Company, Photronics Corp., Precision Echo, Inc., Ahead Technology, Inc., OMI Acquisition Corp., DRS Systems Management Corp., Ahead Technology Acquisition Corp. and DRS/MS shall collectively be referred to as the "Corporate Guarantors" and hereinafter the Partnership Guarantors and the Corporate Guarantors shall collectively be referred to as the "Original Guarantors"), AND 2 AHEAD WISCONSIN ACQUISITION CORPORATION (ALSO DOING BUSINESS AS DRS VIKRON TECHNOLOGY), 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 "Ahead Wisconsin Acquisition Corporation"), AND NORTRONICS ACQUISITION CORPORATION (ALSO DOING BUSINESS AS NORTRONICS, 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 145 South Third Street, Dassel, Minnesota 55325 (hereinafter referred to as "Nortronics Acquisition Corporation"), AND PACIFIC 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 "Pacific Technologies, Inc.", and hereinafter Ahead Wisconsin Acquisition Corporation, Nortronics Acquisition Corporation, Pacific Technologies, Inc. and the Original Guarantors shall collectively be 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 (hereinafter referred to as "Lender"). W I T N E S S E T H : WHEREAS, on May 31, 1996, pursuant to a certain Revolving Line of Credit Loan Agreement dated May 31,1996 (hereinafter referred to as the "Loan Agreement"), executed by and between the Borrower, as the borrower, and the Lender, as the lender, the Lender agreed to make to the Borrower an unsecured recourse revolving line of credit loan in the aggregate principal amount of up to Fifteen Million and 00/100 ($15,000,000.00) Dollars for the purposes of (i) refinancing existing indebtedness of the Borrower and its "Subsidiaries" and "Affiliates" (as such terms are defined in the Loan Agreement) and (ii) financing a portion of the Borrower's working capital and standby letters of credit requirements (hereinafter referred to as the "Revolving Credit Facility"), subject to the terms and conditions of the Loan Agreement; and WHEREAS, on May 31,1996, the Borrower, as the maker, executed and delivered to the Lender, as the payee, a certain Revolving Line of Credit Note dated May 31, 1996 (hereinafter 3 referred to as the "Note"), in the original aggregate principal amount of Seven Million Five Hundred Thousand and 00/100 ($7,500,000.00) Dollars, which Note evidenced the "Revolving Credit Loan Sublimit" (as such term is defined in the Loan Agreement); and WHEREAS, on May 31, 1996 pursuant to a certain Agreement of Guaranty dated May 31, 1996 (hereinafter referred to as the "Agreement of Guaranty"), executed by and between the Original Guarantors, on a joint and several basis, the Original Guarantors unconditionally agreed to guaranty the "Liabilities of the Borrower" (as such term is defined in the Agreement of Guaranty); and WHEREAS, pursuant to a certain First Allonge to Revolving Line of Credit Note dated as of even date herewith (hereinafter referred to as the "First Allonge"), executed by and between the Borrower, as the maker, and the Lender, as the payee, the parties agreed to amend and modify the Note for the purpose of increasing the principal amount of the Note from the existing principal amount of "$7,500,000.00" to a new increased principal amount of "$10,000,000.00"; and WHEREAS, the Loan Agreement, the Note, the Agreement of Guaranty, the First Allonge, this First Amendment and any and all other documents, agreements, instruments or certificates executed in connection with the Loan shall hereinafter collectively be referred to as the "Loan Documents"; and WHEREAS, Ahead Wisconsin Acquisition Corporation was formed on May 9, 1996; and WHEREAS, Pacific Technologies, Inc. was formed on August 8, 1996; and WHEREAS, Nortronics Acquisition Corporation was formed on September 5, 1996; and WHEREAS, all words, terms, definitions and provisions not otherwise 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; and 4 WHEREAS, the Borrower, the Guarantors and the Lender now desire to amend and modify the Loan Agreement, the Agreement of Guaranty 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 "Corporate Guarantors" to provide for Ahead Wisconsin Acquisition Corporation, Nortronics Acquisition Corporation and Pacific Technologies, Inc. to be added as guarantors; (ii) in Article I, Section 1.01 of the Loan Agreement, amending and modifying the definition of "Maximum Amount of Revolving Credit Loans" by deleting the existing principal amount of "$7,500,000.00" and inserting a new increased principal amount of "$10,000,00.00" in its place and stead; (iii) in Article I, Section 1.01 of the Loan Agreement, amending and modifying the amount of the Revolving Credit Loan Sublimit from the existing principal amount of "$7,500,000.00" to a new increased principal amount of "$10,000,000.00"; (iv) in Article I, Section 1.01 of the Loan Agreement, providing for a new definition of "Consolidated Cash Flow Leverage Ratio" (as such term is defined herein); (v) in Article I, Section 1.01 of Loan Agreement, providing for a new definition of "Consolidated EBITDA" (as such term is defined herein); (vi) in Article I, Section 1.01 of the Loan Agreement, providing for a new definition of "Consolidated Senior Bank Debt" (as such term is defined herein); (vii) in Article II, Section 2.01(vi)(a), deleting the reference to the existing principal amount of "$7,500,000.00" and inserting a new increased principal amount of "$10,000,000.00" in its place and stead; (viii) in Article IV, Section 4.01 (iii), of the Loan Agreement, amending and modifying the number of Subsidiaries of the Borrower from the existing number of "eight (8)" to a new increased number of "eleven (11)";(ix) in Article VI, Section 6.12 of the Loan Agreement, providing for a form of additional Agreement of Guaranty which is to be signed by all new guarantors, which form shall be as set forth in the Exhibit "A" attached to this First Amendment, and which form shall be a new Exhibit "H" to be attached to the Loan Agreement, (x) in Article VII, Section 7.01(vi) of the Loan Agreement, adding the words "created or" immediately before the words "acquired by" in the second line of said paragraph; (xi) in Article VIII of the Loan Agreement, providing for a new Section 8.04 which provides for a Consolidated Cash Flow Leverage Ratio; (ixii) in Exhibit "F" of the Loan Agreement deleting the existing Exhibit "F-1" and providing for a new Exhibit "F-1" in the form attached hereto, and (x; (xiii) in the Agreement of Guaranty, providing for a new Paragraph 28 which provides for the addition from time to time of future guarantors without affecting the liabilities of the existing Guarantors; and (xiv) in the Loan Documents, providing that any and all references to the "Corporate Guarantors" and/or the "Guarantors" shall be deemed to include a reference to Ahead Wisconsin Acquisition Corporation, Nortronics Acquisition Corporation and Pacific Technologies, Inc. as new guarantors. NOW, THEREFORE, intending to be legally bound hereby, the Borrower, the Guarantors and the Lender hereby promise, covenant and agree as follows: 1. Principal Balance of the Revolving Credit Facility. There was, as of October 31, 1996, presently due and owing on the Revolving Credit Facility, the principal sum of $7,646,662.14 without offset, defense or counterclaim, all of which are hereby expressly waived by the Borrower and the Guarantors as of the date hereof. The foregoing principal balance is allocated as follows: (i) $6,133,762.14 for Revolving Credit Loans; and (ii) $1,512,900.00 for Letter of Credit Obligations. 5 2. 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 "Corporate Guarantors" shall be amended and modified by deleting the existing clause (ix) and inserting the following new clauses (ix) and (x, (x), (xi) and (xii) in its place and stead: "(ix) Ahead Wisconsin Acquisition Corporation (also doing business as DRS Vikron Technology), 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; (x) Nortronics Acquisition Corporation (also doing business as Nortronics, 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 145 South Third Street, Dassel, Minnesota 55325; (xi) Pacific 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 2535 Camino Del Rio, Suite 300, San Diego, California 92108; and (xii) any new or additional Subsidiaries of the Borrower which are purchased, acquired or created during the term of the Revolving Credit Facility." (b) The definition of "Maximum Amount of Revolving Credit Loans" shall be amended and modified by deleting the existing principal amount of "$7,500,000.00" and inserting a new increased principal amount of "$10,000,000.00" in its place and stead. (c) The definition of "Revolving Credit Loan Sublimit" shall be amended and modified by deleting the existing principal amount of "$7,500,000.00" and inserting a new increased principal amount of "$10,000,000.00." (d) The following new definitions shall be inserted: "Consolidated Cash Flow Leverage Ratio" shall mean as at any date of determination, the ratio of (i) the sum of (a) Consolidated Senior Bank Debt plus (b) Consolidated Subordinated Debt plus (c) issued and outstanding letters of credit -to- (ii) Consolidated EBITDA." "Consolidated EBITDA" shall mean, with respect to the Borrower, its Subsidiaries and/or its Affiliates as at any date of determination for the period of four (4) consecutive Fiscal Quarters immediately preceding said date of determination taken together as 6 one accounting period, the amount equal to the sum of (i) the Consoldiidated Net Income for such test period plus (ii) all interest expense on all Consolidated Debt for such test period plus (iii) all charges against income of the Borrower, its Subsidiaries and/or its Affiliates for federal, state and local taxes for such test period plus (iv) all depreciation expense for such test period plus (v) all amortization expense for such test period plus (vi) all other non-cash charges for such test period, after eliminating therefrom any (a) extraordinary items, (b) gains and losses from the sale of assets in connection with any sale/leaseback transaction or arrangement and (c) results of discontinued operations, all as determined in accordance with Generally Accepted Accounting Principles." "Consolidated Senior Bank Debt" shall mean as at any date of determination, all Consolidated Debt which is due and owing to the Lender, any other financial institutions or any other Person, excluding, however, (i) Consolidated Subordinated Debt", (ii) trade and account payables, (iii) all current obligations in respect of any unfunded vested benefit under any Plan covered by Title IV of ERISA and (iv) all guaranties, endorsements and other contingent obligations to purchase, to provide funds for payments, to supply funds to invest in the Borrower, its Subsidiaries and/or its Affiliates or otherwise to assure a creditor against loss (including endorsements of negotiable instruments for deposit or collection in the ordinary course of business). "First Allonge" shall mean that certain First Allonge to Revolving Line of Credit Loan Note, dated as of December 6, 1996, executed by and between the Borrower and the Lender for the purpose of amending and modifying the Revolving Credit Note to increase the aggregate principal amount thereof from $7,500,000.00 to $10,000,000.00" "First Amendment" shall mean that certain First Modification and Amendment Agreement, dated as of December 6, 1996, executed by and among the Borrower, the Lender, the Partnership Guarantors and the Corporate Guarantors for the purpose of amending and modifying this Loan Agreement." (ii) Article II, Section 2.01(vi)(a) is hereby amended and modified by deleting any and all references to the existing principal amount of "$7,500,000.00" and inserting the new increased principal amount of "$10,000,000,.00" in its place and stead. 7 (iii) Article IV, Section 4.01, Subsection (iii) is hereby amended and modified by deleting any and all references to the existing number of Subsidiaries of the Borrower as being "eight (8)" and inserting a new increased number of "eleven (11)" in its place and stead. (iv) Article VI, Section 6.12 is hereby amended and modified by adding the following additional language at the end of the paragraph: ", which execution shall be accomplished by the signing of the form of Agreement of Guaranty which is attached to the First Amendment as Exhibit "A". (v) Article VII, Section 7.01(vi) of the Loan Agreement is hereby amended and modified by adding the words "created or" immediately before the words "acquired by" in the second line of said paragraph. (vi) Article VIII is hereby amended and modified by inserting the following new Section 8.04: "Section 8.04 Maximum Consolidated Cash Flow Leverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of the Loan Agreement) a Consolidated Cash Flow Leverage Ratio equal to or less than 3.5 to 1.0." (vii) Exhibit "F" is hereby amended and modified by deleting the existing Exhibit "F-1" and inserting the new Exhibit "F-1" attached hereto and made a part hereof, in its place and stead. 3. Agreement of Guaranty. The Agreement of Guaranty is hereby amended and modified as follows: (i) The following new Paragraph 28 shall be inserted: "28. The Guarantors hereby acknowledge and agree that in accordance with and as provided for in Article VI, Section 6.12 of the Loan Agreement additional guarantors will agree to guaranty, on a joint and several basis, with the Guarantors, all of the Liabilities of the Borrower. The Guarantors hereby confirm and reaffirm that the addition hereinafter from time to time of any new guarantor(s) shall not affect the enforceability and validity of this Agreement of Guaranty, as amended and modified against the Guarantors. This Agreement of Guaranty, as amended and modified, shall remain in full force and effect and binding against the Guarantors as a continuing guaranty of the Liabilities of the Borrower subject to the termination provisions therein, without any 8 additional act(s) or documentation by the Guarantors at the time of the addition of said new guarantor(s)." (ii) Any and all references to the "Corporate Guarantors" and/or the "Guarantors" shall be deemed to include a reference to Ahead Wisconsin Acquisition Corporation, as a new guarantoration Nortronics Acquisition Corporation and Pacific Technologies, Inc. as new guarantors. 4. Loan Documents. The Loan Documents are hereby amended and modified as follows: Any and all references to the "Corporate Guarantors" and/or the "Guarantors" shall be deemed to include a reference to Ahead Wisconsin Acquisition Corporation as a new guarantor, Nortronics Acquisition Corporation and Pacific Technologies, Inc. as new guarantors. 5. Further Agreements and Representations. The Borrower and the Guarantors do hereby: (i) ratify, confirm and acknowledge that, as amended and modified, the Loan Agreement, the Note, the Agreement of Guaranty and all 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 Note, the Agreement of Guaranty and all other Loan Documents, as amended and modified; (iii) acknowledge and agree that as of the date hereof, the Borrower and the Guarantors have no defense, set-off, counterclaim or challenge against the payment of any sums due and owing to the Lender or the enforcement of any of the terms of the Loan Agreement, Note, the Agreement of Guaranty and/or the other Loan Documents, all as amended and modified; (iv) acknowledge and agree that, except as previously disclosed by the Borrower and/or the Guarantors to the Lender, all representations and warranties of the Borrower and/or the Guarantors contained in the Loan Agreement, the Note, the Agreement of Guaranty and/or 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; 9 (vi) acknowledge and agree that nothing contained herein and no actions taken pursuant to the terms hereof are intended to constitute a novation of the Note, and the Revolving Credit Facility, or any waiver 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 Lender under the Loan Documents, all of which rights and/or remedies are hereby ratified and confirmed; and (vii) acknowledge and agree that the failure by the Borrower 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. 6. Additional Documents; Further Assurances. The Borrower and the Guarantors further covenant and agree to execute and deliver to the Lender or to use their respective reasonable efforts to cause to be executed and delivered to the Lender at the sole cost and expense of the Borrower and/or the Guarantors, from time to time, any and all other documents, agreements, statements, certificates and information as the Lender shall reasonably request to evidence or effect the terms of this First Amendment. 7. Fees, Costs, Expenses and Expenditures. The Borrower shall pay all of the Lender's 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 Lender and all fees related to filings, recordings of documents and searches, whether or not the transactions contemplated hereunder are consummated. 8. No Waiver. Nothing contained herein constitutes an agreement or obligation by the Lender to grant any further amendments to any of the Loan Documents and nothing contained herein constitutes a waiver or release by the Lender of any rights or remedies available to the Lender under the Loan Documents, at law or in equity, provided that the foregoing is not intended to revoke the Lender's previous consent to the requested actions by the Borrower and/or the Guarantors where such consent was delivered by the Lender in writing. 9. Additional Guarantor. Ahead Wisconsin Acquisition Corporation, Nortronics Acquisition Corporation and Pacific Technologies, Inc. hereby agrees to guaranty, on a joint and several basis with the Original Guarantors, the "Liabilities of the Borrower" (as such term is defined in the Agreement of Guaranty) pursuant to the terms and conditions of the Agreement of Guaranty, as amended and modified. The Original Guarantors hereby expressly confirm and reaffirm that the addition of Ahead Wisconsin Acquisition Corporation, Nortronics Acquisition Corporation and Pacific Technologies, Inc. does not affect the enforceability and validity of the Agreement of Guaranty, as amended and modified with respect to the Original Guarantors, and the Agreement of Guaranty, as amended and modified remains in full force and effect and binding against the Original Guarantors as a continuing guaranty of the "Liabilities of the Borrower" (as such term is defined in the Agreement of Guaranty). 10 10. 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 Borrower and/or the Guarantors. 11. 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. 12. Binding Effect. This First Amendment shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 13. Counterparts. This First Amendment may be executed by one or more of the parties to this First Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 11 IN WITNESS WHEREOF, the Borrower, the Guarantors and the Lender have caused this First Amendment to be executed and delivered by their duly authorized corporate officers, all as of the day and year first written above. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation, as the Borrower /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ------------------- ------------------------- Nancy R. Pitek Mark S. Newman Secretary President & CEO WITNESS: LAUREL TECHNOLOGIES PARTNERSHIP T/A LAUREL TECHNOLOGIES, a Delaware general partnership, as a Guarantor [SEAL] BY: DRS SYSTEMS MANAGEMENT CORPORATION, ATTEST: as the General Partner /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ------------------- ------------------------- Nancy R. Pitek Mark S. Newman Secretary President WITNESS: DRS MEDICAL SYSTEMS, a New Jersey general partnership, as a Guarantor [SEAL] BY: DRS/MS, INC., as the General Partner ATTEST: /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ------------------- ------------------------- Nancy R. Pitek Mark S. Newman Secretary President 12 [SEAL] TECHNOLOGY APPLICATIONS & ATTEST: SERVICE COMPANY, a Delaware corporation, as a Guarantor /s/ TERRENCE L. DEROSA By: /s/ PAUL G. CASNER, JR. - ---------------------- ------------------------- Terrence L. DeRosa Paul G. Casner, Jr. Secretary President [SEAL] PHOTRONICS CORP., a New York corporation, ATTEST: as a Guarantor /s/ DIANE MARONEY By: /s/ RICHARD ROSS - ------------------- ------------------------- Diane Maroney Richard Ross Secretary President [SEAL] PRECISION ECHO, INC., a Delaware ATTEST: corporation, as a Guarantor /s/ STEVE CONLISK By: /s/ STUART F. PLATT - ------------------- ------------------------- Steve Conlisk Stuart F. Platt Secretary President [SEAL] AHEAD TECHNOLOGY, INC. ATTEST: a Delaware corporation, as a Guarantor /s/ STEVE CONLISK By: /s/ ARTHUR HONEGGER - ------------------- ------------------------- Steve Conlisk Arthur Honegger Secretary President 13 [SEAL] OMI ACQUISITION CORP. (ALSO DOING ATTEST: BUSINESS AS OMI CORP.), a Delaware corporation, as a Guarantor /s/ ROBERT RUSSO By: /s/ RICHARD ROSS - ------------------- ------------------------- Robert Russo Richard Ross Secretary President [SEAL] DRS SYSTEMS MANAGEMENT ATTEST: CORPORATION, a Delaware corporation, as a Guarantor /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ------------------- ------------------------- Nancy R. Pitek Mark S. Newman Secretary President [SEAL] AHEAD TECHNOLOGY ACQUISITION ATTEST: CORPORATION (ALSO DOING BUSINESS AS MEC TECHNOLOGY), a Delaware corporation, as a Guarantor /s/ STEVE CONLISK By: /s/ STUART F. PLATT - ------------------- ------------------------- Steve Conlisk Stuart F. Platt Secretary President [SEAL] DRS/MS, INC., a Delaware corporation, ATTEST: as a Guarantor /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ------------------- ------------------------- Nancy R. Pitek Mark S. Newman Secretary President 14 [SEAL] AHEAD WISCONSIN ACQUISITION ATTEST: CORPORATION (ALSO DOING BUSINESS AS VIKRON TECHNOLOGY), a Delaware corporation, as a Guarantor /s/ STEVE CONLISK By: /s/ DONALD A. PULS - ------------------- ------------------------- Steve Conlisk Donald A. Puls Secretary President [SEAL] NORTRONICS ACQUISITION CORPORATION ATTEST: (ALSO D/B/A/ NORTRONICS, INC.), a Delaware corporation, as a Guarantor /s/ STEVE CONLISK By: /s/ STUART F. PLATT - ------------------- ------------------------- Steve Conlisk Stuart F. Platt Secretary President [SEAL] PACIFIC TECHNOLOGIES, INC., ATTEST: a Delaware corporation, as a Guarantor /s/ TERRENCE L. DEROSA By: /s/ PAUL G. CASNER, JR. - ---------------------- ------------------------- Terrence L. DeRosa Paul G. Casner, Jr. Secretary President MELLON BANK, N.A., as the Lender By: /s/ G. RICHARD BERTOLET ------------------------- G. Richard Bertolet Senior Vice President 15 EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN FIRST AMENDMENT AND MODIFICATION AGREEMENT EXECUTED BY AND BETWEEN, AMONGST OTHERS, DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., AS THE BORROWER, AND MELLON BANK, N.A., AS THE LENDER DATED AS OF DECEMBER 6, 1996 AGREEMENT OF GUARANTY THIS AGREEMENT OF GUARANTY (including all amendments, modifications and supplements is hereinafter referred to as the "Agreement of Guaranty"), made this ______ day of __________, 19____ by ___________________________________________________________________ _________, a [GENERAL PARTNERSHIP] [LIMITED PARTNERSHIP] [OTHER] duly organized, validly existing and in good standing under the laws of the State of __________ _____________________, having its principal office located at _________________ __________________________________ (hereinafter referred to as the "Guarantor") IN FAVOR OF 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 (hereinafter referred to as the "Lender"). W I T N E S S E T H: WHEREAS, pursuant to a certain Revolving Line of Credit Loan Agreement dated May 31, 1996, executed by and between Diagnostic/Retrieval Systems, Inc., a Delaware corporation (hereinafter referred to as the "Borrower"), as the borrower, and the Lender, as the lender (hereinafter said Revolving Line of Credit Loan Agreement, as it may be amended, modified, extended, renewed and/or supplemented shall be referred to as the "Original Loan Agreement"), the Lender agreed to make to the Borrower an unsecured recourse revolving line of credit loan in the aggregate principal amount of up to Fifteen Million and 00/100 ($15,000,000.00) Dollars for the purpose of financing a portion of the Borrower's working capital and standby letters of credit requirements (hereinafter referred to as the "Loan"), which "Revolving Credit Sublimit" (as such term is defined in the Original Loan Agreement) is evidenced by a certain Revolving Line of Credit Loan Note dated May 31, 1996, in the aggregate principal amount of the Loan (hereinafter said Revolving Line of Credit Note, as it may be 1 amended, modified, extended, renewed and/or supplemented shall be referred to as the "Original Note"); and WHEREAS, pursuant to a certain First Amendment and Modification Agreement dated as of December 6, 1996, executed by and between, amongst others, the Borrower, as the borrower, and the Lender, as the lender, agreed to amend and modify the Original Loan Agreement and the other Loan Documents for the purposes of, amongst other things, increasing the Revolving Credit Sublimit from the existing principal amount of "$7,500,000.00" to a new increased principal amount of "$10,000,000.00" (hereinafter referred to as the "First Amendment" and hereinafter the First Amendment and the Original Loan Agreement shall collectively be referred to as the "Loan Agreement"); and WHEREAS, pursuant to a certain First Allonge to Revolving Credit Note dated as of December 6, 1996, executed by and between the Borrower, as the maker, and the Lender, as the payee, the parties agreed to amend and modify the Original Note for the purpose of increasing the principal amount of the Note from the existing principal amount of "$7,500,000.00" to a new increased principal amount of "$10,000,000.00" (hereinafter referred to as the "First Allonge" and hereinafter the First Allonge and the Original Note shall collectively be referred to as the "Note"); and WHEREAS, the Guarantor is [A SUBSIDIARY] [AN AFFILIATE] of the Borrower and therefore the Guarantor has a common ownership interest with the Borrower; and WHEREAS, all words and terms not defined herein shall have the respective meanings and be construed herein as provided for in the Note and the Loan Agreement; and WHEREAS, as an inducement to the Lender to make the Loan to the Borrower, the Lender has required that the Guarantor, which Guarantor is affiliated with the Borrower and thus will directly or indirectly benefit from the Loan, personally and unconditionally enter into and execute this Agreement of Guaranty, hereby guarantying the full, prompt and unconditional payment when due of any "Liabilities of the Borrower" (as said term is defined in Paragraph 1 hereof) due and owing to the Lender in connection with the Loan, and the full and complete performance of all other obligations of the Borrower with respect to the Loan. NOW, THEREFORE, IN CONSIDERATION OF THE LOAN MADE TO THE BORROWER AND WITH KNOWLEDGE THAT THE LENDER WOULD NOT MAKE THE LOAN BUT FOR THE PROMISES OF THE GUARANTOR HEREUNDER, THE GUARANTOR HEREBY ABSOLUTELY AND UNCONDITIONALLY, REPRESENTS, WARRANTS AND COVENANTS AS FOLLOWS: 1. The Guarantor hereby irrevocably guaranties, on a joint and several basis with all other existing and all future guarantors that now or hereafter have or may enter into 2 guaranties of the Loan with the Lender, the full, prompt and unconditional payment when due, of each and every Liability of the Borrower owing to the Lender, when and as the same shall become due, whether at the stated maturity date, by acceleration or otherwise, and the full, prompt, and unconditional performance of each and every term and condition of any transaction to be kept and performed by the Borrower under the Note and under the Loan Agreement. This Agreement of Guaranty is a primary obligation of the Guarantor and shall be a continuing inexhaustible Agreement of Guaranty. In the event any of the Liabilities of the Borrower shall not be paid according to their terms, then, upon the written request of the Lender, the Guarantor shall immediately pay the same, this Agreement of Guaranty being a guaranty of full payment and not collectibility. The term "Liability of the Borrower" or "Liabilities of the Borrower" shall include all liabilities of the Borrower owed to the Lender in connection with the Loan, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing, due or to become due, to, and all liabilities of any successor of the Borrower owed to the Lender in connection with the Loan, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing, due or to become due, to, or held by, the Lender. 2. The Guarantor represents and warrants that the representations and warranties set forth in Article IV of the Loan Agreement, with respect to the Guarantor are true, correct and complete, and the Guarantor hereby expressly confirms and affirms each representation and warranty concerning itself, as set forth in Article IV, Section 4.01 and 4.02 of the Loan Agreement, as if restated in full herein. * CHOOSE THE CORRECT P. #3 BELOW AND DELETE THE OTHER CHOICE [3. (i) The Guarantor represents and warrants that (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, (b) is duly qualified to conduct business as a foreign corporation and in good standing under the laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) it has all requisite power and authority to own, operate and encumber its properties and assets and conduct its business as presently conducted or proposed to be conducted in connection with and following the consummation of the transactions contemplated by this Agreement of Guaranty. (ii)(a) The Guarantor has the requisite corporate authority (1) to execute, deliver and perform this Agreement of Guaranty and (2) to file any documents required to be filed by it, if any, under this Agreement of Guaranty with the appropriate Governmental Authority. (b) The execution, delivery and performance under (or filing as the case may be) of this Agreement of Guaranty and any other Loan Document to which it is a party and the consummation of the transactions contemplated herein, have been duly authorized by the Board 3 of Directors of the Guarantor and no further corporate proceedings on the part of the Corporate Guarantor are necessary to consummate such transactions. (c) This Agreement of Guaranty has been duly executed and delivered by the Guarantor and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.] [3. (i) The Guarantor represents and warrants that (a) it is a [general] [limited] partnership duly organized, validly existing and in good standing under the laws of the State of its formation, (b) is duly qualified to do business and in good standing under the laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) it has all requisite power and authority to own, operate and encumber its properties and assets and to conduct its business as presently conducted or proposed to be conducted in connection with and following the consummation of the transactions contemplated by this Agreement of Guaranty. (ii)(a) The Guarantor has the requisite partnership authority (1) to execute, deliver and perform this Agreement of Guaranty and (2) to file any documents required to be filed by it, if any, under this Agreement of Guaranty with the appropriate Governmental Authority. (b) The execution, delivery and performance under (or filing as the case may be) of this Agreement of Guaranty and any other Loan Document to which it is a party and the consummation of the transactions contemplated herein, have been duly authorized in accordance with the partnership agreement of the Guarantor and no further proceedings on the part of the Guarantor are necessary to consummate such transactions. (c) This Agreement of Guaranty has been duly executed and delivered by the Guarantor and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.] 4. The Guarantor represents and warrants that (i) the assumption by it of its obligations hereunder will result in material benefits to it and (ii) this Agreement of Guaranty when executed and delivered by it will constitute a legal, valid and binding obligation on its part, enforceable against it in accordance with its terms, subject, as to enforcement of remedies only, to any applicable bankruptcy, insolvency, reorganization, moratorium, similar laws of general application at the time in effect and general principles of equity. 5. The Guarantor waives notice of acceptance of this Agreement of Guaranty and notice of any Liability of the Borrower to which it may apply, and waives notice of default, non-payment, partial payment, presentment, demand, protest, notice of protest or dishonor and all 4 other notices to which Guarantor might otherwise be entitled, or which might be required by law and required to be given by the Lender. 6. The Guarantor's liability hereunder shall be in no way affected, diminished or released by (i) any amendment, change or modification of the provisions of the Note, the Loan Agreement or any other Loan Document made to or with the Lender by the Borrower, (ii) any extensions of time for performance required thereby, (iii) the release of the Borrower from performance or observation of any of the agreements, covenants, terms or conditions contained in any of said instruments by the Lender or by operation of law, whether made with or without notice to the Guarantor, (iv) acceptance by the Lender of additional security or any increase, substitution or changes therein or (v) the release by the Lender of any security or any withdrawal thereof or decrease therein. 7. Without incurring responsibility to the Guarantor and without impairing or releasing the obligations of the Guarantor hereunder, the Lender may at any time and from time to time without the consent of, or notice to the Guarantor, upon any terms or conditions and in whole or in part: (i) change the manner, place or terms of payment and/or change or extend the time for payment or renew or alter, any Liability of the Borrower or any security therefor, and the guaranty herein made shall apply to the Liabilities of the Borrower as so changed, extended, renewed or altered; (ii) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged, mortgaged or in which a security interest is given to secure, or howsoever securing, the Liabilities of the Borrower; (iii) exercise or refrain from exercising any rights against the Borrower or others (including the Guarantor) or against the security, or otherwise act or refrain from acting; (iv) settle or compromise any Liability of the Borrower, dispose of any security therefor, with or without consideration, or any liability incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any Liability of the Borrower (whether due or not) to creditors of the Borrower other than the Lender and the Guarantor; and (v) apply any sums by whomsoever paid or howsoever realized to any Liability of the Borrower. 8. No invalidity, irregularity or unenforceability of all or any part of any Liability of the Borrower or the impairment or loss of any security therefor, that is not caused by 5 any actions or inactions of the Lender, shall affect, impair or be a defense to this Agreement of Guaranty. The lack of enforceability of this Agreement of Guaranty against the Guarantor shall not relieve the Guarantor of its obligations hereunder. 9. Upon the occurrence of an "Event of Default" as such term is defined in the Loan Agreement, the Lender shall be immediately entitled (i) to enforce the obligation of the Guarantor hereunder and (ii) to set-off any money owed by the Lender in any capacity to the Guarantor or any property of the Guarantor in the possession of the Lender against any of the monetary obligations of the Guarantor to the Lender under this Agreement of Guaranty, without first giving prior notice to the Guarantor (any such notice being expressly waived by the Guarantor; however, the Lender shall give the Guarantor notice within three (3) days after the Lender has set off any amounts), and the Lender shall be deemed to have exercised such right of set-off and to have made a charge against any such money or property immediately upon the occurrence of such Event of Default, even through the actual book entries may be made at some time subsequent thereof. Upon any default by the Guarantor with respect to any of its covenants and agreements under this Agreement of Guaranty, the Lender may (but shall not be so obligated), without waiving or releasing the Guarantor from any of its obligations hereunder, and without prejudice to any other right or remedy of the Lender hereunder, whether or not expressly set forth herein, perform such covenant or agreement in respect of which there shall be a default hereunder and in that regard pay such money as may be required or as the Lender may reasonably deem expedient. Any such monies paid by the Lender as aforesaid, together with interest thereon at the rate then applicable (or which would then have been applicable) under the Note and/or the Loan Agreement shall be obligations of the Borrower under the Note and/or the Loan Agreement which shall be due and payable by the Guarantor to the Lender for the account of the Borrower on demand. l0. The Guarantor hereby waives any right or claim of right to cause a marshaling of the Borrower's assets or to cause the Lender to proceed against any of the security or collateral held by the Lender before proceeding against the Guarantor, and the Guarantor hereby waives any and all legal requirement that the Lender shall institute any action at law or in equity against the Borrower, or anyone else, with respect to the Note, the Loan Agreement or with respect to any other Loan Documents or with respect to any security held by the Lender, as a condition precedent to bringing any action against the Guarantor upon this Agreement of Guaranty. 11. The Guarantor hereby irrevocably and unconditionally waives and relinquishes any and all statutory, contractual, common law, equitable or other claims and rights (i) to seek reimbursement, contribution, indemnification, set-off or other recourse from or against the Borrower in connection with any payments made by the Guarantor under this Agreement of Guaranty and (ii) to be subrogated to the Lender's rights under the Loan Documents upon the Guarantor's performance under this Agreement of Guaranty. 6 12. Until termination, this Agreement of Guaranty is made and shall continue as to any Liability of the Borrower to the Lender without regard to the existence of other collateral or security or guaranties, if any, or to the validity or effectiveness of any or all thereof; and any or all such collateral and security and guaranties may, from time to time, without notice to or consent of the Guarantor, be sold, released, surrendered, exchanged, settled, compromised, waived, subordinated or modified, with or without consideration, on such terms and conditions as may be acceptable to Lender without in any manner affecting or impairing the liability of the Guarantor. The Guarantor's obligations under this Agreement of Guaranty shall extend to any and all monies advanced by the Lender pursuant to the Note and/or the Loan Agreement. 13. The Guarantor covenants and agrees that the covenants set forth in Articles VI and VII of the Loan Agreement are true, correct and complete and the Guarantor hereby expressly confirms and affirms each covenant in Article VI, Sections 6.01 through 6.12 and Article VII, Sections 7.01 through 7.13 of the Loan Agreement as if restated in full herein. 14. The Guarantor covenants and agrees that it shall indemnify, protect, defend and hold harmless the Lender as well as the Lender's directors, officers, employees, agents, attorneys and shareholders (hereinafter referred to collectively as the "Indemnified Parties" and individually as an "Indemnified Party") from and against any and all losses, damages, expenses or liabilities of any kind or nature and from any suits, claims, or demands, including reasonable counsel fees incurred in investigating or defending such claim, suffered by any of them and caused by, relating to, arising out of, resulting from, or in any way connected or in any manner relating to the conduct of the business of the Borrower and/or the Guarantor or the use or intended use of the proceeds of the Loans provided, however, the Guarantor shall not be obligated to indemnify, protect, defend and save harmless an Indemnified Party, if the loss, damage, expense or liability was caused by or resulted from said Indemnified Party's own gross negligence or willful misconduct. In case any action shall be brought against an Indemnified Party based upon any of the above and in respect to which indemnity may be sought against the Guarantor, said Indemnified Party against whom such action was brought, shall promptly notify the Guarantor in writing, and the Guarantor shall assume the defense thereof, including the employment of counsel selected by the Guarantor and reasonably satisfactory to said Indemnified Party, the payment of all costs and expenses and the right to negotiate and consent to any settlement. Upon reasonable determination made by said Indemnified Party against whom such action was brought, said Indemnified Party, shall have the right to employ separate counsel in any such action and to participate in the defense thereof; provided, however, that said Indemnified Party shall pay the costs and expenses incurred in connection with the employment of separate counsel. The Guarantor shall not be liable for any settlement of any such action effected without their consent, but if settled with the Guarantor's consent, or if there is a final judgment for the claimant in any such action, the Guarantor agrees to indemnify and save harmless said Indemnified Party against whom such action was brought, from and against any loss or liability by reason of such settlement or judgment. The provisions of this Paragraph 14 7 shall survive the termination of the Loan and the repayment of the indebtedness evidenced by the Note. 15. If claim is ever made upon the Lender for repayment or recovery of any amount or amounts received by the Lender in payment for, or on account of, any of the Liabilities of the Borrower, and the Lender repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over the Lender or any of its property or (ii) any settlement or compromise of any such claim affected by the Lender with any such claimant (including the Borrower), then, and in such event, the Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon the Guarantor, notwithstanding the cancellation of any note or any other instrument evidencing any Liability of the Borrower, and the Guarantor shall be and remain liable to the Lender hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by the Lender. 16. Settlement of any claim by the Lender against the Borrower, whether in any proceeding or not, and whether voluntary or involuntary, shall not reduce the amount due under the terms of this Agreement of Guaranty except to the extent of the amount paid by the Borrower in connection with the settlement. 17. No delay on the part of the Lender in exercising any of its rights, powers or privileges or partial or single exercise thereof under the Note, this Agreement of Guaranty or any other document made to or with the Lender by the Borrower shall operate as a waiver of any such privileges, powers or rights. No waiver of any of its rights hereunder, and no modification or amendment of this Agreement of Guaranty, shall be deemed to be made by the Lender unless the same shall be in writing, duly signed on behalf of the Lender, by a duly authorized officer, and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of the Lender or the obligations of the Guarantor to the Lender in any other respect at any other time. 18. All rights, powers and remedies afforded to the Lender by reason of this Agreement of Guaranty are separate and cumulative remedies and no one of such remedies whether or not exercised by the Lender shall be deemed to exclude any of the other remedies available to the Lender nor prejudice availability of any other legal or equitable remedy which the Lender may have with respect to the Loan. 19. This Agreement of Guaranty shall be governed by and construed and interpreted in accordance with, the laws of the Commonwealth of Pennsylvania and no defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereon unless such defense is also given or allowed by the laws of the Commonwealth of Pennsylvania. The Lender may bring any action or proceeding to enforce or arising out of this Agreement of Guaranty in any state or federal court of competent jurisdiction 8 in the Commonwealth of Pennsylvania. If the Lender commences such an action in a court located in the Commonwealth of Pennsylvania, or any United States District Court in Pennsylvania, the Guarantor hereby agrees that it will submit to the personal jurisdiction of such courts and will not attempt to have such action dismissed, abated or transferred on the ground of forum non conveniens, and in furtherance of such agreement the Guarantor hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over it in any such action or proceeding may be obtained within or without the jurisdiction of any court located in Pennsylvania and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the Guarantor by registered mail to or by personal service at the last known address of the Guarantor; provided, however, that nothing contained herein shall prohibit the Guarantor from seeking, by appropriate motion, to remove an action brought in Pennsylvania state court to the United States District Court for the Eastern District of Pennsylvania. If such action is so removed, however, the Guarantor shall not seek to transfer such action to any other district, nor shall the Guarantor seek to transfer to any other district any action which the Lender originally commences in such federal court. Any action or proceeding brought by the Guarantor arising out of this Agreement of Guaranty shall be brought solely in a court of competent jurisdiction located in the Commonwealth of Pennsylvania, or in a United States District Court for the Eastern District of Pennsylvania. The Guarantor hereby waives any right to seek removal of any action or proceeding other than as permitted according to this Paragraph 19. 20. This Agreement of Guaranty shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 21. This Agreement of Guaranty shall terminate upon the termination of the Note in accordance with its terms. The Borrower or the Guarantor may terminate this Agreement of Guaranty and the Note and all other obligations of the Borrower or the Guarantor to the Lender under the Note or this Agreement of Guaranty, by paying to the Lender all sums due and owing to the Lender hereunder and under the Note or this Agreement of Guaranty. 22. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied or sent by overnight courier service or United States mail and shall be deemed to have been given when delivered in person or by overnight courier service, upon receipt of a confirmed telecopy transmission during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). Notices to the Lender shall not be effective until received by the Lender. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered shall be as set forth below, or, as to each party, at such other address as may be designated by such party in a written notice to the other party. 9 If to the Guarantor: _______________________ _______________________ _______________________ Attn: _________________ _________________ With a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, New Jersey 07068 Attn: Nina Laserson Dunn, Esq. If to the Lender: Mellon Bank, N.A. Raritan Plaza One Raritan Center Edison, New Jersey 08837 Attn: Mr. Peter Dontas Vice President With a copy to: Reed Smith Shaw & McClay Princeton Forrestal Village 136 Main Street, Suite 250 P.O. Box 7839 Princeton, New Jersey 08543-7839 Attn: Daniel F. Peck, Jr., Esq. All notices, payments, requests, reports, information or demands so given shall be deemed effective upon receipt or, if mailed, upon receipt or the expiration of the fourth (4th) Business Day following the date of mailing, whichever occurs first, except that any notice of change in address shall be effective only upon receipt by the party to whom said notice is addressed. A failure to send the requisite copies does not invalidate an otherwise properly sent notice to the Guarantor and/or the Lender. 23. In case of any proceedings to collect any liabilities of the Guarantor owed to the Lender hereunder, the Guarantor shall pay all costs and expenses of every kind for collection, sale or delivery of any collateral or assets or properties of the Guarantor, including reasonable attorneys' fees, and after deducting such costs and expenses from the proceeds of sale or collection, the Lender may apply any residue to the liabilities of the Guarantor who shall 10 continue liable for any deficiency, with interest at the rate provided for in the Note and/or the Loan Agreement. 24. In all references herein to any parties, persons, entities or corporations, the use of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the text of the within instrument may require. 25. The Guarantor hereby acknowledges and agrees that they shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial condition and business operations as the Guarantor may require, and that the Lender has no duty at any time to disclose to the Guarantor any information relating to the business operations or financial condition of the Borrower. 26. This Agreement of Guaranty may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 27. The Guarantor hereby acknowledges and agrees that in accordance with and as provided for in Article VI, Section 6.12 of the Loan Agreement additional guarantors will agree to guaranty, on a joint and several basis, with the Guarantor, all of the Liabilities of the Borrower. The Guarantor hereby confirms and reaffirms that the addition hereinafter from time to time of any new guarantor(s) shall not affect the enforceability and validity of this Agreement of Guaranty against the Guarantor. This Agreement of Guaranty shall remain in full force and effect and binding against the Guarantor as a continuing guaranty of the liabilities of the Borrower subject to the termination provisions herein, without any additional act(s) or documentation by the Guarantor at the time of the addition of said new guarantor(s). 11 IN WITNESS WHEREOF, the Guarantor has caused this Agreement of Guaranty to be duly executed and delivered by its appropriate authorized [GENERAL PARTNER(S)] [CORPORATE OFFICERS], [AND, IF APPLICABLE, ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED AND ATTESTED, PURSUANT TO THE RESOLUTION OF ITS BOARD OF DIRECTORS,] officers, and, if applicable, its corporate seal to be hereunto affixed and attested, pursuant to the resolution of its Board of Directors, all as of the day and year first above written. WITNESS/ATTEST: ____________________________, a ___________________, as the Guarantor ___________________ By: _________________________ Name: Name: Title: Title: 12 EXHIBIT "F-1" ATTACHED TO AND MADE A PART OF THAT CERTAIN FIRST AMENDMENT AND MODIFICATION AGREEMENT EXECUTED BY AND BETWEEN, AMONGST OTHERS, DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., AS THE BORROWER, AND MELLON BANK, N.A., AS THE LENDER DATED AS OF OCTOBER ___DECEMBER 6, 1996 FORM OF COMPLIANCE CERTIFICATE ---------------------- This Officer's Certificate of Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Certificate") is delivered to you pursuant to Section 5.02(iv) of the Revolving Line of Credit Loan Agreement dated May 31, 1996 (as may be amended from time to time, hereinafter referred to as the "Loan Agreement") by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower"), and Mellon Bank, N.A., (hereinafter referred to as the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. The Borrower hereby delivers to the Lender, together with the financial statements being delivered pursuant to Section 5.02(i) and (iii) of the Loan Agreement, this Certificate for the accounting period from ____________, 19__ to ____________, 19__*. For purposes hereof, section and subsection references herein relate to sections and subsections, respectively, of the Loan Agreement, and amounts or ratios refer to the maximum or minimum amounts or ratios required under the relevant sections of the Loan Agreement. I. NEGATIVE COVENANTS A. CONSOLIDATED DEBT (Section 7.01(vi)) B. LIENS (Section 7.02(ii)(e)) Amount of Purchase Money Liens $_______________________ Permitted Amount $1,000,000.00 at anytime outstanding - ---------- * Insert dates representing the fiscal period covered by this Certificate. 1 C. LOANS, ADVANCES AND INVESTMENTS (Section 7.03) 1. Subsection 7.03(iv) Aggregate demand advances to officers and employees outstanding at any time during the period covered by this Certificate: Outstanding $[ ] Aggregated maximum $250,000.00 at any permitted to time outstanding officers/employees D. RESTRICTED JUNIOR PAYMENTS (Section 7.04) Actual Amount $____________________ Permitted Amount [$___________________] II. FINANCIAL COVENANTS A. MINIMUM CONSOLIDATED QUICK RATIO (Section 8.01) Consolidated Quick Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Quick Ratio _____ to 1.0 Minimum Required Current Ratio 1.0 to 1.0 B. MAXIMUM CONSOLIDATED LEVERAGE RATIO (Section 8.02) Consolidated Leverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Senior Liabilities (exclusive of contingent liabilities) $___________ Actual Consolidated Tangible Net Worth $___________ Actual Consolidated Subordinated Debt $___________ Actual Consolidated Leverage Ratio _____ to 1.0 Maximum Permitted Consolidated Leverage Ratio 1.0 to 1.0 2 C. MINIMUM CONSOLIDATED INTEREST COVERAGE RATIO (Section 8.03) Consolidated Interest Coverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Net Income $___________ Actual Interest Expense $___________ Actual Prepaid Subordinated Debt $___________ Actual Consolidated Interest Coverage Ratio _____ to 1.0 Minimum Required Consolidated Interest Ratio 1.75 to 1.0 D. MAXIMUM CONSOLIDATED CASH FLOW LEVERAGE RATIO (Section 8.03) Consolidated Cash Flow Leverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Senior Bank Debt $___________ Actual Consolidated Subordinated Debt $___________ Actual EBITDA $___________ Actual Consolidated Cash Flow Leverage Ratio _____ to 1.0 Maximum Required Consolidated Cash Flow Leverage Ratio 3.5 to 1.0 3 I hereby certify, in my capacity as an Authorized Officer of the Borrower, that the information set forth above is accurate as of , 19 , to the best of my knowledge after diligent inquiry. Dated: ______________, 19 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. a Delaware corporation By:_______________________________________ Name: Title: 4 EX-10.104 7 EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT ================================================================================ EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT executed by and between DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., as the Borrower, AND MELLON BANK, N.A., as the Lender Dated: As of December 6, 1996 ================================================================================ TABLE OF CONTENTS Page ---- PREAMBLE AND RECITALS.......................................................1 ARTICLE I DEFINITIONS; RULES OF INTERPRETATION AND CONSTRUCTION; ACCOUNTING PRINCIPLES Section 1.01 Definitions...................................................2 Section 1.02 Rules of Interpretation and Construction.....................22 Section 1.03 Accounting Principles........................................23 ARTICLE II AMOUNT AND TERMS FOR THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY Section 2.01 Equipment Line of Credit/Term Loan Facility..................25 Section 2.02 Interest on the Equipment Line of Credit/Term Loans..........27 Section 2.03 Fees.........................................................31 Section 2.04 Voluntary Prepayments........................................32 Section 2.05 Payments; Collection of Accounts.............................33 Section 2.06 Special Provisions Governing Eurodollar Rate Loans...........34 Section 2.07 Increased Capital............................................37 Section 2.08 Authorized Officers of the Borrower..........................37 Section 2.09 Taxes........................................................38 Section 2.10 Security for the Equipment Line of Credit/Term Loan Facility.38 Section 2.11 Yield Maintenance Calculated on Fixed Rate Loans ............38 ARTICLE III CONDITIONS TO THE EQUIPMENT LINE OF CREDIT/TERM LOANS Section 3.01 Conditions Precedent to the Effectiveness of this Loan Agreement.....................................................40 Section 3.02 Conditions Precedent to All Equipment Line of Credit/Term Loans.........................................................42 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Representations and Warranties on the Effective Date.........44 Section 4.02 Subsequent Funding Representations and Warranties............52 ARTICLE V REPORTING COVENANTS Section 5.01 Statement of Accounting......................................53 Section 5.02 Reporting and Information Requirements.......................53 ARTICLE VI AFFIRMATIVE COVENANTS Section 6.01 Corporate Existence, Etc.....................................58 Section 6.02 Corporate Powers, Etc........................................58 Section 6.03 Compliance with Laws, Etc....................................58 Section 6.04 Payment of Taxes and Claims..................................58 Section 6.05 Maintenance of Properties; Insurance.........................58 Section 6.06 Inspection of Property; Books and Records; Discussion........59 Section 6.07 Litigation, Claims, Etc......................................59 Section 6.08 Labor Disputes...............................................60 Section 6.09 Maintenance of Licenses, Permits, Etc........................60 Section 6.10 Use of Proceeds..............................................60 Section 6.11 Continuation of or Change in Business........................60 Section 6.12 Additional Corporate Guarantors and/or Partnership Guarantors...................................................60 ARTICLE VII NEGATIVE COVENANTS Section 7.01 Consolidated Debt............................................61 Section 7.02 Sale of Assets; Liens .......................................61 Section 7.03 Loans, Advances and Investments..............................62 Section 7.04 Restricted Junior Payments...................................63 Section 7.05 Transactions with Shareholders and Affiliates................63 Section 7.06 Restriction on Fundamental Changes...........................63 Section 7.07 ERISA........................................................63 Section 7.08 Amendment of Articles of Incorporation or By-laws............64 Section 7.09 Margin Regulations...........................................64 Section 7.10 Cancellation of Consolidated Debt; Prepayment................64 Section 7.11 Environmental Liabilities....................................64 Section 7.12 Guaranties...................................................65 Section 7.13 No Negative Pledge to Other Person...........................65 ARTICLE VIII FINANCIAL COVENANTS Section 8.01 Minimum Consolidated Quick Ratio.............................66 Section 8.02 Maximum Consolidated Senior Liabilities Leverage Ratio.......66 Section 8.03 Minimum Consolidated Interest Coverage Ratio.................66 Section 8.04 Maximum Consolidated Cash Flow Leverage Ratio................66 ARTICLE IX EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 9.01 Events of Default............................................67 Section 9.02 Rights and Remedies..........................................69 Section 9.03 Application of Proceeds......................................70 Section 9.04 No Notices...................................................70 Section 9.05 Agreement to Pay Attorneys' Fees and Expenses ...............70 Section 9.06 No Additional Waiver Implied by One Waiver...................70 Section 9.07 Failure to Exercise Rights...................................70 Section 9.08 Waiver of Jury Trial.........................................71 Section 9.09 Remedies Cumulative..........................................71 iii ARTICLE X MISCELLANEOUS Section 10.01 Expenses....................................................72 Section 10.02 Indemnity...................................................72 Section 10.03 Amendments and Waivers......................................73 Section 10.04 Independence of Covenants...................................73 Section 10.05 Notices.....................................................73 Section 10.06 Survival of Warranties and Agreements.......................73 Section 10.07 Marshalling; Recourse to Security; Payments Set Aside.......73 Section 10.08 Severability................................................74 Section 10.09 Governing Law...............................................74 Section 10.10 Successors and Assigns......................................74 Section 10.11 Consent to Jurisdiction and Service of Process..............74 Section 10.12 Counterparts; Effectiveness; Inconsistencies................75 Section 10.13 Entire Agreement............................................75 iv EXHIBITS AND SCHEDULES Exhibits Exhibit "A" List of Eurodollar Affiliates Exhibit "B" Form of Notice of Borrowing Exhibit "C" Form of Notice of Conversion/Continuation Exhibit "D" Form of Equipment Line of Credit/Term Loan Note Exhibit "E" Form of Opinion Letter Exhibit "F" Form of Officer's Certificate Exhibit "G" Form of Security Agreement Exhibit "H" Form of Agreement of Guaranty for Additional Corporate Guarantors and Partnership Guarantors Schedules Schedule 2.01(i) List of Subsidiaries and/or Affiliates Who May Borrow Schedule 4.01(iii) Existing Issued and Authorized Capital Stock of the Borrower Schedule 4.01(vii) Pending Actions, Suits, Proceedings, Governmental Investigations or Arbitrations Schedule 4.01(xv) Environmental Disclosure Schedule 4.01(xvi) ERISA Schedule 4.01 (xx) List of Joint Ventures Schedule 4.01(xxi) Existing Insurance Policies, Programs and Claims Schedule 4.01(xxvii) Labor Unions/Collective Bargaining Agreements Schedule 4.01(xxxii) Location of Collateral Schedule 6.05 Insurance Policies and Programs Schedule 7.01(iii) Permitted Existing Consolidated Debt Schedule 7.03 Existing Loans and Investments Schedule 7.12(i) List of Existing Guaranties v vi EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT THIS EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT (including all amendments, modifications and supplements is hereinafter referred to as the "Loan Agreement"), is made as of December 6, 1996, by and between DIAGNOSTIC/RETRIEVAL 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 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as the "Borrower"), 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 (hereinafter referred to as the "Lender"). W I T N E S S E T H: WHEREAS, the Borrower is engaged in the business of designing, manufacturing and marketing high technology products for military and commercial customers in the United States and abroad; and WHEREAS, the Borrower has requested that the Lender make to the Borrower a secured recourse equipment line of credit/term loan in the aggregate principal amount of Five Million and 00/100 ($5,000,000.00) Dollars for the purpose of financing the acquisition of certain machinery and equipment by the Borrower and the "Guarantors", as such term is defined herein (hereinafter referred to as the "Equipment Line of Credit/Term Loan Facility") and WHEREAS, the Lender has agreed to make the Equipment Line of Credit/Term Loan Facility available to the Borrower and the Guarantors, subject to the terms, conditions and provisions hereinafter set forth; and NOW, THEREFORE, in consideration of these premises and the mutual representations, covenants and agreements of the Borrower and the Lender, each party binding itself and its successors and assigns, does hereby promise, covenant and agree as follows: ARTICLE I DEFINITIONS, RULES OF INTERPRETATION AND CONSTRUCTION, AND ACCOUNTING PRINCIPLES Section 1.01 Definitions. The following terms, as used in this Loan Agreement, shall have the following meanings, unless the context clearly indicates and requires otherwise: "Affiliate" of any Person shall mean any other Person which or who, directly or indirectly, controls or is controlled by, or is under common control with such Person; provided, however, natural persons and minority partners of any said Person shall not be deemed an Affiliate for purposes of this definition. For the purposes of the preceding sentence, "controls" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, fifty percent (50%) or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, fifty percent (50%) or more of any class of equity interest). "Agreement of Guaranty" shall mean that certain Agreement of Guaranty executed by the Corporate Guarantors and the Partnership Guarantors, on a joint and several basis, and delivered to the Lender, dated the date of this Loan Agreement, pursuant to which the Corporate Guarantors and the Partnership Guarantors unconditionally guaranty the prompt and complete performance of all of the Borrower's duties, covenants and obligations under this Loan Agreement and the Equipment Line of Credit/Term Loan Note. The term "Agreement of Guaranty" shall also be deemed to mean and refer to all amendments, modifications and supplements to said agreement made and/or entered into subsequent to the Closing Date, including, without limitation, any Agreement of Guaranty(s) in the form of Exhibit "H" attached hereto and made a part hereof (fully executed) which are consummated for the purposes of adding any new and/or additional Persons as guarantors, all as provided for in Section 6.12 of this Loan Agreement. "Applicable Interest Rate" shall mean the applicable per annum interest rate on each of the Equipment Line of Credit/Term Loans determined pursuant to Section 2.02(i) of this Loan Agreement. "Authorized Officer" shall mean those officers/general partners of the Borrower, the Corporate Guarantors and/or the Partnership Guarantors, whose signatures and incumbency shall have been certified to the Lender pursuant to an Officer's Certificate delivered on the Closing Date or any other form of resolution or certification delivered to and approved by the Lender after the Closing Date. "Bankruptcy Code" shall mean Title 11 of the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended from time to time, or any successor statute. 2 "Benefit Plan" shall mean a defined benefit plan as defined in Section 3 (35) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Big-Six Accounting Firm" shall mean any of Arthur Andersen & Co., KPMG Peat Marwick, Coopers & Lybrand, Ernst & Young, Deloitte & Touche and Price Waterhouse or any of their respective successors. "Borrower" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Borrowing" and/or "Borrowings" shall mean a borrowing consisting of Equipment Line of Credit/Term Loans made on the same day by the Lender. "Borrowing Date" shall mean with respect to any Equipment Line of Credit/Term Loan, any Business Day specified in any Notice of Borrowing delivered to the Lender by the Borrower in accordance with the provisions of Section 2.01 (ii) of this Loan Agreement, as the date upon which the Borrower requests the Lender to make an Equipment Line of Credit/Term Loan hereunder and upon which such Equipment Line of Credit/Term Loan is made. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania, or is a day upon which banking institutions located in such state are required or authorized by law or other governmental action to close and (ii) with respect to all notices, determinating fundings and payments in connection with the Eurodollar Rate, any day which is a Business Day described in clause (i) above, and which is also a day for trading by and between banks in the London interbank eurodollar market. "Capital Expenditures" shall mean, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during such period) of the Borrower, its Subsidiaries and its Affiliates during such period which would be classified as capital expenditures in accordance with Generally Accepted Accounting Principles (including, without limitation, expenditures for maintenance and repairs which are capitalized, and Capitalized Leases to the extent an asset is recorded in connection therewith in accordance with Generally Accepted Accounting Principles). "Capitalized Lease" and "Capitalized Leases" shall mean at any time any lease which is, or is required under Generally Accepted Accounting Principles to be, capitalized on the balance sheet of the lessee at such time. 3 "Capitalized Lease Obligation" shall mean all monetary obligations of any Person under any leasing or similar arrangement which, in accordance with Generally Accepted Accounting Principles, are or would be classified as Capitalized Leases. "CERCLIS" shall mean the Comprehensive Environmental Response, Compensation and Liability Information System List, as the same may be amended from time to time. "Chattel Paper" shall mean all "chattel paper", as such term is now or hereafter defined in the applicable Uniform Commercial Code, now or hereafter owned by the Borrower, its Subsidiaries and/or its Affiliates, in connection with the acquisition of any Equipment. "Claim" shall mean any claim or demand, by any Person, of whatsoever kind or nature for any alleged Liabilities and Costs, based in a dispute whether involving contract, tort, implied or express warranty, strict liability, criminal or civil statute, permit, ordinance or regulation, common law or otherwise, the consequences of which dispute are reasonably likely to result in a Material Adverse Effect. "Closing Date" shall mean the date upon which this Loan Agreement is executed by the Lender and the Borrower, and the conditions set forth in Section 3.01 of this Loan Agreement have been completed and fulfilled to the satisfaction of the Lender. "Code" means the Internal Revenue Code of 1986, as amended, any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Collateral" shall mean all property, assets, interests and/or rights on or in which a Lien is granted by the Borrower, the Corporate Guarantors and/or the Partnership Guarantors to the Lender pursuant to this Loan Agreement, all Security Agreements and/or the other Loan Documents provided for herein or therein or delivered or to be delivered hereunder or thereunder, as this Loan Agreement and any such other Loan Documents may be amended, supplemented, restated, extended or otherwise modified from time to time in accordance with the provisions hereof or thereof, including, but not limited to, all hereafter acquired Equipment, Chattel Paper, Contracts and General Intangibles. "Collateral Documents" shall mean the collective reference to the Security Agreements and any other security agreements, mortgages, deeds of trust, collateral assignments, instruments, documents, certificates or agreements executed and delivered by, or on behalf of, the Borrower, its Subsidiaries and its Affiliates to the Lender, at any time pursuant to or in connection with the Equipment Line of Credit/Term Loan Facility to create, continue or evidence Liens to secure the Obligations. "Commitment Letter" shall mean the commitment letter dated October 8, 1996, from the Lender to the Borrower, pursuant to which the Lender offered and the Borrower accepted the Lender's commitment to provide the Equipment Line of Credit/Term Loan Facility. 4 "Consolidated Cash and Cash Equivalents" shall mean all (i) cash and cash equivalents and (ii) any of the following: (a) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year after the date of acquisition thereof; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one (1) year after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc. and not listed in Credit Watch published by Standard & Poor's Corporation; (c) commercial paper of a corporation having a net worth of not less than $1,000,000,000.00, other than commercial paper issued by the Borrower, its Subsidiaries or its Affiliates, maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (d) domestic certificates of deposit or domestic time deposits or repurchase agreements maturing within one (1) year after the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having FDIC insurance; (e) any funds deposited or invested by the Borrower, its Subsidiaries and/or its Affiliates of the Borrower in accounts maintained with the Lender and/or with any other commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having FDIC insurance; and (f) money market funds having assets in excess of $1,000,000,000.00. "Consolidated Cash Flow Leverage Ratio" shall mean as at any date of determination thereof, the ratio of (i) the sum of (a) Consolidated Senior Bank Debt plus (b) Consolidated Subordinated Debt -to- (ii) Consolidated EBITDA. "Consolidated Current Liabilities" shall mean, as at any date of determination, all liabilities which, in accordance with Generally Accepted Accounting Principles, would be classified on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates as current liabilities, but in any event all borrowings under the Revolving Line of Credit Loan Agreement. "Consolidated Debt" shall mean with respect to the Borrower, its Subsidiaries and its Affiliates, the aggregate sum of the following items as such items appear on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates to any Person (other than each other) in accordance with Generally Accepted Accounting Principles: (i) the unpaid principal balance of all indebtedness or liability for money borrowed or owed by the Borrower, its Subsidiaries and/or its Affiliates to any Person (other than each other) from time to time (including any renewals, extensions and refundings thereof), whether or not the indebtedness was heretofore or hereafter created, issued, incurred, assumed or guarantied; (ii) the unpaid principal balance of all indebtedness or liability for the deferred purchase price of property or services incurred (including trade obligations); (iii) all obligations as lessee under leases which have been or should be recorded as Capitalized Lease Obligations; (iv) all current Obligations in respect of any unfunded vested benefits under any Plan covered by Title IV of ERISA; (v) all obligations, contingent or otherwise 5 relative to the face amount of all Letters of Credit issued for the Borrower's, its Subsidiaries' and/or Affiliates' account, whether or not drawn; (vi) all obligations arising under bankers' acceptance facilities issued for the account of the Borrower, its Subsidiaries and/or its Affiliates; (vii) all guaranties, endorsements and other contingent obligations to purchase, to provide funds for payments, to supply funds to invest in the Borrower, its Subsidiaries and/or its Affiliates or otherwise to assure a creditor against loss (except endorsements of negotiable instruments for deposit or collection in the ordinary course of business shall not constitute Consolidated Debt); and (viii) all obligations secured by any mortgage, lien, pledge, or security interest or other charge or encumbrance on property, whether or not the obligations have been assumed. "Consolidated EBITDA" shall mean, with respect to the Borrower, its Subsidiaries and its Affiliates as at any date of determination for the period of four (4) consecutive Fiscal Quarters immediately preceding said date of determination taken together as one accounting period, the amount equal to the sum of (i) the Consolidated Net Income for such test period plus (ii) all interest expense on all Consolidated Debt for such test period plus (iii) all charges against income of the Borrower, its Subsidiaries and/or its Affiliates for federal, state and local taxes for such test period plus (iv) all depreciation expense for such test period plus (v) all amortization expense for such test period plus (vi) all other non-cash charges for such test period, after eliminating therefrom any (a) extraordinary items, (b) gains and losses from the sale of assets in connection with any sale/leaseback transaction or arrangement and (c) results of discontinued operations, all as determined in accordance with Generally Accepted Accounting Principles. "Consolidated Interest Coverage Ratio" shall mean, as of any date of determination thereof for the period of four (4) consecutive Fiscal Quarters immediately preceding said date of determination taken together as one accounting period, the ratio of (i) the sum of (a) Consolidated Net Income for such test period plus (b) all interest expenses on all Consolidated Debt for such test period minus (c) prepaid principal on Consolidated Subordinated Debt as permitted under Sections 7.04 and 7.10 of this Agreement, during such test period -to- (ii) all interest expenses on all Consolidated Debt for such test period, all as calculated in accordance with Generally Accepted Accounting Principles. "Consolidated Net Income" shall mean, as of any date of determination for any test period, all amounts which, in accordance with Generally Accepted Accounting Principles, would be included under net income (after the payment of all federal and state income taxes) on a consolidated income statement of the Borrower, its Subsidiaries and its Affiliates for such test period. "Consolidated Net Worth" shall mean, as at any date of determination, all items which, in accordance with Generally Accepted Accounting Principles, would be included under shareholders' equity on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates at such date. "Consolidated Quick Ratio" shall mean, as at any date of determination, the ratio of (i) the sum of (a) Consolidated Cash and Cash Equivalents plus, (b) billed accounts receivable of the 6 Borrower, its Subsidiaries and its Affiliates as shown on their consolidated balance sheet in accordance with Generally Accepted Accounting Principles -to- (ii) Consolidated Current Liabilities. "Consolidated Senior Bank Debt" shall mean as at any date of determination, all Consolidated Debt which is due and owing to the Lender, any other financial institution or any other Person, excluding, however, (i) Consolidated Subordinated Debt, (ii) all trade and accounts payable, (iii) all current Obligations in respect of any unfunded vested benefit under any Plan covered by Title IV of ERISA and (iv) all guaranties, endorsements and other contingent obligations to purchase, to provide funds for payments, to supply funds to invest in the Borrower, its Subsidiaries and/or its Affiliates or otherwise to assure a creditor against loss (including endorsements of negotiable instruments for deposit or collection in the ordinary course of business). "Consolidated Senior Liabilities" shall mean, as at any date of determination, all items which, in accordance with Generally Accepted Accounting Principles, would be included on a consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates as Consolidated Debt, excluding, however, Consolidated Subordinated Debt. "Consolidated Subordinated Debt" shall mean, as at any date of determination, any Consolidated Debt of the Borrower, its Subsidiaries and/or its Affiliates, which in accordance with the terms of the documentation evidencing said Consolidated Debt, is subordinated to the repayment of the Equipment Line of Credit/Term Loan Facility, including, without limitation, (i) the then outstanding principal balance of an original $25,000,000.00 9% Senior Subordinated Convertible Debentures Due October 1, 2003, evidenced by that certain Indenture dated as of September 22, 1995, executed by and between the Borrower and The Trust Company of New Jersey and (ii) the then outstanding principal balance of an original $25,000,000.00 8-1/2 % Convertible Subordinated Debentures Due August 1, 1998, evidenced by that certain Indenture dated August 1, 1983, executed by and between the Borrower and Bankers Trust Company. "Consolidated Tangible Net Worth" shall mean, as at any date of determination, Consolidated Net Worth minus the following: (i) goodwill, including any amounts (however designated on the balance sheet) representing the cost of acquisitions of Subsidiaries and/or Affiliates in excess of underlying tangible assets; (ii) patents, trademarks and copyrights; and (iii) deferred charges (including, without limitation, unamortized debt discount and expense, organization expenses and experimental and development expenses, but excluding prepaid expenses). "Contracts" shall mean all contracts, licenses, instruments, undertakings, documents or other agreements in connection with the acquisition of any Equipment in or under which the Borrower, its Subsidiaries and/or its Affiliates may now or hereafter have any rights, title, or interests, including, without limitation, (i) any claim arising thereunder from misrepresentation or breach of warranty and (ii) all such agreements which pertain to the sale, construction, design, manufacture or other acquisition of any Equipment, other than such contracts, agreements which specifically prohibit their assignment as security, provided, that notwithstanding any such 7 prohibitions, such contracts, licenses, instruments, undertakings, documents or other agreements shall be deemed to be General Intangibles to the extent that such prohibition is inconsistent with the provisions of the applicable Uniform Commercial Code. "Contractual Obligation" shall mean with respect to any Person, any provision of any Securities issued by that Person or any indenture, mortgage, deed of trust, contract, undertaking, document, instrument or other agreement or instrument to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject (including, without limitation, any restrictive covenant affecting such Person or any of its properties). "Corporate Guarantors" shall mean the collective reference to (i) Technology Applications & Service Company, 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; (ii) Photronics Corp., 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 270 Motor Parkway, Hauppauge, New York 11788; (iii) 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; (iv) 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; (v) OMI Acquisition Corp., (also doing business as OMI Corp.), a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, having its principal office located at 270 Motor Parkway, Hauppauge, New York 11788; (vi) 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 138 Bauer Drive, Oakland, New Jersey 07436; (vii) Ahead Technology Acquisition Corporation (also doing business as MEC Technology), 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; (viii) 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 138 Bauer Drive, Oakland, New Jersey 07436; (ix) Ahead Wisconsin Acquisition Corporation (also doing business as Vikron Technology), 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; (x) Nortronics Acquisition Corporation (also doing business as Nortronics, 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; (xi) Pacific Technologies, Inc., a corporation 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 and (xii) any new or additional Subsidiaries of the Borrower which are purchased, acquired or created during the term of the Equipment Line of Credit/Term Loan Facility. Each of the Corporate Guarantors may sometimes be hereinafter referred to individually as a "Corporate Guarantor". "Customary Permitted Liens" shall mean 8 (i) Liens (other than Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority or claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Generally Accepted Accounting Principles; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than any Lien imposed under ERISA) imposed by Law, including, without limitation, Liens in favor of any Governmental Authority securing progress payments made under government contracts created in the ordinary course of business and for amounts not yet due or which are being contested in good faith by appropriate proceedings which are sufficient to prevent imminent foreclosure of such Liens, are promptly instituted and diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Generally Accepted Accounting Principles; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts, statutory obligations and other similar obligations or arising as a result of progress payments or deposits under government contracts (including foreign government contracts); (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property or impair the use thereof; (v) Liens arising as a result of the filing of any financing statement under the Uniform Commercial Code of a particular State or comparable law of any jurisdiction covering consigned or leased goods which do not constitute assets of the Borrower, its Subsidiaries and/or its Affiliates and which consignment and/or lease is not intended as security for an obligation; (vi) Liens arising out of and with respect to customer deposits made in the ordinary course of the Borrower's, its Subsidiaries' and/or its Affiliates' businesses; and (vii) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (vi) above, provided (a) that, in the case of paragraphs (i) through (iii) above, the principal amount of the obligation secured thereby is not increased and (b) that any such extension, renewal or replacement is limited to the property originally encumbered thereby. "Default Rate" shall mean a rate of interest equal to three percent (3.0%) above the applicable nondefault interest rate with respect to the Equipment Line of Credit/Term Loans. 9 "DOL" shall mean the United States Department of Labor and any successor department or agency. "Dollar," "Dollars" and the symbol "$" shall mean lawful money of the United States of America. "Environment" shall mean all air, surface water, water, vapor, groundwater, drinking water supply or land, including land surface or subsurface, and includes all fish, wildlife, biota and all other natural resources. "Environmental Approval" shall mean any Governmental Action pursuant to or required under any Environmental Law. "Environmental Claim" shall mean, with respect to any Person, any action, suit, proceeding, investigation, notice, claim, complaint or demand, made by any other Person (including but not limited to, any Governmental Authority, citizens' group or present or former employee of such first Person) alleging, asserting or claiming any actual or potential (i) violation of any Environmental Law, (ii) liability under any Environmental Law or (iii) liability for investigatory costs, cleanup costs, governmental response costs, damages to the Environment, property damages, personal injuries, fines or penalties arising out of, based on or resulting from the presence, or release into the Environment, of any Environmental Concern Materials at any location, whether or not owned by such Person; provided, however, in no event shall any voluntary action, proceeding or investigation made or brought by the Borrower, its Subsidiaries and/or its Affiliates from time to time in connection with their own activities or inactivities be included in this definition. "Environmental Cleanup Site" shall mean any location which is listed or proposed for listing on the National Priorities List, on CERCLIS or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding or investigation related to or arising from any alleged violation of any Environmental Law. "Environmental Concern Materials" shall mean (i) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollution, contaminate or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in any Environmental Law), (ii) any toxic chemical or other substance from or related to industrial, commercial or institutional activities and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea-formaldehyde. "Environmental Law" and "Environmental Laws" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (i) pollution or protection of the Environment, (ii) exposure of Persons, including, but not limited to, employees, to Environmental Concern Materials, (iii) protection of the public health or welfare from the effects of products, 10 by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (iv) regulation of the manufacture, generation, use or introduction into commerce of Environmental Concern Materials including their manufacture, formulation, packaging, labeling, distribution, treatment, transportation, handling, storage or disposal. Without limitation, "Environmental Law" shall include (a) any Environmental Approval and the terms and conditions thereof; (b) the following statutes: the Clean Air Act (42 U.S.C. ss.7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. ss.9601 et seq.); the Federal Water Pollution Control Act (33 U.S.C. ss.1251 et seq.); the Hazardous Material Transportation Act (49 U.S.C. ss.1801 et seq.); the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.136 et seq.); the Resource Conservation and Recovery Act of 1976 (42 U.S.C. ss.6901 et seq.) (including the Hazardous and Solid Waste Amendments of 1984), the Toxic Substance Control Act (15 U.S.C. ss.2601 et seq.); the Federal Occupational Safety & Health Act of 1970 (29 U.S.C. ss.651 et seq.) (including ss.3101 of the Omnibus Reconciliation Act of 1990), and the regulations promulgated thereunder and all as amended from time to time; and (c) any common law doctrine (including, without limitation, injunctive relief and tort, such as negligence, nuisance, trespass and strict liability) that may impose obligations or liabilities for personal injury or property damage due to, or threatened as a result of, the presence of or exposure to Environmental Concern Materials. "Environmental Lien" shall mean a Lien in favor of any Governmental Authority for (i) any liability currently due and payable under any Environmental Laws or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of any Environmental Concern Materials into the Environment. "Equipment" shall have the meaning ascribed and assigned to such term as set forth on Schedule "A" of the Security Agreement. "Equipment Line of Credit Period" shall mean the period commencing on the Closing Date and ending on the Equipment Line of Credit Termination Date. "Equipment Line of Credit/Term Loan" and "Equipment Line of Credit/Term Loans" shall mean any advance(s) of the Equipment Line of Credit/Term Loan Facility proceeds by the Lender to the Borrower and/or the Person(s) described on Schedule 2.01 of this Loan Agreement, all pursuant to and in accordance with Section 2.01 of this Loan Agreement. "Equipment Line of Credit/Term Loan Facility" shall have the meaning ascribed and assigned to such term as set forth in the second recital of this Loan Agreement. "Equipment Line of Credit/Term Loan Maturity Date" shall mean the earlier of (i) May 31, 2004 or (ii) the date of termination of the Equipment Line of Credit/Term Loan Facility pursuant to Section 9.02 of this Loan Agreement. "Equipment Line of Credit/Term Loan Note" shall mean that certain Equipment Line of Credit/Term Loan Note in substantially the form attached hereto as Exhibit "D" with the blanks appropriately filled in, such note payable to the order of the Lender in a face amount equal to the 11 Equipment Line of Credit/Term Loan Facility, as said note may be amended, supplemented, restated, extended or otherwise modified from time to time. "Equipment Line of Credit Termination Date" shall mean the earlier of (i) June 30, 1999 or (ii) the date of termination of the Equipment Line of Credit/Term Loan Facility pursuant to Section 9.02 of this Loan Agreement. "Equipment Line Term Period" shall mean the period commencing on July 1, 1999 and ending on the Equipment Line of Credit/Term Loan Maturity Date, unless otherwise prepaid earlier. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute of similar import, together with the regulations promulgated thereunder by the United States Treasury Department, the DOL and/or the PBGC. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower, its Subsidiaries and/or its Affiliates would be deemed to be a "single employer" within the meaning of Section 4001 of ERISA. "Eurodollar Affiliate" shall mean with respect to the Lender, the affiliate of the Lender, if any, set forth on Exhibit "A" attached to this Loan Agreement. "Eurodollar Interest Payment Date" shall mean, with respect to any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable to such Loan. "Eurodollar Interest Period" shall mean one or more periods of time during which the Borrower may select, convert to or continue a Eurodollar Rate Loan, such funding period with respect to the Equipment Line of Credit/Term Loan Facility, to be either a fourteen, thirty, sixty or ninety day period, subject to availability, all as more fully subject to the provisions of Section 2.06 of this Loan Agreement. "Eurodollar Interest Rate Determination Date" shall mean the date on which the Lender determines the Eurodollar Rate applicable to (i) a Borrowing or (ii) the continuation or conversion of Eurodollar Rate Loans. The Eurodollar Interest Rate Determination Date shall be the second Business Day prior to the first day of the Eurodollar Interest Period applicable to such Borrowing, continuation or conversion. "Eurodollar Portion" of any Equipment Line of Credit/Term Loans shall mean at any time the portion, including the whole, of such Equipment Line of Credit/Term Loans bearing interest at any time under the Eurodollar Rate. "Eurodollar Rate" shall mean, with respect to any Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans, an interest rate per annum determined by the Lender obtained by dividing (i) the rate of interest determined by the Lender in good faith in accordance with its 12 usual procedures (which determination shall be conclusive) to be the average (rounded upward to the nearest whole multiple of one one-thousandth of one percent (1/1000 of 1%) per annum if such average is not such a multiple) of the rates per annum at which deposits in Dollars are offered to the Lender by major money center banks in the London interbank eurodollar market at approximately 11:00 a.m. (London time) on the Eurodollar Interest Rate Determination Date for a period equal to such Eurodollar Interest Period and in an amount substantially equal to the amount of the Eurodollar Rate Loan to be made by the Lender and to be outstanding during such Eurodollar Interest Period by (ii) a percentage equal to 100% minus the Eurodollar Reserve Percentage. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. The "Eurodollar Rate" may also be expressed by the following formula: [average of the rates offered by major money center banks in the Eurodollar Rate = London interbank Eurodollar market as determined by the Lender] [1.00 - Eurodollar Reserve Percentage] Finally, the "Eurodollar Rate" shall in all circumstances mean the rate of interest which is customarily referred to as the "London Interbank Offered Rate". "Eurodollar Rate Loans" shall mean those Equipment Line of Credit/Term Loans outstanding which bear interest at a rate determined by reference to the Eurodollar Rate as provided for in Sections 2.02(i) and 2.06 of this Loan Agreement. "Eurodollar Rate Option" shall mean one of the interest rates available to the Borrower as provided for and described in Section 2.02(i)(a)(2) and Section 2.02(i)(b)(2) of this Loan Agreement. "Eurodollar Rate Taxes" shall have the meaning ascribed to such term in Section 2.06(vii)(a) of this Loan Agreement. "Eurodollar Reserve Percentage" shall mean for any date that percentage, if any (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Lender (which determination shall be conclusive) which is in effect on such date, as prescribed by the Federal Reserve Board, for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in respect of "eurocurrency liabilities" having a term equal to the applicable Eurodollar Interest Period (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). "Event of Default" or "Events of Default" shall mean any of the events of default as defined and described in Section 9.01 of this Loan Agreement. 13 "FDIC" shall mean the Federal Deposit Insurance Corporation or any successor thereto. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System or any governmental authority succeeding to its functions. "Fiscal Quarter" shall mean the following three month periods of each Fiscal Year: April 1 - June 30 July 1 - September 30 October 1 - December 31 January 1 - March 31 "Fiscal Year" shall mean that period commencing on April 1 and ending on March 31 of each year or such other period as the Borrower may designate and the Lender may approve in writing. "Fixed Rate" shall mean a per annum fixed rate of interest which interest rate shall be determined as of the date three (3) days prior to the first day of any applicable Fixed Rate Interest Period (based upon the Lender's then internal cost of funds plus 150 basis points) and which interest rate shall remain fixed throughout the applicable Fixed Rate Interest Period with respect to all or any portion of the outstanding principal balance of the Equipment Line of Credit/Term Loan Facility. "Fixed Rate Interest Period" shall mean one or more periods of time during the Equipment Line Term Period only, during which the Borrower may select, convert to or continue a Fixed Rate Loan, such funding period(s) with respect to the Equipment Line of Credit/Term Loan Facility to be used for such duration as determined by the Borrower. "Fixed Rate Loans" shall mean those Equipment Line of Credit/Term Loans outstanding which bear interest at the Fixed Rate as provided for and described in Section 2.02(i)(b)(3). "Fixed Rate Option" shall mean one of the interest rates available to the Borrower as provided for and described in Section 2.02(i)(b)(3). "Funding Segment" shall mean with respect to an Eurodollar Rate Loan, the entire principal amount of such Eurodollar Portion to which at the time in question there is applicable a particular Eurodollar Interest Period beginning on a particular day and ending on a particular day. (By definition, each such Eurodollar Portion is at all times composed of an integral number of discrete Funding Segments and the sum of the principal amounts of all Funding Segments of any such Eurodollar Portion at any time equals the principal amount of such Eurodollar Portion at such time.) 14 "General Intangibles" shall mean all "general intangibles", as such term is now or hereafter defined in the applicable Uniform Commercial Code, other than which relate to or are associated with any Equipment, including, all Contracts. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in the United States of America, as in effect from time to time, as developed, modified and set forth in the opinions and pronouncements of the Accounting Principles Board, the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, or in such other statements by such other Person as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination, subject to the terms of Section 1.03 of this Loan Agreement. "Governmental Action" shall mean any approval, order, consent, authorization, certificate, license, permit or validation of, or exemption or other action by, or filing, recording or registration with or notice to, any Governmental Authority. "Governmental Authority" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Indemnified Party" and "Indemnified Parties" shall mean the Lender and the directors, officers, trustees, employees, agents, attorneys and controlling shareholders of the Lender. "Independent Certified Public Accountant" shall mean KPMG Peat Marwick and any other recognized independent certified public accounting firm selected by the Borrower, its Subsidiaries and/or its Affiliates which accounting firm is satisfactory to the Lender, including, without limitation, any one of the other Big-Six Accounting Firms. "IRS" shall mean the Internal Revenue Service and any Person succeeding to the functions thereof. "Law" shall mean any law (including common law), constitution, statute, treaty, convention, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "Lender" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Letter of Credit" or "Letters of Credit" shall mean any standby letter of credit issued by the Lender for the account of the Borrower pursuant to Section 2.01(vi) the Revolving Line of Credit Loan Agreement. "Liabilities and Costs" shall mean all liabilities, obligations, responsibilities, losses, damages, punitive damages, consequential damages, treble damages, costs and reasonable expenses 15 (including, without limitation, attorneys', experts' and consulting fees and costs of investigation and feasibility studies), fines, penalties and monetary sanctions, interest, direct or indirect, known or unknown, absolute or contingent, past, present or future arising out of or relating to any action, suit, proceeding or resolution or settlement thereof. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or preference, priority, security interest or other security agreement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan Account" shall have the meaning ascribed to such term in Section 2.05(iv) hereof. "Loan Agreement" shall have the meaning ascribed and assigned to such term as set forth in the preamble of this Loan Agreement. "Loan Documents" shall mean any and all agreements, documents, certificates and instruments executed by the Borrower, the Corporate Guarantors, the Partnership Guarantors and/or any other Person and delivered by them to the Lender pursuant to and in connection with the Equipment Line of Credit/Term Loan Facility, including, without limitation, this Loan Agreement, the Equipment Line of Credit/Term Loan Note, the Swap Agreement, if any, the Agreement of Guaranty and all Security Agreements in each case as amended, supplemented, restated, extended or otherwise modified from time to time in accordance with the provisions hereof or thereof. "Margin Stock" shall have the meaning ascribed and assigned to such term in Regulation G and Regulation U. "Marketable Securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness commonly known as "securities", secured or unsecured, convertible, subordinated or otherwise, and in general any instruments commonly known as "securities" and any certificates of interest, shares or participation in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing which can readily be bought and sold on any nationally recognized securities exchange and would properly be classified as marketable securities on the consolidated balance sheet of the Borrower, its Subsidiaries and its Affiliates in accordance with Generally Accepted Accounting Principles. "Material Adverse Effect" shall mean a material adverse effect upon (i) the business, financial condition, financial performance, properties or operations of the Borrower, its Subsidiaries and its Affiliates taken as a whole or (ii) the ability of the Borrower, the Corporate Guarantors and the Partnership Guarantors to perform their collective obligations and duties under the Loan Documents. 16 "Multiemployer Plan" shall mean an employee benefit plan defined in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate. "Notice of Borrowing" shall mean, with respect to a proposed Borrowing pursuant to Section 2.01(ii) hereof, a notice substantially in the form of Exhibit "B" attached hereto and made a part thereof. "Notice of Conversions/Continuation" shall mean, with respect to a proposed conversion or continuation of a Equipment Line of Credit/Term Loan pursuant to Section 2.02(iii) hereof, a notice in the form of Exhibit "C" attached hereto and made a part hereof. "Obligations" shall mean all present and future indebtedness and other liabilities of the Borrower owing to the Lender, or any Person entitled to indemnification pursuant to Section 10.02 hereof, or any of their respective successors, transferees or assigns, of every type and description, whether or not evidenced by any note, guaranty or other instrument, arising under or in connection with this Loan Agreement or any other Loan Document, whether or not for the payment of money, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to the Borrower under this Loan Agreement, the Swap Agreement, if any, or any other Loan Document. "Office" when used in connection with the Lender, shall mean its principal office located at 1735 Market Street, Philadelphia, Pennsylvania 19101, or at such office or offices of the Lender or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Lender to the Borrower. "Officer's Certificate" shall mean a certificate of the Borrower executed by any of the Authorized Officers of the Borrower, including, without limitation, the president, any vice-president or the chief financial officer, in the form of Exhibit "F" attached hereto and made a part hereof. "Operating Lease" shall mean, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which is not a Capitalized Lease. "Partnership Guarantors" shall mean (i) Laurel Technologies Partnership t/a 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; (ii) DRS Medical Systems, a general partnership duly organized, validly existing and in good standing under the laws of the State of New Jersey, having its principal office located at 138 Bauer Drive, Oakland, New Jersey 07436 and (iii) any new or additional Affiliates of the Borrower in which the Borrower acquires an ownership interest of more than fifty percent (50%). 17 "PBGC" shall mean the Pension Benefit Guaranty Corporation and any Person succeeding to any or all of its functions and duties under ERISA. "Permits" shall mean any permit, approval, authorization, license, variance, or permission required from a Governmental Authority under any applicable Requirement of Law. "Person" or "Persons" shall mean any natural person, employee, general or limited partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, company, trust, bank or other organization, whether or not a legal entity or any other non-governmental entity, or any Governmental Authority. "Plan" shall mean any employee pension benefit plan within the meaning of Section 3(2) of ERISA (other than a Multiemployer Plan) covered by Title IV of ERISA by reason of Section 4021 of ERISA, of which the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate is or has been within the preceding five years a "contributing sponsor" within the meaning of Section 4001(a)(13) of ERISA, or which is or has been within the preceding five years maintained for employees of the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate. "Potential Event of Default" shall mean an event, condition or situation which, with the giving of any required notice and/or the passage of any required grace or cure periods, or any combination of the foregoing, would constitute an Event of Default. "Prime Rate" or "Prime Lending Rate" shall mean the fluctuating interest rate publicly announced by the Lender from time to time as its "prime rate "or "prime lending rate", which per annum rate may not necessarily be the rate actually charged by the Lender to its most creditworthy customers. "Prime Rate Loans" shall mean all Equipment Line of Credit/Term Loans outstanding which bear interest at a rate determined by reference to the Prime Rate as provided for in Section 2.02(i) of this Loan Agreement. "Prime Rate Option" shall mean one of the interest rates available to the Borrower as provided for and described in Section 2.02(i)(a)(1) and Section 2.02(i)(b)(1) of this Loan Agreement. "Property" shall mean any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by the Borrower, its Subsidiaries and/or its Affiliates. "RCRA" shall mean the Resource Conservation and Recovery Act of 1976, 42 U.S.C. '6901 et. seq., and any successor statute, and regulations promulgated thereunder. 18 "Regulation D" shall mean Regulation D of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation G" shall mean Regulation G of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation T" shall mean Regulation T of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation U" shall mean Regulation U of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Regulation X" shall mean Regulation X of the Federal Reserve Board, or any successor statute or regulation thereto, as in effect from time to time. "Release" shall mean release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of Environmental Concern Materials in violation of Environmental Laws into the indoor or outdoor Environment or into or out of any Property, including the movement of Environmental Concern Materials through or in the air, soil, surface water, groundwater or Property. "Remedial Action" shall mean actions, other than voluntary actions on the part of any Person, required to (i) clean up, remove, treat or in any other way address Environmental Concern Materials in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Environmental Concern Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Reportable Event" shall have the meaning ascribed to such term in Section 4043 of ERISA or regulations promulgated thereunder. "Requirements of Law" shall mean, as to any Person, the charter and by-laws or other organization or governing documents of such Person, and any law, rule or regulation, Permit, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, including, without limitation, the Securities Act, the Securities Exchange Act, Regulations G, U and X, and any certificate of occupancy, zoning ordinance, building, environmental or land use requirement or Permit or occupational safety or health law, rule or regulation. "Restricted Junior Payments" shall mean (i) any dividend or other distribution to the shareholders of the Borrower (whether direct or indirect and whether in cash, property, Securities or otherwise) on account of any shares of any class of capital stock (or equivalent partnership interest) of the Borrower now or hereafter outstanding, (ii) any payment or prepayment of principal of, 19 premium, if any, or interest on, or fees in respect of, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Consolidated Subordinated Debt after the occurrence of an Event of Default and (iii) any prepayment in advance of anticipated and scheduled payment dates of principal of, premium, if any, or interest on, or fees in respect of, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Consolidated Subordinated Debt (except for (a) prepayments in connection with the refinance of such Consolidated Subordinated Debt in amounts and on terms and conditions equal to or better than the existing terms and conditions and (b) prepayments of up to $1,000,000.00 in the aggregate of outstanding principal on any said Consolidated Subordinated Debt). "Revolving Line of Credit Loan Agreement" shall mean that certain Revolving Line of Credit Loan Agreement dated May 31, 1996, executed by and between the Borrower, as the borrower, and the Lender, as the lender. "Security Agreement" and "Security Agreements" shall mean a Security Agreement in the form of Exhibit "G" attached hereto and made a part hereof (fully executed), whereby the Borrower, the applicable Corporate Guarantor or the applicable Partnership Guarantor has collaterally assigned, hypothecated, pledged, conveyed, transferred, given and granted to the Lender, a continuing security interest in all of the Borrower's, the applicable Corporate Guarantor's or the applicable Partnership Guarantor's rights, title and interests in and to all of the tangible and intangible assets and properties of the Borrower, the applicable Corporate Guarantor or the applicable Partnership Guarantor described therein, including, without limitation, hereafter acquired Equipment, Chattel Paper, Contracts and General Intangibles as said Security Agreement may be amended, modified, extended and/or supplemented from time to time. "Securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness commonly known as "securities", secured or unsecured, convertible, subordinated or otherwise, and in general any instruments commonly known as "securities", and any certificates of interest, shares or participation in temporary or interim certificates for the purchase or acquisition of, and any right to subscribe to, purchase or acquire any of the foregoing, but shall not include any evidence of the Obligations. "Securities Act" shall mean the Securities Act of 1933, as amended to the date hereof and from time to time hereafter, and any successor statute. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended to the date hereof from time to time hereafter, and any successor statute. "Single Employer Plan" shall mean any Plan which is not a Multiemployer Plan under Title IV of ERISA. "Solvent" shall mean when used with respect to any Person, that at the time of determination: 20 (i) the fair value of its assets (at fair valuation) is in excess of the total amount of its liabilities, including, without limitation, contingent liabilities; (ii) it is then able to pay its debts as they mature; and (iii) it owns property having a value (at fair valuation) in excess of the total amount required to pay its debts. "Subsidiary" or "Subsidiaries" shall mean (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect a majority of directors is at the time, directly or indirectly, owned by the Borrower, by the Borrower and one or more Subsidiaries of the Borrower or by one or more Subsidiaries of the Borrower, (ii) any other Person (other than a corporation) in which the Borrower and one or more Subsidiaries of the Borrower, directly or indirectly, at the date of determination thereof has at least majority ownership interest and/or (iii) any entity whose net earnings (losses) or portions thereof would be properly included and consolidated with the net earnings of the Borrower; provided, however, that the term Subsidiary shall not include any entity that is not reflected on the balance sheet of the Borrower due to inactivity and lack of material assets and liabilities. "Swap Agreement" shall mean any interest rate swap, cap or collar agreement(s) executed by and between the Borrower and the Lender on the Closing Date or any time thereafter, including all schedules, providing for the transfer or mitigation of interest rate risks either generally or under specific contingencies, as said agreement(s) may have been and may hereafter be amended, modified, supplemented, extended, renewed or otherwise renegotiated by and between the Lender and the Borrower, subject to the Lender's review and approval on a case by case basis. "Swap Obligation" shall mean the Borrower's obligations to the Lender arising from time to time under the Swap Agreement, including any and all payment or reimbursement obligations of whatever nature. "Taxes" shall have the meaning ascribed and assigned to such term as set forth in Section 2.02(vi) of this Loan Agreement. "Termination Event" shall mean (i) any Reportable Event with respect to any Benefit Plan described in Section 4043 of ERISA and the regulations issued thereunder for which the notice requirements have not been waived by the PBGC, (ii) the withdrawal of the Borrower, any of its Subsidiaries and/or Affiliates, or an ERISA Affiliate from a Benefit Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the occurrence of an obligation arising under Section 4041 of ERISA of the Borrower, any of its Subsidiaries and/or Affiliates or an ERISA Affiliate to provide affected parties with a written notice of an intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA, (iv) the institution by the PBGC of proceedings to terminate any Benefit Plan, (v) any event or condition which constitutes grounds under Section 4042 of ERISA for the appointment of 21 a trustee to administer a Benefit Plan or (vi) the partial or complete withdrawal of the Borrower, any of its Subsidiaries and/or Affiliates or any ERISA Affiliate from a Multiemployer Plan. Section 1.02 Rules of Interpretation and Construction. In this Loan Agreement unless the context otherwise clearly requires: (i) Articles and Sections mentioned by number only are the respective Articles and Sections of this Loan Agreement as so numbered; (ii) Words importing a particular gender mean and include every other gender, and words importing the singular number mean and include the plural number and vice versa; (iii) Words importing persons mean and include firms, associations, partnerships (including limited partnerships), societies, trusts, corporations or other legal entities, including public or governmental bodies, as well as natural persons; (iv) Any headings preceding the texts of the several Articles and Sections of this Loan Agreement, and any table of contents or marginal notes appended to copies hereof, shall be solely for convenience of reference and shall not affect or control the meaning, construction or interpretation of this Loan Agreement; (v) If any clause, provision or section of this Loan Agreement shall be ruled invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any of the remaining provisions thereof, unless not invalidating or rendering unenforceable the remaining provisions shall be inequitable; (vi) The terms "herein", "hereunder", "hereby", "hereto", "hereof" and any similar terms as used in this Loan Agreement refer to this Loan Agreement as a whole and not to any particular provision of this Loan Agreement; the term "heretofore" means before the date of execution of this Loan Agreement; and the term "hereafter" means on or after the date of execution of this Loan Agreement; (vii) This Loan Agreement and all matters relating hereto shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania; and (viii) If any clause, provision or section of this Loan Agreement shall be determined to be apparently contrary to or conflicting with any other clause, provision or section of this Loan Agreement, then the clause, provision or section containing the more specific provisions shall control and govern with respect to such apparent conflict; and (ix) References in this Loan Agreement to "determination" (and similar terms) by the Lender include good faith and reasonable estimates by the Lender (in the case of quantitative determinations) and good faith and reasonable beliefs by the Lender (in the case of qualitative determinations). 22 Section 1.03 Accounting Principles. (i) As used in this Loan Agreement "Generally Accepted Accounting Principles" shall be established on the date a relevant computation or determination is to be made or the date of relevant financial statements as the case may be. (ii) Except as otherwise provided in this Loan Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Loan Agreement shall be prepared, in accordance with Generally Accepted Accounting Principles (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by Generally Accepted Accounting Principles. (iii) If any change in Generally Accepted Accounting Principles after the date of this Loan Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more provisions of this Loan Agreement shall have occurred or in the opinion of the Borrower would likely occur which would not have occurred or be likely to occur if no change in accounting principles had taken place, (a) the Borrower and the Lender agree that such violation shall not be considered to constitute an Event of Default or a Potential Event of Default for a period of thirty (30) days from othe date the Borrower notifies the Lender of the applicability of this Section 1.03(iii); (b) the Borrower and the Lender agree in such event to negotiate in good faith an amendment of this Loan Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in Generally Accepted Accounting Principles; and (c) if the Borrower and the Lender are unable to negotiate such an amendment within the thirty (30) day period described above in clause (a), the Borrower shall have the option of (A) prepaying and terminating the Loan (pursuant to applicable provisions hereof) or (B) submitting the drafting of such an amendment to a firm of Independent Certified Public Accountants of nationally recognized standing acceptable to the Borrower and the Lender, which shall complete its draft of such amendment within thirty (30) days of submission; if the Borrower and the Lender cannot agree, the firm shall be selected by binding arbitration in the City of Philadelphia, Pennsylvania in accordance with the then applicable rules of the American Arbitration Association. If the Borrower does not exercise either such option within said period, then as used in this Loan Agreement, "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in effect at the relevant date. The Borrower and the Lender agree that if the Borrower elects the option in clause (B) above, until such firm has been selected and completes drafting such amendment, no such violation shall constitute an Event of Default or a Potential Event of Default. (iv) If any change in Generally Accepted Accounting Principles after the date of this Loan Agreement is required to be applied to transactions or conditions then or thereafter in existence, and the Lender shall assert that the effect of such change is or shall likely be to distort materially the effect of any of the definitions of financial terms in Article I of this Loan Agreement or any of the covenants of the Borrower in Article VIII of this Loan Agreement (hereinafter referred 23 to as the "Financial Provisions"), so that the intended economic effect of any of the Financial Provisions will not in fact be accomplished, then (a) the Lender shall notify the Borrower of such assertion, specifying the change in Generally Accepted Accounting Principles which is objected to, and until otherwise determined as provided below, the specified change in Generally Accepted Accounting Principles shall not be made by the Borrower in its financial statements for the purpose of applying the Financial Provisions; and (b) The Lender and the Borrower shall follow the procedures set forth in paragraph (iii)(b) and the first sentence of paragraph (c) of subsection (iii) of this Section 1.03. If the Borrower and the Lender are unable to agree on an amendment as provided in said paragraph (iii)(b) and if the Borrower does not exercise either option set forth in the first sentence of said paragraph (iii)(c) within the specified period, then as used in this Loan Agreement "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles in effect at the relevant date, except that the specified change in "Generally Accepted Accounting Principles" which is objected to by the Lender shall not be made in applying the Financial Provisions. The Borrower and the Lender agree that if the Borrower elects the option in clause (B) of the first sentence of said paragraph (iii)(c), until such independent accounting firm has been selected and completes drafting such amendment, the specified change in "Generally Accepted Accounting Principles" shall not be made in applying the Financial Provisions. (v) All expenses of compliance with this Section 1.03 shall be paid for by the Borrower, except the Borrower and the Lender shall be responsible for their own costs and expenses associated with proceedings under Section 1.03(iii)(c) hereof other than the cost and expense payable to the American Arbitration Association and any such accounting firm which shall be divided equally between the Lender on the one hand and the Borrower on the other. 24 ARTICLE II AMOUNTS AND TERMS FOR THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY Section 2.01 Equipment Line of Credit/Term Loan Facility. (i) Availability. (a) Subject to the terms and conditions set forth in this Loan Agreement, and provided no Potential Event of Default or Event of Default shall have occurred and be continuing, the Lender hereby agrees to make to the Borrower or to any other Person described on Schedule 2.01 attached hereto as directed by the Borrower pursuant to this Loan Agreement from time to time during the Equipment Line of Credit Period, equipment line of credit loans (hereinafter each individually referred to as an "Equipment Line of Credit/Term Loan" and collectively, the "Equipment Line of Credit/Term Loans"), in an amount which shall not exceed in the aggregate at any time outstanding the $5,000,000.00 principal amount of the Equipment Line of Credit/Term Loan Facility. If the outstanding principal amount of the Equipment Line of Credit/Term Loans shall intentionally or unintentionally exceed the amount of the $5,000,000.00 principal amount of the Equipment Line of Credit/Term Loan Facility at any time, such excess shall be (1) immediately payable by the Borrower to the Lender, (2) deemed secured by the Collateral and (3) subject to the terms of this Loan Agreement. No new or additional Equipment Line of Credit/Term Loan shall be made during the Equipment Line Term Period. The Equipment Line of Credit/Term Loans shall be evidenced by the Equipment Line of Credit/Term Loan Note. The Lender is hereby authorized to record the dates and amounts of each Equipment Line of Credit/Term Loan made by the Lender and the dates and amounts of each payment or prepayment of principal thereof on "Schedule 1" annexed to and constituting a part of the Equipment Line of Credit/Term Loan Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information as recorded; provided, however, the failure to make such notation with respect to any Borrowing shall not otherwise affect the obligation of the Borrower to the Lender under this Loan Agreement or the Equipment Line of Credit/Term Loan Note. (b) During the Equipment Line of Credit Period, Equipment Line of Credit/Term Loans may be voluntarily prepaid pursuant to Section 2.04 hereof and, subject to the provisions of this Loan Agreement, any amounts so prepaid may be reborrowed, until the Business Day next preceding the Equipment Line of Credit Termination Date. The Lender's commitment to make Equipment Line of Credit/Term Loans shall expire on the Equipment Line of Credit Termination Date, and all Equipment Line of Credit/Term Loans then outstanding shall, provided no Potential Event of Default or Event of Default exists under this Loan Agreement, (1) be converted to a term loan and (2) commence amortizing during the Equipment Line Term Period, all as more fully provided for in Section 2.01(v) below. (ii) Notice of Borrowing. During the Equipment Line of Credit Period, whenever the Borrower desires to borrow a Prime Rate Loan or an Eurodollar Rate Loan under this Section 2.01, the Borrower shall deliver to the Lender a Notice of Borrowing no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the proposed Borrowing Date, in the case of a Borrowing as a 25 Prime Rate Loan, and at least two (2) Business Days in advance of the proposed Borrowing Date in the case of a Borrowing as a Eurodollar Rate Loan. The Notice of Borrowing shall specify (a) the Borrowing Date (which shall be a Business Day) in respect of the Equipment Line of Credit/Term Loan, (b) the amount of the proposed Borrowing which shall not be less than $25,000.00, (c) the intended use of the proceeds of such Borrowing, (d) the applicable interest rate option as described in Section 2.02(i) of this Loan Agreement, (e) the Eurodollar Interest Period, if applicable, and (f) the location of the Equipment to be acquired with the proceeds of the Equipment Line of Credit/Term Loan. In lieu of delivering the above-described Notice of Borrowing, the Borrower may give the Lender telephonic notice of any proposed Borrowing by the time required under this Section 2.01(ii); provided, however, that such notice shall be confirmed in writing by delivery to the Lender promptly (but in no event later than the Borrowing Date of the requested Equipment Line of Credit/Term Loan) of a Notice of Borrowing. Any Notice of Borrowing (or telephonic notice in lieu thereof) pursuant to this Section 2.01(ii) shall be irrevocable. In addition, the Borrower shall also deliver to the Lender invoices or other written documentation evidencing the purchase price of the Equipment that the Borrower intends to acquire with the proceeds of the requested Equipment Line of Credit/Term Loan. The Lender will advance up to eighty percent (80%) of the purchase price of said Equipment, or such lesser amount as requested by the Borrower. The Lender will advance not more than $750,000.00 of the proceeds of the Equipment Line of Credit/Term Loan Facility for "deposits" or "progress payments" in connection with the acquisition of said Equipment. The Borrower covenants and agrees that it shall provide, furnish and obtain for the benefit of the Lender, within six (6) months of each advance of proceeds of the Equipment Line of Credit/Term Loan made for "deposits" or "progress payments", a first lien prior security interest in the Equipment being purchased with said "deposits" and "progress payments". In furtherance of said agreement, the Borrower shall give the Lender written evidence of the Borrower's ownership and possession of said Equipment, together with the necessary UCC-1 Financing Statements described in Section 3.02(ii). At such time as the Lender is satisfied of the Borrower's ownership interest in said Equipment, said "deposits" or "progress payments" shall no longer constitute a "deposit" or "progress payment" for purposes of this Section 2.01(ii). (iii) Making of Equipment Line of Credit/Term Loans. The Lender shall make the proceeds of such Equipment Line of Credit/Term Loan available to the Borrower at the Lender's Office, no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on such Borrowing Date and shall disburse such funds in Dollars and in immediately available funds to an account of the Borrower maintained with the Lender and thereafter to any substitute account, designated in writing by the Borrower in the Notice of Borrowing. (iv) Use of Proceeds of Equipment Line of Credit/Term Facility. The proceeds of the Equipment Line of Credit/Term Loan Facility shall be used by the Borrower for the sole purpose of financing a portion of the purchase price and certain costs and expenses incurred by the Borrower, its Subsidiaries and/or it Affliates in connection with the acquisition of certain Equipment used in their respective businesses. (v) Amortization of the Equipment Line of Credit/Term Loan Facility. (a) During the Equipment Line of Credit Period, provided no Event of Default or Potential Event of Default 26 shall have occurred and be continuing, there shall be no required principal amortization payments on the Equipment Line of Credit/Term Loan Facility from the Borrowing Date of an Equipment Line of Credit/Term Loan through December 31st of the year in which said Borrowing occurred. Commencing on March 31st of the following calendar year and continuing thereafter on the first (1st) day of each succeeding month, the Borrower shall repay to the Lender the outstanding principal balance of each Equipment Line of Credit/Term Loan in an amount sufficient to repay the outstanding principal balance of the Equipment Line of Credit/Term Loan over a hypothetical sixty (60) month term. (b) Notwithstanding any term or condition to the contrary set forth above, the Borrower shall commence principal payments to the Lender in monthly installments for any Borrowing made during the 1999 calendar year no later than June 30, 1999. In the event the Borrower shall request a Borrowing on June 30, 1999, then the Borrower shall pay to the Lender one-sixtieth (1/60th) of the principal amount of the Borrowing on said date. (c) Notwithstanding any term or condition to the contrary set forth above, the Borrower may, at its sole option, elect to commence the payment of principal amortization on any or all of the outstanding Equipment Line Credit/Term Loans prior to March 31st of each succeeding year following the year of each said Borrowing. The Borrower shall give the Lender written notice of said election at least ten (10) days prior to the making of the first payment and thereafter all succeeding payments shall continue uninterrupted on the first day of each month for a period of fifty-nine (59) months. (d) During the Equipment Line Term Period, subject to the prior terms, conditions and the provisions of this Section 2.01(v) and Section 2.04, the Borrower shall continue to repay to the Lender the outstanding principal balance of the Equipment Line of Credit/Term Loan Facility in consecutive monthly installments in an amount sufficient to repay the entire outstanding principal balance of the Equipment Line of Credit/Term Loan Facility on or before the Equipment Line of Credit/Term Loan Maturity Date. The final payment of all principal, unpaid accrued interest, fees and expenses, if any, owing to the Lender on the Equipment Line of Credit/Term Loan Facility shall be due and payable on the Equipment Line of Credit/Term Loan Maturity Date. Section 2.02 Interest on the Equipment Line of Credit/Term Loans. (i) Rate of Interest. (a) During the Equipment Line of Credit Period, all Equipment Line of Credit/Term Loans shall bear interest computed daily on the outstanding principal balance thereof from the date made until paid in full at one or more of the interest rate options selected by the Borrower from among the two (2) interest rate options set forth below. Subject to the provisions of this Loan Agreement, the Borrower may select different options to apply simultaneously to different portions of the Equipment Line of Credit/Term Loans and may select different Funding Segments to apply simultaneously to different parts of the Eurodollar Rate Portion of the Equipment Line of Credit/Term Loans. Each selection of a rate option shall apply separately and without overlap to the Equipment Line of Credit/Term Loans as a class. The aggregate number of 27 Funding Segments applicable to the Eurodollar Rate Portion of the Equipment Line of Credit/Term Loans at any time shall not exceed twenty (20). Interest Rate Options For Equipment Line of Credit/Term Loans during the Equipment Line of Credit Period: (1) Prime Rate: A fluctuating rate per annum for each day equal to the Prime Rate of the Lender, in effect from time to time (such interest rate to change immediately upon any change in the Prime Rate); or (2) Eurodollar Rate. A fixed rate per annum for each day during a Eurodollar Interest Period equal to the Eurodollar Rate for such Eurodollar Interest Period plus one hundred fifty (150) basis points. The Lender shall give prompt notice to the Borrower of the Eurodollar Rate determined or adjusted in accordance with the provisions hereof, which determination or adjustment shall be conclusive (absent manifest error) if made in good faith. (b) During the Equipment Line Term Period, all Equipment Line of Credit/Term Loans shall bear interest computed daily on the outstanding principal balance thereof from the date made until paid in full at one or more of the interest rate options selected by the Borrower from among the three (3) interest rate options set forth below. Subject to the provisions of this Loan Agreement, the Borrower may select different options to apply simultaneously to different portions of the Equipment Line of Credit/Term Loans and may select different Funding Segments to apply simultaneously to different parts of the Eurodollar Rate Portion of the Equipment Line of Credit/Term Loans. Each selection of a rate option shall apply separately and without overlap to the Equipment Line of Credit/Term Loans as a class. The aggregate number of Funding Segments applicable to the Eurodollar Rate Portion of the Equipment Line of Credit/Term Loans at any time shall not exceed twenty (20). Interest Rate Options For Equipment Line of Credit/Term Loans during the Equipment Line Term Period: (1) Prime Rate: A fluctuating rate per annum for each day equal to the Prime Rate of the Lender, in effect from time to time (such interest rate to change immediately upon any change in the Prime Rate); (2) Eurodollar Rate. A fixed rate per annum for each day during a Eurodollar Interest Period equal to the Eurodollar Rate for such Eurodollar Interest Period plus one hundred fifty (150) basis points. The Lender shall give prompt notice to the Borrower of the Eurodollar Rate determined or adjusted in accordance with the provisions hereof, which determination or adjustment shall be conclusive (absent manifest error) if made in good faith; or 28 (3) Fixed Rate: A fixed rate per annum for each day during the Fixed Rate Interest Period equal to the Fixed Rate. (c) Notwithstanding subparagraph (a) and (b) above, interest in respect of any Equipment Line of Credit/Term Loans shall not exceed the maximum rate permitted by applicable Law. (ii) Interest Payments. Subject to Section 2.02(iv) hereof, interest accrued on all Prime Rate Loans shall be payable by the Borrower in arrears (a) on the first day of each Fiscal Quarter during the term of this Loan Agreement, with the first payment commencing on January 1, 1997 and (b) at maturity. Interest accrued on each Eurodollar Rate Loan shall be payable by the Borrower in arrears (1) on each Eurodollar Interest Payment Date applicable to that Eurodollar Rate Loan, (2) upon prepayment thereof in full or in part and (3) at maturity. Interest accrued on each Fixed Rate Loan shall be payable by the Borrower in arrears (x) on the first day of each month commencing on the first day of each month during the Equipment Line Term Period and (y) at maturity. (iii) Conversion or Continuation. (a) Subject to the provisions of Section 2.04, Section 2.06, and Section 2.11 hereof, the Borrower shall have the option (1) to convert at any time all or any part of outstanding Equipment Line of Credit/Term Loans which, in the aggregate, equal $250,000.00 or an integral multiple of $1,000.00 in excess of that amount from Prime Rate Loans to Eurodollar Rate Loans; or (2) to convert at any time all or any part of outstanding Equipment Line of Credit/Term Loans from Prime Rate Loans to Fixed Rate Loans; or (3) to convert all or any part of outstanding Equipment Line of Credit/Term Loans which, in the aggregate, equal $250,000.00 or an integral multiple of $1,000.00 in excess of that amount from Eurodollar Rate Loans to Prime Rate Loans on the expiration date of any Eurodollar Interest Period applicable thereto; or (4) to convert all or any part of outstanding Equipment Line of Credit/Term Loans which, in the aggregate, equal $250,000.00 or an integral multiple of $1,000.00 in excess of that amount from Eurodollar Rate Loans to Fixed Rate Loans on the expiration date of any Eurodollar Interest Period applicable thereto; or (5) to convert at any time all or any part of outstanding Equipment Line of Credit/Term Loans from Fixed Rate Loans to Prime Rate Loans; or (6) to convert at any time all or any part of outstanding Equipment Line of Credit/Term Loans which, in the aggregate, equal $250,000.00 or an integral multiple of $1,000.00 from Fixed Rate Loans to Eurodollar Rate Loans; or (7) upon the expiration of any Eurodollar Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Equipment Line of Credit/Term Loans equal to $250,000.00 or an integral multiple of $1,000.00 in excess of that amount as Eurodollar Rate Loans of the same type, and the succeeding Eurodollar Interest Period of such continued Equipment Line of Credit/Term Loans shall commence on the expiration date of the Eurodollar Interest Period applicable thereto; provided, however, that no outstanding Equipment Line of Credit/Term Loan may be continued as, or be converted into, a Eurodollar Rate Loan when any Event of Default or Potential Event of Default has occurred and is continuing. (b) In the event the Borrower shall elect to convert or continue an Equipment Line of Credit/Term Loan under this Section 2.02(iii), the Borrower shall deliver a Notice of 29 Conversion/Continuation to the Lender no later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the proposed conversion date in the case of a conversion to a Prime Rate Loan, and no later than 2:00 p.m. (Philadelphia, Pennsylvania time) at least two Business Days in advance of the proposed conversion/continuation date in the case of a conversion to or a continuation of a Eurodollar Rate Loan. A Notice of Conversion/Continuation shall specify (1) the proposed conversion/continuation date (which shall be a Business Day), (2) the amount of the Equipment Line of Credit/Term Loan to be converted/continued, (3) the nature of the proposed conversion/continuation and (4) in the case of a conversion to, or continuation of, a Eurodollar Rate Loan, the requested Eurodollar Interest Period. In lieu of delivering the above-described Notice of Conversion/Continuation, the Borrower may give the Lender telephonic notice of any proposed conversion/continuation by the time required under this Section 2.02(iii); provided, however, that such notice shall be confirmed in writing by delivery to the Lender promptly (but in no event later than the proposed conversion/continuation date) of a Notice of Conversion/Continuation. (c) Any Notice of Conversion/Continuation for conversion to, or continuation of, an Equipment Line of Credit/Term Loan (or telephonic notice in lieu thereof) shall be irrevocable and the Borrower shall be bound to convert or continue in accordance therewith. (iv) Default Interest. Notwithstanding the rates of interest specified in Section 2.02(i) hereof and the payment dates specified in Section 2.02(ii) hereof, effective immediately upon the occurrence of any Event of Default under Section 9.01 of this Loan Agreement and for as long thereafter as any such Event of Default shall be continuing, the principal balance of all Loans then outstanding and, to the extent permitted by applicable Law, any interest payments on the Loans not paid when due, shall bear interest payable upon demand at the Default Rate. (v) Computation of Interest. Interest on Prime Rate Loans, Eurodollar Rate Loans and Fixed Rate Loans shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days. In computing interest on any Equipment Line of Credit/Term Loan, the date of the making of the Equipment Line of Credit/Term Loan or the first day of a Eurodollar Interest Period, as the case may be, shall be included and the date of payment or the expiration date of a Eurodollar Interest Period, as the case may be, shall be excluded; provided, however, that if an Equipment Line of Credit/Term Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Equipment Line of Credit/Term Loan. (vi) Changes; Legal Restrictions. Except as provided in Section 2.06(iv) hereof with respect to certain determinations on Eurodollar Interest Rate Determination Dates, in the event that after the date hereof (a) the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a court or Governmental Authority or any change in the interpretation or application thereof by a court or Governmental Authority, or (b) compliance by the Lender with any request or directive from any central bank or other Governmental Authority or quasi-governmental authority: 30 (1) subjects the Lender (or its applicable lending office or Eurodollar Affiliate) to any taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any kind which the Lender determines to be applicable to this Loan Agreement, the Equipment Line of Credit/Term Loans, or change in the basis of taxation of payments to the Lender of principal, fees, interest, or any other amount payable hereunder, except for net income or franchise taxes imposed by any jurisdiction (all such non-excepted taxes, duties and other charges being hereinafter referred to as "Taxes"); or (2) does or may impose, modify, or hold applicable, in the determination of a Lender, any reserve, special deposit, compulsory loan, FDIC insurance, capital allocation or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, commitments made, or other credit extended by, or any other acquisition of funds by, the Lender or any applicable lending office or Eurodollar Affiliate of the Lender (except, with respect to Prime Rate Loans to the extent that the reserve and FDIC insurance requirements are reflected in the definition of "Prime Rate" and, with respect to a Eurodollar Rate Loan, to the extent that the reserve requirements are reflected in the definition of "Eurodollar Rate"); or (3) does or is reasonably likely to impose on the Lender any other condition materially more burdensome in nature, extent or consequence than those in existence as of the Closing Date; and the result of any of the foregoing is to increase the cost to the Lender of making, renewing or maintaining the Equipment Line of Credit/Term Loans, then, in any such case, the Borrower shall promptly pay to the Lender, upon demand, such amount or amounts (based upon an allocation thereof by the Lender to the financing transactions contemplated by this Loan Agreement and effected by this Section 2.02 (vi) as may be necessary to compensate the Lender for any such additional cost incurred or reduced amount received. The Lender shall deliver to the Borrower a written statement of the costs or reductions claimed and the basis therefore, and the allocation made by the Lender of such costs and reductions shall be conclusive, absent manifest error. If the Lender subsequently recovers any amounts previously paid by the Borrower pursuant to this Section 2.02 (vi), the Lender shall, within thirty (30) days after receipt of such refund and to the extent permitted by applicable Law, pay to the Borrower the amount of any such recovery. Section 2.03. Fees. (i) Unused Commitment Fee. The Borrower shall pay to the Lender an unused commitment fee accruing at the rate of one-eighth of one percent (0.125%) per annum from and after the Closing Date until the Obligations are repaid in full and the Equipment Line of Credit/Term Loan Facility is terminated, upon the average daily amount of the excess of the Equipment Line of Credit/Term Loan Facility over all outstanding Equipment Line of Credit/Term Loans from time to time. All such commitment fees payable under this Section 2.03 shall be calculated and payable quarterly in arrears on the first Business Day in each Fiscal Quarter beginning after the Closing Date. 31 (ii) Late Charge Fee. In the event that any payment, including, without limitation, interest or principal, required to be made by the Borrower under the Equipment Line of Credit/Term Loan Note or under this Loan Agreement shall not be received by the Lender within fifteen (15) days of when due, the Lender may charge, and if so charged, the Borrower shall pay, a late charge of ($0.05) for each dollar ($1.00) of each delinquent payment for the purpose of defraying the expense incident to the handling of such delinquent payment. In no event shall said late charge fee be less than ten dollars ($10.00). (iii) Payment of Fees. The fees described in this Section 2.03 represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit, and the obligation of the Borrower to pay each fee described herein shall be in addition to, and not in lieu of, the obligation of the Borrower to pay interest, other fees and expenses otherwise described in this Loan Agreement and the Commitment Letter. Fees shall be payable when due at the Office of the Lender in immediately available funds. All fees shall be non-refundable when paid. All fees and expenses specified or referred to in this Loan Agreement due and owing to the Lender, including, without limitation, those referred to in this Section 2.03 and in Section 10.01 hereof and in the Commitment Letter, shall bear interest, if not paid when due, at the Default Rate (but not to exceed the maximum rate permitted by applicable Law), shall constitute Obligations. All fees described in this Section 2.03 and the Commitment Letter which are expressed as a per annum charge shall be calculated on the basis of the actual number of days elapsed in a 360-day year. Section 2.04 Voluntary Prepayments. (i) The Borrower may, at any time and from time to time, upon the giving of at least one (1) Business Days' prior express written notice to the Lender, voluntarily prepay any Prime Rate Loan in whole or in part, without premium or fee, in an aggregate minimum amount of $25,000.00 and in integral multiples of $1,000.00; provided, however, any principal prepayment of a Prime Rate Loan shall be accompanied by the payment of all unpaid accrued interest due and owing on said Prime Rate Loan. (ii) The Borrower may, at any time and from time to time, upon the giving of at least one (1) Business Days' prior express written notice to the Lender, voluntarily prepay any Eurodollar Rate Loan in whole or in part, in an aggregate minimum amount of $25,000.00 and in integral multiples of $1,000.00, subject to the following: (a) any principal prepayment of a Eurodollar Rate Loan shall be accompanied by the payment of all unpaid accrued interest due and owing on said Eurodollar Rate Loan and (b) the Borrower shall pay to the Lender all amounts described in Section 2.06(vi) of this Loan Agreement. (iii) The Borrower may, at any time and from time to time, voluntarily prepay any Fixed Rate Loan, in whole or in part, without premium or fee, in an aggregate minimum amount of $10,000.00 subject to the indemnification provisions of Section 2.11 of this Loan Agreement. (iv) Notwithstanding any provision of this Section 2.04 to the contrary, in the event that any prepayments of any Equipment Line of Credit/Term Loans are made in connection with 32 the termination of this Loan Agreement, such prepayments shall be made only upon ten (10) Business Days' prior express written notice to the Lender. Section 2.05 Payments; Collection of Accounts. (i) Manner and Time of Payment. All payments of principal, interest and fees hereunder payable to the Lender shall be made without condition or reservation or right, in Dollars and in immediately available funds, delivered to the Lender not later than 2:00 p.m. (Philadelphia, Pennsylvania time) on the date due, to such account of the Lender at its Office, as the Lender may designate. Funds received by the Lender after that time and date shall be deemed to have been paid on the next succeeding Business Day. The Lender shall send a monthly and/or quarterly invoice, as applicable, to the Borrower reflecting the accrued interest due and owing and all fees due and owing hereunder. The Borrower hereby agrees that on the Business Day that any payment of principal, interest and fees are due, the Lender shall automatically charge a demand deposit account of the Borrower, which account shall be maintained with the Lender at all times throughout the term of the Equipment Line of Credit/Term Loan Facility. The Borrower's authorization of the Lender to charge such account having sufficient funds on deposit shall constitute payment of the amount so authorized notwithstanding the Lender's failure to charge said account. Any failure or delay by the Lender in submitting invoices for interest and fee payments shall not discharge or relieve the Borrower of the obligation to make such payments into the demand deposit account. (ii) Apportionment of Payments. So long as there does not exist an Event of Default, all payments of principal and interest in respect of outstanding Equipment Line of Credit/Term Loans, all payments of the fees described herein and in the Commitment Letter, and all payments in respect of any other Obligation shall be allocated by the Borrower as it may be entitled thereto as provided herein. After the occurrence and during the continuance of an Event of Default, the Lender shall, after providing notice to the Borrower that payments and proceeds shall be so applied, apply all payments remitted to the Lender subject to the provisions of this Loan Agreement, (a) first, to pay Obligations in respect of any fees, expense reimbursements or indemnities then due and owing to the Lender from the Borrower; (b) second, to pay interest due in respect of Equipment Line of Credit/Term Loans; (c) third, to pay or prepay principal of Equipment Line of Credit/Term Loans and (d) fourth, to the ratable payment of all other Obligations. (iii) Payments on Non-Business Days. Whenever any payment to be made by the Borrower hereunder shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder and of any of the fees specified in Section 2.03 hereof, as the case may be. (iv) Lender's Accounting. The Lender shall maintain a loan account (hereinafter referred to as the "Loan Account") on its books in which shall be recorded (a) principal amount of Equipment Line of Credit/Term Loans owing to the Lender from time to time; (b) all other appropriate debits and credits as provided in this Loan Agreement, including, without limitation, all interest, fees, expenses, charges and other Obligations; and (c) all payments of Obligations made by 33 the Borrower or for the Borrower's account. All entries in the Loan Account shall be made in accordance with the Lender's customary accounting practices as in effect from time to time. The Lender will render a statement of the Loan Account upon the request of the Borrower. Each and every such statement shall be deemed final, binding and conclusive upon the Borrower in all respects as to all matters reflected therein (absent manifest error), unless the Borrower, within ten (10) days after the date such statement is rendered, delivers to the Lender written notice of any objection which the Borrower may have to any such statement. In that event, only those items expressly objected to in such notice shall be deemed to be disputed by the Borrower. Section 2.06 Special Provisions Governing Eurodollar Rate Loans. Notwithstanding other provisions of this Loan Agreement to the contrary, if any, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: (i) Amount of Eurodollar Rate Loans. Each Eurodollar Rate Loan shall be for a minimum amount of $250,000.00 and in integral multiples of $1,000.00 in excess of that amount. (ii) Determination of Eurodollar Interest Period. By giving notice as set forth in Sections 2.01 (ii) and 2.02(iii) hereof (with respect to a conversion into or a continuation of Eurodollar Rate Loans), the Borrower shall have the option, subject to the other provision of this Section 2.06, to specify an Eurodollar Interest Period to apply to the Borrowing of Eurodollar Rate Loans described in such notice, subject to availability. The determination of Eurodollar Interest Periods shall be subject to the following provisions: (a) In the case of immediately successive Eurodollar Interest Periods applicable to a Borrowing of Eurodollar Rate Loans, each successive Eurodollar Interest Period shall commence on the day on which the next preceding Eurodollar Interest Period expires; (b) If any Eurodollar Interest Period would otherwise expire on a day which is not a Business Day, the Eurodollar Interest Period shall be extended to expire on the next succeeding Business Day; provided, however, that if any such Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in that month, that Eurodollar Interest Period shall expire on the immediately preceding Business Day; (c) The Borrower may not select a Eurodollar Interest Period for any Equipment Line of Credit/Term Loan which terminates later than the Equipment Line of Credit/Term Loan Maturity Date; (d) The Borrower may not select a Eurodollar Interest Period with respect to any portion of principal of a Eurodollar Rate Loan which extends beyond a date on which the Borrower is required to make a scheduled payment of any portion of principal, it being understood and agreed that any Eurodollar Rate Loan whose Eurodollar Interest Period ends less than one month prior to such required principal payment date shall be deemed converted to a Prime Rate Loan as of the last 34 day of such Eurodollar Interest Period for purposes of determining whether any portion of principal of any Eurodollar Rate Loan is required in order to make a mandatory payment of principal; and (e) There shall be no more than twenty (20) Eurodollar Interest Periods under this Loan Agreement in effect at any one time under the Equipment Line of Credit/Term Loan Facility. (iii) Determination of Interest Rate. As soon as practicable after 2:00 p.m. (Philadelphia, Pennsylvania time) on any Eurodollar Interest Rate Determination Date, the Lender shall determine (which determination shall, absent manifest error, be rebuttably presumed correct) the interest rate which shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Eurodollar Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrower. (iv) Interest Rate Unascertainable, Inadequate or Unfair. If, with respect to any Eurodollar Interest Period, the Lender determines that (a) deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Eurodollar Interest Period, (b) adequate and reasonable means do not exist for ascertaining the Eurodollar Rate or (c) a contingency has occurred which materially and adversely affects the London interbank Eurodollar market then the Lender shall forthwith give notice thereof to the Borrower, whereupon until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (1) the right of the Borrower to elect to have Equipment Line of Credit/Term Loans bear interest based upon the Eurodollar Rate shall be suspended and (2) each outstanding Eurodollar Rate Loan shall be converted into a Prime Rate Loan on the last day of the then current Eurodollar Interest Period therefor, notwithstanding any prior election by the Borrower to the contrary. (v) Illegality. (a) In the event that on any date the Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties) that the making or continuation of any Eurodollar Rate Loan has become unlawful by compliance by the Lender in good faith with any Law, of any Governmental Authority (whether or not having the force of Law and whether or not failure to comply therewith would be unlawful), then, and in any such event, the Lender shall promptly give notice (by telephone promptly confirmed in writing) to the Borrower. (b) Upon the giving of the notice referred to in Section 2.06(v)(a) hereof, (1) the Borrower's right to request of the Lender and the Lender's obligation to make Eurodollar Rate Loans shall be immediately suspended, and the Lender shall make an Equipment Line of Credit/Term Loan, as part of any requested Borrowing of Eurodollar Rate Loans, as a Prime Rate Loan, which Prime Rate Loan shall, for all purposes, be considered a part of such Borrowing, and (2) if the affected Eurodollar Rate Loan or Loans are then outstanding, the Borrower shall immediately (or, if permitted by applicable Law, no later than the date permitted thereby, upon at least one Business Day's written notice to the Lender) convert each such Equipment Line of Credit/Term Loan into a Prime Rate Loan. 35 (c) In the event that the Lender determines at any time following its giving of the notice referred to in Section 2.06(iv) and Section 2.06(v)(a) hereof that the Lender may lawfully make Eurodollar Rate Loans of the type referred to in such notice, the Lender shall promptly give notice (by telephone confirmed in writing) to the Borrower of that determination, whereupon the Borrower's right to request of the Lender, and the Lender's obligation to make, Eurodollar Rate Loans shall be restored. (vi) Compensation. In addition to such amounts as are required to be paid by the Borrower pursuant to Sections 2.02(iv), 2.02(vi), 2.03 (iii), 2.04(ii), 2.06(vii), 2.07 and 2.09 hereof, the Borrower shall compensate the Lender, upon demand, for all losses, expenses and liabilities (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds required by the Lender to fund or maintain the Lender's Eurodollar Rate Loans) which losses, expenses and liabilities the Lender may sustain (a) if for any reason a Borrowing, conversion or continuation of Eurodollar Rate Loans does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion/Continuation or in a telephonic request for borrowing or conversion/continuation or a successive Eurodollar Interest Period does not commence after notice therefor is given pursuant to Section 2.02(iii) hereof as a result of any action or inaction on the part of any Person (other than the Lender), (b) if any prepayment of an Eurodollar Rate Loan (including, without limitation, any prepayment pursuant to Section 2.04 hereof) occurs for any reason on a date which is not the last day of the applicable Eurodollar Interest Period, (c) as a consequence of any required conversion of a Eurodollar Rate Loan to a Prime Rate Loan as a result of any of the events indicated in Section 2.06(v) or (d) as a consequence of any other failure by the Borrower to repay Eurodollar Rate Loans when required by the terms of this Loan Agreement. The Lender shall deliver to the Borrower a written statement as to such losses, expenses and liabilities which statement shall be conclusive as to such amounts in the absence of manifest error. (vii) Eurodollar Rate Taxes. The Borrower agrees that: (a) the Borrower will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of an Equipment Line of Credit/Term Loan solely as a result of the interest rate being determined by reference to the Eurodollar Rate or the provisions of this Loan Agreement relating to the Eurodollar Rate or the recording, registration, notarization or other formalization of any thereof or any payments of principal, interest or other amounts made on or in respect of an Equipment Line of Credit/Term Loan made to the Borrower when the interest rate is determined by reference to the Eurodollar Rate (all such taxes, levies, costs and charges being hereinafter collectively called "Eurodollar Rate Taxes"); provided, however, that Eurodollar Rate Taxes shall not include net income or franchise taxes imposed by any jurisdiction. The Borrower shall also pay such additional amounts equal to increases in net income or franchise taxes attributable to payments made by the Borrower pursuant to this clause (a). Promptly after the date on which payment of any such Eurodollar Rate Tax is due pursuant to applicable law, the Borrower will, at the request of the Lender, furnish to the Lender evidence, in form and substance satisfactory to the Lender, that the Borrower has met its obligation under this Section 2.06(vii); and 36 (b) the Borrower will indemnify the Lender against, and reimburse the Lender on demand for, any Eurodollar Rate Taxes paid by the Lender in respect of an Equipment Line of Credit/Term Loan made to the Borrower, as determined by the Lender in its sole discretion. The Lender shall provide the Borrower with (1) appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this clause (b) and (2) such information as may reasonably be required to indicate the basis for such Eurodollar Rate Taxes; provided, however, that if the Lender subsequently recovers, or receives a net tax benefit with respect to, any amount of Eurodollar Rate Taxes previously paid by the Borrower pursuant to this Section 2.06(vii)(b), the Lender shall, within thirty (30) days after receipt of such refund, and to the extent permitted by applicable law, pay to the Borrower the amount of any such recovery or permanent net tax benefit. (viii) Booking of Eurodollar Rate Loans. The Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of, any of its branch offices, agencies or the office of an Affiliate of the Lender; provided, however, the Lender shall not be entitled to receive any greater amount under Section 2.02(vi) or 2.06(vii) hereof as a result of the transfer of any such Equipment Line of Credit/Term Loan than the Lender would be entitled to immediately prior thereto unless (a) such transfer occurred at a time when circumstances giving rise to the claim for such greater amount did not exist and were not reasonably foreseeable in the view of the Lender and (b) such claim would have arisen even if such transfer had not occurred. (ix) Affiliates Not Obligated. No Eurodollar Affiliate or other Affiliate of the Lender shall be deemed a party to this Loan Agreement or shall have any rights, liability or obligation under this Loan Agreement. Section 2.07 Increased Capital. If either (i) the introduction of or any change in or in the interpretation of any Law or regulation or (ii) compliance by the Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender determines that the amount of such capital is increased by or based upon the existence of the Lender's commitment to make Equipment Line of Credit/Term Loans and other commitments of this type or upon the existence of letters of credit (or similar contingent obligations), then, upon demand by the Lender, the Borrower shall immediately pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender in the light of such circumstances, to the extent that the Lender determines such increase in capital to be allocable to the existence of the Lender's commitment to fund the Equipment Line of Credit/Term Loan Facility. A certificate as to such amounts submitted to the Borrower by the Lender, shall, in the absence of manifest error, be conclusive and binding for all purposes. Section 2.08. Authorized Officers of the Borrower. The Borrower shall notify the Lender in writing of the names of the officers and employees authorized to request Equipment Line of Credit/Term Loans and shall provide the Lender with a specimen signature of each such Authorized 37 Officer. The Lender shall be entitled to rely conclusively on such officer's or employee's authority to request such Equipment Line of Credit/Term Loans until the Lender receives written notice to the contrary. The Lender shall have no duty to verify the authenticity of the signature appearing on any written Notice of Borrowing or Notice of Conversion/Continuation and, with respect to an oral request for such an Equipment Line of Credit/Term Loan, the Lender shall have no duty to verify the identity of any Person representing himself as one of the officers or employees authorized to make such request on behalf of the Borrower. The Lender shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above which the Lender believes in good faith to have been given by a duly Authorized Officer or other Person authorized to borrow on behalf of the Borrower or for otherwise acting in good faith under this Section 2.08. Section 2.09 Taxes. (i) Payments Net of Taxes. All payments made by the Borrower under this Loan Agreement or any other Loan Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to the Lender under this Loan Agreement or any other Loan Document, the Borrower shall pay the relevant amount of such Taxes and the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Loan Agreement and the other Loan Documents. Whenever any Taxes are paid by the Borrower with respect to payments made in connection with this Loan Agreement or any other Loan Document, as promptly as possible thereafter, the Borrower shall send to the Lender for its own account a certified copy of an original official receipt received by the Borrower showing payment thereof. (ii) Indemnity. The Borrower hereby indemnifies the Lender for the full amount of all Taxes attributable to payments by or on behalf of the Borrower hereunder or under any of the other Loan Documents (including any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any failure to pay such Taxes unless such failure was the result of the action or inaction of the Lender to notify the Borrower in writing of the existence of such Taxes). Such indemnification shall be made within thirty (30) days from the date the Lender makes written demand therefor. Section 2.10. Security for the Equipment Line of Credit/Term Loan Facility. As security for the due and punctual payment and performance of the obligations of the Borrower under the Loan Documents, the Borrower shall execute, or cause to be executed, and deliver to the Lender the Collateral Documents. Section 2.11 Yield Maintenance Calculation on Fixed Rate Loans. The Borrower hereby agrees to indemnify the Lender against any loss or expense which Lender may sustain or incur as a consequence of the receipt or recovery by the Lender of all or any part of the Equipment Line 38 Credit/Term Loan Facility prior to the agreed upon term of any Fixed Rate Loan, exclusive of the regular periodic payments of principal and interest required hereunder. Without limiting the effect of the foregoing, the amount to be paid by the Borrower to the Lender in order to indemnify the Lender for any loss occasioned by any voluntary prepayment of the Fixed Rate Loans, and as liquidated damages therefore, shall be equal to the sum of the discounted present value of the excess (if any) of each periodic interest payment due thereunder calculated as follows: (i) the applicable interest rate for such Fixed Rate Loan being prepaid over (ii) the Fixed Rate which would otherwise be applicable to a Fixed Rate Loan being prepaid. For purposes of calculating the "discounted present value", the Borrower and the Lender agree that the applicable United States Treasury Securities note or bill of similar maturity for each periodic interest payment shall be used. 39 ARTICLE III CONDITIONS TO THE EQUIPMENT LINE OF CREDIT/TERM LOANS Section 3.01 Conditions Precedent to the Effectiveness of this Loan Agreement. This Loan Agreement shall become effective on the Closing Date when the following conditions precedent have been satisfied (unless waived by the Lender or unless the deadline for delivery has been extended by the Lender): (i) Certain Documents. The Lender shall have received on or before the Closing Date all of the following, all of which, except as otherwise specifically described below, shall be in form and substance satisfactory to the Lender: (a) This Loan Agreement together with all Exhibits and Schedules attached hereto; (b) A Notice of Borrowing pursuant to Section 2.01 hereof dated the Closing Date executed by the Borrower; (c) The Equipment Line of Credit/Term Loan Note; (d) The Agreement of Guaranty; (e) The opinion of counsel to the Borrower substantially in the form of Exhibit "E" attached hereto; (f) A certificate of the Secretary or Assistant Secretary of the Borrower, its Subsidiaries and its corporate Affiliates dated the Closing Date certifying (1) the names and true signatures of the incumbent officers of the Borrower, its Subsidiaries and its corporate Affiliates authorized to sign this Loan Agreement and all other Loan Documents executed by the Borrower, its Subsidiaries and its corporate Affiliates in connection with this Loan Agreement, (2) the By-Laws of the Borrower, its Subsidiaries and its corporate Affiliates as in effect on the date of such certification, (3) the resolutions of the Borrower's, its Subsidiaries' and its corporate Affiliates' respective Boards of Directors approving and authorizing the execution, delivery and performance of this Loan Agreement and all other Loan Documents which were executed by the Borrower, its Subsidiaries and its corporate Affiliates in connection herewith and (4) that there have been no changes in the Certificate of Incorporation and By-Laws of the Borrower since the date of the most recent certification thereof by the Office of the appropriate Secretary of State delivered to the Lender prior to the Closing Date; (g) The Certificate of Incorporation of the Borrower, its Subsidiaries and/or its corporate Affiliates as amended, modified or supplemented to the Closing Date, shall be certified to be true, correct and complete by the appropriate Secretaries of State as of dates acceptable to the Lender; 40 (h) Good Standing Certificate(s) certified by the appropriate Secretaries of State relating to the Borrower, its Subsidiaries and/or its corporate Affiliates for each of the states in which the Borrower, its Subsidiaries and/or its corporate Affiliates are qualified to conduct business; (i) The annual operating plan for the 1997 Fiscal Year. (j) Evidence of the insurance required by this Loan Agreement; (k) A contemporaneous search of UCC, real property, tax, judgment and litigation dockets and records and other appropriate registers shall have revealed no filings or recordings in effect with respect to the Borrower, its Subsidiaries and its Affiliates, except such as are acceptable to the Lender, and the Lender shall have received a copy of the search reports received as a result of the search; (l) The partnership agreements for each of the Partnership Guarantors shall be certified to be true, correct and complete by the Partnership Guarantors as of the Closing Date; and (m) Such additional documentation as the Lender may reasonably require. (ii) Fees and Expenses Paid. The Borrower shall have paid to the Lender, for its own account, all fees and expenses due and payable under this Loan Agreement and the Commitment Letter on or before the Closing Date. (iii) Representations and Warranties. All of the representations and warranties of the Borrower, the Corporate Guarantors and/or the Partnership Guarantors contained in subsections (i) through (xxxii) of Section 4.01 hereof and in any other Loan Document (other than for changes permitted or contemplated by this Loan Agreement and/or the Agreement of Guaranty) shall be true and correct in all material respects on and as of the Closing Date as though made on and as of that date (except any such representations and warranties stated to be given on a specific date other than the Closing Date). (iv) No Default. No Event of Default or Potential Event of Default hereunder or under the other Loan Documents shall have occurred and be continuing on the Closing Date. (v) No Injunction. No Requirements of Law shall prohibit, and no order, judgment or decree of any Governmental Authority shall and, except as set forth on Schedule 4.01(vii) hereto, no litigation shall be pending or threatened which in the judgment of the Lender would, enjoin, prohibit, restrain, impose or result in the imposition of any material adverse condition upon the consummation of the transactions contemplated hereby. 41 (vi) Consents. The Borrower, the Corporate Guarantors and/or the Partnership Guarantors shall have received all consents and authorizations required pursuant to any material Contractual Obligation with any other Person and shall have obtained all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary to allow the Borrower, the Corporate Guarantors and/or the Partnership Guarantors lawfully to execute, deliver and perform, in all material respects, its obligations under this Loan Agreement and the other Loan Documents. (vii) No Material Adverse Change. No adverse change deemed material by the Lender, in its sole opinion, shall have occurred since the date of the most recent annual audited financial report of the Borrower, its Subsidiaries and its Affiliates delivered to the Lender through the Closing Date, as to the condition (financial or otherwise), operations, performance or properties of the Borrower, its Subsidiaries and its Affiliates individually or taken as a whole. Section 3.02. Conditions Precedent to All Equipment Line of Credit/Term Loans. The obligation of the Lender to make any Equipment Line of Credit/Term Loan on any date, is subject to the following conditions precedent as of such date: (i) Notice of Borrowing. With respect to a request for an Equipment Line of Credit/Term Loan, the Lender shall have received in accordance with the provisions of Section 2.01(ii) hereof, on or before any Borrowing Date, an original and duly executed Notice of Borrowing. (ii) Security Agreement and Other Information. The Lender shall have received from the Borrower, the Corporate Guarantor or the Partnership Guarantor, as the case may be, in its capacity as the debtor, a fully completed and executed Security Agreement for Equipment being acquired. In addition, the Borrower shall furnish the Lender with (a) a copy of the sales contract, purchase order, conditional sales agreement or other written agreement covering the acquisition of the Equipment, (b) information as to the then current location of the Equipment, (c) information as to "deposits" and/or "progress payments" and (d) any other information reasonably requested by the Lender in connection with said Equipment. (iii) UCC-1 Financing Statements. The Lender shall have received from the Borrower, the Corporate Guarantor or the Partnership Guarantor, as the case may be, in its capacity as the purchaser of the Equipment being acquired, fully executed UCC-1 Financing Statements prepared by the Borrower, the applicable Corporate Guarantor or the applicable Partnership Guarantor, together with the appropriate filing fees for filing said UCC-1 Financing Statement(s) in the appropriate filing office(s) and accurately describing the Equipment to be acquired with the proceeds of any Equipment Line of Credit/Term Loan. (iv) Additional Matters. As of the Borrowing Date for any Equipment Line of Credit/Term Loan: 42 (a) Representations and Warranties. All of the representations and warranties of the Borrower contained in subsections (i) through (xxxii) of Section 4.01 hereof and in any other Loan Document (other than representations and warranties which expressly speak only of a different date and other than for changes permitted or contemplated by this Loan Agreement) shall be true and correct in all material respects; (b) No Default. No Event of Default or Potential Event of Default shall have occurred and be continuing or would result from the making of the requested Equipment Line of Credit/Term Loan; (c) No Injunction. No law or regulations shall prohibit, and no order, judgment or decree of any Governmental Authority shall, and, except as set forth on Schedule 4.01(vii) hereto, no litigation shall be pending or threatened which in the reasonable judgment of the Lender would, enjoin, prohibit, restrain, impose or result in the imposition of any material adverse condition upon the Lender from making the Equipment Line of Credit/Term Loan requested to be made on the Borrowing Date; (d) No Material Adverse Change. No adverse change deemed material by the Lender, in its reasonable opinion, shall have occurred after the Closing Date as to the condition (financial or otherwise), operations, performance or properties of the Borrower, its Subsidiaries and/or its Affiliates, individually or taken as a whole; and (e) Location of Collateral. The Notice of Borrowing shall specify the location of the Collateral, which shall be one of the locations set forth on Schedule 4.01 (xxviii), unless otherwise specified. In the event the Collateral is to be located at a location other than a location set forth in Schedule 4.01(xxviii), the Borrower, the Corporate Guarantor and/or the Partnership Guarantor shall execute any and all amendments, modifications and/or supplements to incorporate said new location into this Loan Agreement and the other Loan Documents. Each submission by the Borrower to the Lender of a Notice of Borrowing with respect to an Equipment Line of Credit/Term Loan and the acceptance by the Borrower of the proceeds of each such Equipment Line of Credit/Term Loan made hereunder shall constitute a representation and warranty by the Borrower as of the Borrowing Date in respect of such Equipment Line of Credit/Term Loan that all the conditions contained in this Section 3.02 have been satisfied. 43 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Representations and Warranties on the Effective Date. In order to induce the Lender to enter into this Loan Agreement, the Borrower hereby represents and warrants to the Lender that the following statements are true, correct and complete on and as of the Closing Date: (i) Organization; Corporate Powers. The Borrower (a) is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, (b) is duly qualified to conduct business as a foreign corporation and is in good standing under the Laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) has all requisite power and authority to own, operate and encumber its property and assets and to conduct its business as presently conducted and as proposed to be conducted in connection with and following the consummation of the transactions contemplated by the Loan Documents. (ii) Authority. (a) The Borrower has the requisite corporate power and authority (1) to execute, deliver and perform each of the Loan Documents executed by it, or to be executed by it, and (2) to file the Loan Documents filed by it, or to be filed by it, with the appropriate Governmental Authority. (b) The execution, delivery and performance (or filing, as the case may be) of each of the Loan Documents to which it is a party and the consummation of the transactions contemplated thereby, have been duly authorized by the Board of Directors of the Borrower and no further corporate proceedings on the part of the Borrower are necessary to consummate such transactions. (c) Each of the Loan Documents to which the Borrower is a party has been duly executed and delivered (or filed, as the case may be) by the Borrower and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. (iii) Subsidiaries and Ownership of Capital Stock. As of the Closing Date, the Borrower has eleven (11) Subsidiaries. In addition, the two (2) Partnership Guarantors are Affiliates of the Borrower. Schedule 4.01(iii) attached hereto sets forth the number of issued and authorized shares of each class of capital stock of the Borrower. No capital stock (or any securities, instruments, warrants, option or purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock) of the Borrower is subject to issuance under any security, instrument, warrant, option or purchase rights, conversion or exchange rights, call, commitment or claim of any right, title or interest therein or thereto, except as set forth on Schedule 4.01(iii) attached hereto. The outstanding capital stock of the Borrower is duly authorized, validly issued, fully paid and nonassessable and is not Margin Stock. 44 (iv) No Conflict. The execution and delivery by the Borrower, the Corporate Guarantors and the Partnership Guarantors of each Loan Document and the performance of each of the transactions contemplated thereby do not and will not (a) to the best knowledge of the Borrower, constitute a tortious interference with any Contractual Obligation of the Borrower, the Corporate Guarantors and the Partnership Guarantors, (b) conflict with or violate the Borrower's and/or the Corporate Guarantors' respective Certificates of Incorporation or By-Laws, (c) conflict with or violate the Partnership Guarantors' partnership agreements, (d) conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law or, subject to clause (a) above, Contractual Obligation of the Borrower, or require termination of any Contractual Obligation, the consequences of which conflict or default or termination would have or is reasonably likely to have a Material Adverse Effect (e) result in or require the creation or imposition of any Lien whatsoever upon any of the properties or assets of the Borrower, its Subsidiaries and/or its Affiliates (other than Liens permitted pursuant to Section 7.02(ii) hereof) or (f) require any approval of stockholders, other than as otherwise obtained. (v) Governmental Consents. The execution, delivery and performance of each Loan Document and the transactions contemplated thereby do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by any Governmental Authority, except filings, consents or notices which have been, or will in due course, be made, obtained or given. (vi) Governmental Regulation. The Borrower, its Subsidiaries and its Affiliates are not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, the Investment Company Act of 1940 or any other Law such that the Borrower's, its Subsidiaries' and/or its Affiliates' ability to incur indebtedness is limited or their ability to consummate the transactions contemplated hereby is materially impaired. (vii) Litigation; Adverse Effects. (a) Except as set forth in Schedule 4.01(vii) attached hereto, there is no action, suit, proceeding, governmental investigation or arbitration, at law or in equity, or before or by any Governmental Authority, pending, or to the knowledge of the Borrower, threatened against the Borrower, its Subsidiaries and/or its Affiliates or threatened against any Property of the Borrower, its Subsidiaries and its Affiliates which is reasonably likely to (1) result in any Material Adverse Effect, (2) materially and adversely affect the ability of the Borrower, its Subsidiaries and its Affiliates to perform their respective obligations under the Law, any material Contractual Obligation and/or the Loan Documents or (3) materially and adversely affect the ability of the Borrower, its Subsidiaries and/or its Affiliates to perform their collective Obligations or the Lender's ability to enforce such Obligations. (b) The Borrower, its Subsidiaries and its Affiliates are not (1) in violation of any applicable Law which violation has or is reasonably likely to have a Material Adverse Effect or (2) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or Governmental Authority which has or is reasonably likely to have a Material Adverse Effect. Except as set forth in Schedule 4.01(vii) attached hereto, there is no action, suit, proceeding or investigation pending or, to the best knowledge of the Borrower, 45 threatened against or affecting the Borrower , its Subsidiaries and/or its Affiliates challenging the validity or the enforceability of any of the Loan Documents. (viii) No Material Adverse Change. No material adverse change has occurred in (a) the condition (financial or otherwise), operations or performance of the Borrower, its Subsidiaries and its Affiliates taken as a whole, or the ability of the Borrower to perform its Obligations under the Loan Documents to which it is a party. (ix) Payment of Taxes. All tax returns and reports of the Borrower, its Subsidiaries and its Affiliates required to be filed, have been timely filed (or appropriate extensions of time for the filing of same have been timely requested), and all taxes, assessments, fees and other governmental charges thereupon and upon their respective Properties, assets, income and franchises which are shown on such returns as being due and payable, have been paid when due and payable, except such taxes, if any, that are reserved against in accordance with Generally Accepted Accounting Principles, such taxes as are being contested in good faith by appropriate proceedings or such taxes the failure to make payment of which when due and payable would not have, in the aggregate, a Material Adverse Effect. The Borrower has no knowledge of any proposed tax assessment against the Borrower, the Corporate Guarantors and/or the Partnership Guarantors that is reasonably likely to have a Material Adverse Effect, which is not being actively contested in good faith by the Borrower, the Corporate Guarantors and/or the Partnership Guarantors. (x) Material Adverse Agreements. The Borrower, its Subsidiaries and/or its Affiliates are not a party to or subject to any Contractual Obligation or other restriction contained in their respective Certificates of Incorporation, By-laws, partnership agreements or similar governing documents which has or is reasonably likely to have a Material Adverse Effect. (xi) Performance. The Borrower, its Subsidiaries and its Affiliates are not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation applicable to them, and no condition exists which, with the giving of notice or the lapse of time or both, would constitute a default under such Contractual Obligation, in each case, except where the consequences, direct or indirect, of such default or defaults, if any, would not have or are not reasonably likely to have a Material Adverse Effect. (xii) Securities Activities. The Borrower, its Subsidiaries and its Affiliates are not engaged principally in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. (xiii) Requirements of Law. The Borrower has no actual knowledge of any non-compliance with respect to all Requirements of Law applicable to the Borrower, its Subsidiaries, its Affiliates and their respective businesses, and the Borrower, its Subsidiaries and its Affiliates are not charged with, or to the best of the Borrower's knowledge, under investigation with respect to, any violation of any such Requirements of Law, except where a non-compliance or violation of all Requirements of Law would not result in a Material Adverse Effect. 46 (xiv) Patents, Trademarks, Permits, Etc. The Borrower, its Subsidiaries and its Affiliates own, license or otherwise have the lawful right to use, or have all permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of their respective businesses as currently conducted which are material to their condition (financial or otherwise), operations and performance, taken as a whole. The use of such permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know how and processes by the Borrower, its Subsidiaries and its Affiliates does not infringe on the rights of any Person, subject to such claims and infringements and do not, in the aggregate, give rise to any liability on the part of the Borrower , its Subsidiaries and its Affiliates which has or is reasonably likely to have a Material Adverse Effect. (xv) Environmental Matters. Except as disclosed in Schedule 4.01(xv) attached hereto and except where the failure to comply with the provisions of clauses (a) through (k) below does not result in a Material Adverse Effect, (a) the operations of the Borrower, its Subsidiaries and its Affiliates comply in all substantial respects with all applicable environmental, health and safety Requirements of Law; (b) the Borrower, its Subsidiaries and its Affiliates have obtained all environmental, health and safety Permits necessary for their respective operations, and all such Permits are in good standing, and the Borrower, its Subsidiaries and its Affiliates are in material compliance with all terms and conditions of such Permits; (c) the Borrower's, its Subsidiaries' and its Affiliates' respective present Properties and operations, and to the best of the Borrower's knowledge, the Borrower's, its Subsidiaries' and its Affiliates' respective past Properties and operations, are not the subject of any order from or agreement with any Governmental Authority or private party or any judicial or administrative proceeding or investigations respecting any environmental, health or safety Requirements of Law, and are not the subject of any Remedial Action or other Liabilities and Costs arising from the Release or threatened Release of an Environmental Concern Material into the Environment; (d) the Borrower, its Subsidiaries and its Affiliates have not filed any notice under any Requirement of Law indicating past or present treatment, storage or disposal of an Environmental Concern Material in violation of any Environmental Law; (e) the Borrower, its Subsidiaries and its Affiliates have not filed any notice under any applicable Requirement of Law reporting a Release of an Environmental Concern Material into the Environment in violation of any Environmental Law; (f) there is not now, nor has there ever been, on or in the Property of the Borrower, its Subsidiaries and/or its Affiliates in violation of any Environmental Law: (1) any generation, treatment, recycling, storage or disposal of any Environmental Concern Material, (2) any underground storage tanks or surface impoundments, (3) any asbestos-containing material, or (4) any polychlorinated biphenyls (PCB's) used in hydraulic oils, electrical transformers or other equipment; (g) the Borrower, its Subsidiaries and/or its Affiliates has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Environmental Concern Material into the Environment, or as a result of exposure to asbestos or to cotton dust, which may result in any liability; (h) after due inquiry, no Environmental Lien has attached to any Property of the Borrower, its Subsidiaries and/or its Affiliates; (i) the Borrower, its Subsidiaries and its Affiliates have not entered into any negotiations or agreements with any Person (including, without limitation, the prior owner(s) of any Property owned or leased by the Borrower, its Subsidiaries and/or its 47 Affiliates) relating to any Remedial Action or environmentally related Claim; (j) the Borrower, its Subsidiaries and its Affiliates have no material contingent liability in connection with any Release or threatened Release of any Environmental Concern Material into the Environment; and (k) none of the products that the Borrower, its Subsidiaries and/or its Affiliates manufacture, distribute or sell, or, to the best of the Borrower's knowledge, ever has manufactured, distributed or sold, contains an asbestos-containing material. (xvi) ERISA. As of the Closing Date, the Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate do not maintain or contribute to any Plan other than a Plan listed on Schedule 4.01(xvi) attached hereto. Except as otherwise provided on Schedule 4.01(xvii), each Plan which is intended to be a qualified plan has been determined by the IRS to be qualified under Section 401(a), and each trust related to any such Plan has been so determined to be exempt from federal income tax under Section 501(a) of the Code prior to its amendment by the Tax Reform Act of 1986, and such Plan and trust are being operated in all material respects in compliance with and will be timely amended in accordance with the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1987 as interpreted by the regulations promulgated thereunder. Except as otherwise provided on Schedule 4.01(xvi) attached hereto, the Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate do not maintain or contribute to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA which provides lifetime benefits to retirees other than as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and interpreted by regulations promulgated thereunder. The Borrower, its Subsidiaries, its Affiliates and all of their ERISA Affiliates are in compliance in all material respects with the responsibilities, obligations or duties imposed on them by ERISA or regulations promulgated thereunder with respect to all Plans. No material accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code) exists in respect to any Benefit Plan. The Borrower, its Subsidiaries, its Affiliates any ERISA Affiliate and any fiduciary of any Plan (a) have not engaged in a nonexempt "prohibited transaction" described in Section 406 of ERISA or Section 4975 of the Code or (b) have not taken any action which would constitute or result in a Termination Event with respect to any Plan such that actions under (a) or (b) or both would result in a material obligation to pay money. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate have not incurred any material liability to the PBGC which remains outstanding other than the liability to pay the PBGC insurance premiums for the current year. Schedule B to the most recent annual report filed with the IRS with respect to each Benefit Plan (which has been furnished to the Lender) is complete and accurate in all material respects. Except as provided on Schedule 4.01(xvi) attached hereto, since the date of each such Schedule B, there has been no material adverse change in the funding status or financial condition of the Benefit Plan relating to such Schedule B which would result in a Material Adverse Effect. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate have not failed to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment which would in the aggregate have a Material Adverse Effect. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate are not required to provide security to a Plan under Section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the plan year. The Borrower, its Subsidiaries, its Affiliates and any ERISA Affiliate are not contributing and have not ever 48 contributed to or been obligated to contribute to any Multiemployer Plan, and no employees or former employees of the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate have been covered by any Multiemployer Plan in respect of their employment by the Borrower or any ERISA Affiliate, and, accordingly, the representations and warranties in this paragraph (xvi) do not apply to Multiemployer Plans. (xvii) Solvency. The Borrower, its Subsidiaries and its Affiliates taken as a whole are Solvent after giving effect to the transactions contemplated by this Loan Agreement and the other Loan Documents, the payment and accrual of all costs payable on the Closing Date with respect to any of the foregoing, and all obligations, if any, under any Plan or the equivalent for unfunded past service liability and any other unfunded medical (including post-retirement) and death benefits. (xviii) Notes Qualification. As of the date on which this representation and warranty is made, the offering and issuance of the Equipment Line of Credit/Term Loan Note is exempt from registration under Section 5 of the Securities Act or has been registered pursuant to a registration statement filed pursuant to the Securities Act and, if so registered, is qualified under the Trust Indenture Act of 1939, as amended. (xix) Assets and Properties. Substantially all of the assets and properties owned by, leased to or used by the Borrower, its Subsidiaries and its Affiliates (a) are in good operating condition and repair, (ordinary wear and tear excepted), (b) are free and clear of any known defects (except such defects as do not substantially interfere with the continued use thereof in the conduct of normal operations) and (c) are able to serve the function for which they are currently being used, in each case where the failure of such asset to meet such requirements would not have or is not reasonably likely to have a Material Adverse Effect. (xx) Joint Venture; Partnership. Except as set forth in Schedule 4.01 (xx) attached hereto, as of the Closing Date the Borrower, its Subsidiaries and its Affiliates are not engaged in any joint venture or partnership with any other Person. (xxi) Insurance. The Borrower, its Subsidiaries and its Affiliates maintain with financially sound and reputable insurers not related to or affiliated with the Borrower, its Subsidiaries and its Affiliates, insurance with respect to its properties and businesses, insured against such liabilities, casualties and contingencies and in such types and amounts as is customary in the case of corporations engaged in the same or a similar business or having similar properties similarly situated. Schedule 4.01(xxi) attached hereto sets forth a list of all insurance currently maintained by or in respect of the Borrower, its Subsidiaries and its Affiliates setting forth the identity of the insurance carrier, the type of coverage, the amount of coverage and the deductible. There are no claims, actions, suits, proceedings against, arising under or based upon any of such insurance policies except as set forth in Schedule 4.01(xxi) attached hereto. (xxii) Title to Property. The Borrower, its Subsidiaries and its Affiliates have good and marketable title in fee simple to all respective Property owned or purported to be owned by 49 them, including, without limitation to all property reflected in the most recent consolidated balance sheet referred to in Section 4.01(xxiii) hereof or submitted pursuant to Article V (except as sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet), in each case free and clear of all Liens, other than Liens permitted under the terms of Section 7.02 of this Loan Agreement.. (xxiii) Audited Financial Statements. The Borrower has heretofore furnished to the Lender consolidated and consolidating balance sheet of the Borrower, its Subsidiaries and its Affiliates dated as of March 31, 1996, and the related statements of income, cash flows and changes in stockholders' equity for the 1995 Fiscal Year then ended, as examined and reported on by its Independent Certified Public Accountant, who delivered an unqualified opinion in respect thereof, all as set forth in the Form 10-K. Such financial statements (including the notes thereto) present fairly the financial condition of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Year and the results of its operations and its cash flows for the Fiscal Year then ended, all in conformity with Generally Accepted Accounting Principles. (xxiv) Interim Financial Statements. The Borrower has heretofore furnished to the Lender interim balance sheets of the Borrower, its Subsidiaries and its Affiliates as of the end of its first and second Fiscal Quarters of the Fiscal Year beginning April 1, 1996, together with the related statements of income and cash flows for the applicable fiscal periods ending on each such date, all as set forth in the Form 10-Q. Such financial statements present fairly the financial condition of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Quarters and the results of its operations and its cash flows for the fiscal periods then ended, all in conformity with Generally Accepted Accounting Principles (except to the extent set forth in the notes to said financial statements), subject to normal and recurring year-end audit adjustments. (xxv) Absence of Undisclosed Liabilities. The Borrower, its Subsidiaries and its Affiliates have no liability or obligation of any nature whatever (whether absolute, accrued, contingent or otherwise, whether or not due), forward or long-term commitments or unrealized or anticipated losses from unfavorable commitments, except (a) as disclosed in the financial statements referred to in Sections 4.01(xxiii) and (xxiv) hereof, (b) matters that, individually or in the aggregate could not have a Material Adverse Effect and (c) Contractual Obligations incurred in the ordinary course of the Borrower's, its Subsidiaries' and its Affiliates' business. (xxvi) Margin Regulations. No part of the proceeds of the Equipment Line of Credit/Term Loan Facility will be used for the purpose of buying or carrying any Margin Stock, as such term is used in Regulations G and U of the Federal Reserve Board, as amended from time to time, or to extend credit to others for the purpose of buying or carrying any Margin Stock. The Borrower, its Subsidiaries and its Affiliates are not engaged in the business of extending credit to others for the purpose of buying or carrying Margin Stock. Neither the making of any Equipment Line of Credit/Term Loan nor any use of proceeds of any such Equipment Line of Credit/Term Loan will violate or conflict with the provisions of Regulation G, T, U or X of the Federal Reserve Board, as amended from time to time. 50 (xxvii) Labor Matters. Except as set forth on Schedule 4.01(xxvii) attached hereto, the Borrower, its Subsidiaries and its Affiliates is not a party to any labor union or collective bargaining agreements. The Borrower, its Subsidiaries and its Affiliates is in compliance with all applicable laws respecting employment and employment practices, including, without limitation, laws, regulations, and judicial and administrative decisions relating to wages, hours, conditions of work, collective bargaining, health and safety, payment of social security, payroll, withholding and other taxes, worker's compensation, insurance requirements, as well as requirements of ERISA and the Consolidated Omnibus Budget Reconciliation Act, except to the extent that noncompliance would not have a Material Adverse Effect. There is no (a) unfair labor practice complaint pending or, to the best knowledge of the Borrower, threatened against the Borrower before the National Labor Relations Board or any court nor any pending or, to the best knowledge of the Borrower, threatened sexual harassment, or wrongful discharge claim, (b) labor strike, dispute, slowdown, or stoppage pending or, to the best knowledge of the Borrower, threatened against the Borrower, or (c) representation petition, respecting the employees of the Borrower filed or threatened to be filed with the National Labor Relations Board. (xxviii) Brokerage Commissions. No other Person is entitled to receive from the Borrower, its Subsidiaries and/or its Affiliates any brokerage commission, finder's fee or similar fee or payment in connection with the consummation of the transactions contemplated by this Loan Agreement. No brokerage or other fee, commission or compensation is to be paid by the Lender by reason of any act, alleged act or omission of the Borrower, its Subsidiaries and/or its Affiliates with respect to the transactions contemplated hereby. (xxix) Books and Records. The Borrower maintains its books and records relative to its assets, properties and business transactions at the Borrower's principal corporate offices located at 5 Sylvan Way, Parsippany, New Jersey 07054; provided, however, with respect to the books and records of the Borrower's division commonly known as "DRS Military Systems", its books and records are maintained at 138 Bauer Drive, Oakland New Jersey 07436. (xxx) Business Name. The only name by which the Borrower is known or under which the Borrower is conducting its business is "Diagnostic/Retrieval Systems, Inc." or "DRS". (xxxi) Pledge of Collateral. The Borrower, its Subsidiaries and its Affliates at all times shall have good title to the Collateral pledged by it and all such Collateral shall be free and clear of all Liens, except as specifically permitted or contemplated by the terms and provisions of this Loan Agreement and the Collateral Documents relating to such Collateral. (xxxii) Location of Collateral. None of the Collateral to be pledged to the Lender as collateral security pursuant to this Loan Agreement, the Collateral Documents or any other Loan Documents, shall be located in or on any site or property other than as set forth on Schedule 4.01(xxxii), unless (a) the Lender has received prior written notice of the Borrower's, Corporate Guarantor's and/or Partnership Guarantor's intention to move or relocate collateral to any other site or property and (b) the Lender shall have received from the Borrower, the Corporate Guarantor or the Partnership Guarantor, as the case may be, fully executed UCC-1 Financing Statements 51 prepared by the Borrower, the applicable Corporate Guarantor or the applicable Partnership Guarantor, together with the appropriate filing fees for filing said UCC-1 Financing Statement in the appropriate filing office(s). Section 4.02. Subsequent Funding Representations and Warranties. In order to induce the Lender to enter into this Loan Agreement and to make the Equipment Line of Credit/Term Loans, the Borrower hereby represents and warrants to the Lender that the statements set forth in sections (i) through (xxxii) of Section 4.01 hereof (except (i) to the extent that such statements (a) are made expressly only as of the Closing Date or (b) other than for changes permitted or contemplated by this Loan Agreement), are true, correct and complete in all material respects on and as of the Borrowing Date in respect of each Borrowing after the Closing Date. 52 ARTICLE V REPORTING COVENANTS On and after the Closing Date and so long as the Borrower shall have any Obligation hereunder, unless the Lender shall give its prior express written consent to the effect otherwise, then: Section 5.01. Statement of Accounting. The Borrower shall make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and any other accounting principles applicable thereto and (b) to maintain accountability for assets and (iii) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 5.02 Reporting and Information Requirements. The Borrower shall deliver or cause to be delivered to the Lender the following financial statements, data, reports and information, at the Borrower's own cost and expense: (i) Annual Audited Consolidated and Consolidating Financial Statements of the Borrower, its Subsidiaries and its Affiliates. As soon as available, but in any event within ninety (90) days after the close of each Fiscal Year of the Borrower, "audited" consolidated statements of income, retained earnings and a statement of cash flows for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Year and a consolidated balance sheet for the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Year, and notes to each, all as set forth in the Form 10-K filed with the United States Securities and Exchange Commission. Such consolidated financial statements shall be accompanied by an opinion of the Independent Certified Public Accountant, which opinion shall be free of exceptions or qualifications which is of "going concern" or like nature or which relates to a more limited scope of examination. Such opinion shall in any event contain a written statement of such accountants substantially to the effect that (a) such accountants examined the financial statements in accordance with Generally Accepted Auditing Standards and accordingly made such tests of accounting records and such other auditing procedures as such accountants considered necessary under the circumstances and (b) in the opinion of such accountants such financial statements present fairly the financial position and cash flows of the Borrower, its Subsidiaries and its Affiliates as of the end of such Fiscal Year, and the results of the Borrower's, its Subsidiaries' and its Affiliates' operations and the changes in their financial position for such Fiscal Year, in conformity with Generally Accepted Accounting Principles applied on a basis consistent with that of the preceding Fiscal Year. In addition to the delivery of the annual "audited" consolidated financial statements, the Borrower shall also deliver to the Lender, at the same time, an "unaudited" management prepared consolidating statement of income for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Year and a consolidating balance 53 sheet for the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Year, all prepared and certified to the Lender by the Borrower's chief accounting officer in her capacity as an Authorized Officer. (ii) Annual Operating Plan. As soon as available, but in any event within ninety (90) days after the close of each Fiscal Year of the Borrower, a copy of the Borrower's, its Subsidiaries' and its Affiliates' annual operating plan for the then current Fiscal Year. (iii) Quarterly Consolidated and Consolidating Financial Statements of the Borrower, its Subsidiaries and its Affiliates. As soon as available, but in any event within forty-five (45) days after the close of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, "unaudited" consolidated statements of income and a statement of cash flows for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the end of such Fiscal Quarter, and an "unaudited" balance sheet of the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Quarter, all as set forth in the Form 10-Q filed with the United States Securities and Exchange Commission. In addition to the delivery of the quarterly consolidated financial statements, the Borrower shall also deliver to the Lender, at the same time, an "unaudited" management prepared consolidating statement of income for the Borrower, its Subsidiaries and its Affiliates for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the end of such Fiscal Quarter and an "unaudited" consolidating balance sheet of the Borrower, its Subsidiaries and its Affiliates as of the close of such Fiscal Quarter, all as certified by the chief accounting officer of the Borrower in her capacity as an Authorized Officer as presenting fairly the financial position of the Borrower, its Subsidiaries and its Affiliates as of the end of such dates and fiscal periods and the results of the Borrower's, its Subsidiaries' and its Affiliates' operations and the changes in the Borrower's, its Subsidiaries' and its Affiliates' financial position and cash flows for such fiscal periods, in conformity with Generally Accepted Accounting Principles applied in a manner consistent with that of the most recent audited financial statements furnished to the Lender, subject to normal and recurring year-end audit adjustments. (iv) Contract Backlog Report. As soon as available, but in any event within forty-five (45) days after the close of each Fiscal Quarter of each Fiscal Year of the Borrower, a contract backlog report for the Borrower, its Subsidiaries and its Affiliates signed by an Authorized Officer of the Borrower. (v) Compliance Certificates. Together with each delivery of any financial statement pursuant to this Section 5.02(i) and Section 5.02(iii) above, an Officer's Certificate of the Borrower substantially in the form of Exhibit "F" attached hereto, (a) stating that the officer signatory thereto in his capacity as an Authorized Officer has reviewed the terms of this Loan Agreement and the principal Loan Documents, and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and condition of the Borrower, its Subsidiaries and its Affiliates, taken as a whole, during the accounting period covered by such financial statements, and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date 54 of the Officer's Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto; and (b) demonstrating in reasonable detail compliance during and at the end of such accounting periods with the covenants contained in Article VIII of this Loan Agreement. (vi) Quarterly Accounts Receivable Aging Reports, Etc. As soon as available, but in any event within forty-five (45) days after the close of each Fiscal Quarter of each Fiscal Year of the Borrower, a quarterly accounts receivable aging report in summary form only, setting forth the amounts due and owing to each of the Borrower, its Subsidiaries and its Affiliates, respectively, as of the close of the preceding Fiscal Quarter. (vii) Other Reports and Information. Promptly upon their becoming available to the Borrower, a copy of (a) all reports, financial statements and other information distributed generally by the Borrower, its Subsidiaries and/or its Affiliates to their respective stockholders, partners, bondholders or the financial community and (b) all accountants' management letters pertaining to, all other reports submitted by accountants in connection with any audit of, and all other material reports, if any, from outside accountants with respect to, the Borrower, its Subsidiaries and/or its Affiliates. (viii) Further Information. The Borrower shall promptly furnish to the Lender such business, financial or other information concerning the Borrower, its Subsidiaries and its Affiliates in such form as the Lender may reasonably request from time to time. (ix) Notice of Event of Default. Promptly upon becoming aware of any Event of Default or Potential Event of Default, the Borrower shall give the Lender written notice thereof, together with a written statement of the President or chief accounting officer of the Borrower in her capacity as an Authorized Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower. (x) Notice of Material Adverse Change. Promptly upon becoming aware thereof, the Borrower shall give the Lender written notice concerning any material adverse change in the business, assets, operations or financial condition of the Borrower, its Subsidiaries and/or its Affiliates taken as a whole, including, without limitation, any loss from casualty or theft in excess of $500,000.00 whether or not insured, affecting any Property of the Borrower, setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower. (xi) Notice of Material Proceedings. Promptly upon becoming aware thereof, the Borrower shall give the Lender written notice of the commencement, existence or threat of any action, suit, proceeding, governmental investigation or arbitration against or affecting the Borrower, its Subsidiaries and/or its Affiliates (including without limitation, litigation, arbitration or administration proceedings) which, if adversely decided, would have a Material Adverse Effect on 55 the business, assets, operations or financial condition of the Borrower, its Subsidiaries and/or its Affiliates taken as a whole or on the ability of the Borrower, its Subsidiaries and/or its Affiliates to perform their obligations under this Loan Agreement or the other Loan Documents. (xii) Notice of Pension-Related Events. The Borrower shall give the Lender the following: (a) As soon as possible, and in any event within ten (10) days after the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate knows or has reason to know that a Termination Event has occurred, a written statement of the chief accounting officer of the Borrower describing such Termination Event and the action, if any, which the Borrower, its Subsidiaries, its Affiliates. or an ERISA Affiliate has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the IRS, the DOL or PBGC with respect thereto; (b) As soon as possible, and in any event within fifteen (15) days, after the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate knows or has reason to know that a non-exempt prohibited transaction (as defined in Section 406 of ERISA and Section 4975 of the Code) has occurred, a statement of the chief accounting officer of the Borrower describing such transaction; (c) Within ten (10) days after the filing thereof with the DOL, IRS or PBGC, copies of each annual report, filed with respect to each Benefit Plan; (d) Within ten (10) days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by the Borrower, its Subsidiaries, its Affiliates, or an ERISA Affiliate with respect to such request; (e) Within thirty (30) days after a written request from the Lender, information describing an amendment of any existing Benefit Plan which will result in a material increase in the benefits under such Benefit Plan or a notification of any such increase, or the establishment of any new Plan or the commencement of contributions to any Plan to which the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate was not previously contributing in a material amount; (f) Promptly upon, and in any event within fifteen (15) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice; (g) Promptly upon, and in any event within ten (10) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of an unfavorable determination letter from the IRS regarding the qualification of a Plan under Section 401(a) of the Code; 56 (h) Promptly upon, and in any event within fifteen (15) Business Days after, receipt by the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate of a notice from a Multiemployer Plan regarding the imposition of withdrawal liability; and (i) Promptly upon, and in any event within fifteen (15) Business Days after, the Borrower, its Subsidiaries, its Affiliates or any ERISA Affiliate fails to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or payment, a notification of such failure provided that such installment payment is an amount which is material. (xiii) Notice of Other Material Defaults. Promptly upon becoming aware of any material default by the Borrower, its Subsidiaries and/or its Affiliates under any Contractual Obligation to which the Borrower, its Subsidiaries and/or its Affiliates or by which the Borrower, its Subsidiaries and/or its Affiliates or their respective properties may be bound (the result of which could reasonably be expected to have a Material Adverse Effect), the Borrower shall give the Lender written notice thereof, together with a written statement of the President or chief accounting officer of the Borrower in her capacity as an Authorized Officer setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrower, its Subsidiaries and/or its Affiliates. (xiv) Notice of Material Claims. The Borrower shall promptly notify the Lender of all written claims, complaints, orders, citations or notices, whether formal or informal, received by the Borrower, its Subsidiaries or its Affiliates from a Governmental Authority or other Person relating to any Law, including, without limitation, any Environmental Law or health and safety law, which could reasonably be expected to have a Material Adverse Effect. Such notices shall include, among other information, the name of the party who filed the claim, the potential amount of the claim, and the nature of the claim. 57 ARTICLE VI AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all of the Obligations, unless the Lender shall give its prior express written consent to the effect otherwise, then: Section 6.01 Corporate Existence, etc. The Borrower, its Subsidiaries and its Affiliates shall at all times maintain their respective status as a corporation and/or partnership, as applicable, duly organized, validly existing and in good standing under the laws of their respective jurisdiction of incorporation and/or formation and preserve and keep in full force and effect their rights and franchises unless the failure to maintain such rights and franchises would not have a Material Adverse Effect. Section 6.02 Corporate Powers, etc. The Borrower, its Subsidiaries and its Affiliates shall qualify and remain qualified to conduct business in each jurisdiction in which the nature of their respective businesses or the ownership of their respective properties or both requires it to be so qualified, unless the failure to maintain so qualified would not have a Material Adverse Effect. The Borrower, its Subsidiaries and its Affiliates shall transact business in their own names and trade names and shall invoice all accounts in their own respective names and trade names. Section 6.03 Compliance with Laws, etc. The Borrower, its Subsidiaries and its Affiliates shall comply with all Requirements of Law, and all restrictive covenants affecting the Borrower, its Subsidiaries and its Affiliates or the business, properties, assets or operations of the Borrower, its Subsidiaries and its Affiliates except to the extent non-compliance with this Section 6.03 would not result in a Material Adverse Effect. Section 6.04 Payment of Taxes and Claims. The Borrower, its Subsidiaries and its Affiliates shall pay or cause to be paid (i) all taxes, assessments and other governmental charges imposed upon them or on any of their respective properties or assets or in respect of any of their respective franchises, business, income or property before any penalty or interest accrues thereon and (ii) all Claims (including, without limitation, claims for labor, services, materials and supplies) for sums material in the aggregate to the Borrower, its Subsidiaries and its Affiliates which have become due and payable and which by Law have or may become a Lien (other than a Customary Permitted Lien) upon the Borrower's, its Subsidiaries' and/or its Affiliates' Property, prior to time when any penalty or fine shall be incurred with respect thereto; provided, however, that no such taxes, assessments and governmental charges referred to in clause (i) above or Claims referred to in clause (ii) above need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if adequate reserves shall have been set aside therefor in accordance with Generally Accepted Accounting Principles. Section 6.05. Maintenance of Properties; Insurance. The Borrower, its Subsidiaries and its Affiliates shall maintain or cause to be maintained in good repair, working order and condition, 58 excepting ordinary wear and tear, all of their respective Properties material to their operations and will make or cause to be made all appropriate repairs, renewals and replacements thereof, consistent with past practice. The Borrower, its Subsidiaries and its Affiliates shall maintain or cause to be maintained with financially sound and reputable insurers reasonably acceptable to the Lender, the insurance policies and programs listed on Schedule 6.05 attached hereto or substantially similar programs or policies and amounts or other programs, policies and amounts acceptable to the Lender and containing loss payable clauses in favor of the Borrower, its Subsidiary or its Affliate, as applicable, and the Lender as their respective interests may appear. Not later than thirty (30) days later than the renewal, replacement or material modification of any policy or program, the Borrower shall deliver or cause to be delivered to the Lender a certificate of insurance setting forth for each such policy or program: (i) the amount of such policy, (ii) the risks insured against by such policy, (iii) the name of the insurer and each insured party under such policy, and (iv) the policy number of such policy. Section 6.06. Inspection of Property; Books and Records; Discussions. Except for information and records which the Borrower may not under applicable Law disseminate or disclose to the Lender, the Borrower shall permit any authorized representative(s) designated by the Lender to visit, to conduct a field audit or to otherwise inspect any of the Borrower's, its Subsidiaries' and/or its Affiliates' respective Properties, including their financial and accounting records, and to make copies and take extracts therefrom, and to discuss the Borrower's, its Subsidiaries' and/or its Affiliates' respective affairs, finances and accounts with the Lender's officers, employees, representatives or independent certified public accountants, upon reasonable notice and during normal business hours. All information furnished to the Lender shall be received and maintained by the Lender in strict confidence and in accordance with applicable Law, and the Lender shall not disseminate said information to any Person except where required by and in accordance with applicable Law or where contemplated by the Loan Documents. The Lender agrees that it shall not take any action or omit to take any action which would cause or result in the violation of Law (including without limitation, any export control law) by the Borrower, its Subsidiaries and its Affiliates. Each such visitation and inspection by or on behalf of the Lender after the occurrence and during the continuance of an Event of Default shall be at the Borrower's own cost and expense. The Borrower shall, and shall cause its Subsidiaries and its Affiliates, to keep proper books and records and account in accordance with sound and accepted accounting practices, consistently applied (and all Requirements of Law). Section 6.07. Litigation, Claims, etc. The Borrower shall provide the Lender with (i) a litigation status report with respect to any suit at law or in equity asserted against it of the type referred to in Schedule 4.01(vii) attached hereto, in form and substance satisfactory to the Lender, promptly after the close of each calendar quarter; (ii) notice of any suit at law or in equity or claim brought or asserted against the Borrower, its Subsidiaries and/or its Affiliates promptly after learning thereof with respect to any suit or claim involving money or property valued in excess of $500,000.00 or any such suits or claims which in the aggregate involve money or property valued in excess of $500,000.00; and (iii) prompt notice of any investigation or proceeding before or by any Governmental Authority, the effect of which is reasonably likely to have a Material Adverse Effect. 59 Section 6.08 Labor Disputes. The Borrower shall notify the Lender in writing, promptly, but in any event within two (2) Business Days after learning thereof, of any material labor dispute to which the Borrower, its Subsidiaries and/or its Affiliates may become a party, any strikes or walkouts relating to any of their Properties and the expiration of any labor contract to which they are a party or by which they are bound. Section 6.09 Maintenance of Licenses, Permits, etc. The Borrower (i) shall maintain in full force and effect, and shall cause each of its Subsidiaries and Affiliates, to maintain in full force and effect, all licenses, permits, governmental approvals, franchises, authorizations or other rights necessary for the operation of the Borrower's, its Subsidiaries' and/or its Affiliates' businesses, except where the failure to obtain any of the foregoing would not have or is not reasonably likely to have a Material Adverse Effect and (ii) shall notify the Lender in writing, promptly after learning thereof, of the suspension, cancellation, revocation or discontinuance of or of any pending or threatened action or proceeding seeking to suspend, cancel, revoke or discontinue any such license, permit, governmental approval, franchise authorization or right, where the result thereof could reasonably be expected to have a Material Adverse Effect. Section 6.10 Use of Proceeds. The Borrower shall not use the proceeds of any Loans hereunder directly or indirectly for any unlawful purpose, in any manner inconsistent with Section 2.01(iv) hereof, or inconsistent with any other provision of any Loan Document. Section 6.11 Continuation of or Change in Business. The Borrower, its Subsidiaries and its Affiliates shall continue to engage in their collective businesses substantially as conducted and operated during the present and preceding Fiscal Year, and the Borrower, its Subsidiaries and its Affiliates shall not engage in any other material business other than the business of high technology products and services for military and commercial customers in the United States and abroad. Section 6.12 Additional Corporate Guarantors and/or Partnership Guarantors. The Borrower shall cause any Subsidiaries and/or Affiliates which are acquired or formed after the Closing Date to execute the Agreement of Guaranty, which is attached hereto as Exhibit "H". 60 ARTICLE VII NEGATIVE COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all of the Obligations, unless the Lender shall give its prior written consent to the effect otherwise, then: Section 7.01. Consolidated Debt. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly create, incur, assume or otherwise become or remain directly or indirectly liable with respect to, any Consolidated Debt, except for: (i) the Obligations; (ii) accounts payable owing to and letters of credit in favor of trade creditors arising from current liabilities for goods and services purchased in the normal course of the Borrower's, its Subsidiaries' and/or its Affiliates' respective businesses; (iii) the permitted existing Consolidated Debt as described on Schedule 7.01 (iii) attached hereto, and extensions, renewals, replacements and refinancing thereof, not exceeding the principal amount outstanding on the date of such extension, renewal, replacement or refinancing, provided that the terms are no less advantageous to the Borrower, its Subsidiaries and/or its Affiliates than the predecessor obligation; (iv) Consolidated Debt in respect of loans, advances or guarantees permitted by Section 7.03 hereof; and (v) Consolidated Debt in connection with purchase money Liens permitted by Section 7.02 (ii) (e) hereof; and (vi) Consolidated Debt in the form of term loans only, having in the aggregate an outstanding principal balance of not more than $5,000,000.00, which Consolidated Debt was created or acquired by the Borrower, its Subsidiaries and/or its Affiliates in connection with the acquisition (whether a stock acquisition or asset acquisition) of any Subsidiary, Affiliate or any other Person. Section 7.02. Sales of Assets; Liens. (i) Sales. The Borrower, its Subsidiaries and its Affiliates shall not sell, assign, transfer, lease, convey, abandon or otherwise dispose of, voluntarily or involuntarily, any Properties, whether now owned or hereafter acquired, or any income or profits therefrom, except such sales, assignments, transfer, leases, conveyances, etc., which do not result in a Material Adverse Effect. 61 (ii) Liens. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any of their respective Properties except: (a) Liens securing the Obligations, if any such liens are granted to the Lender in the future; (b) any interest or title of a lessor or secured by a lessor's interest under any lease permitted by this Loan Agreement; (c) Liens existing on the date of this Loan Agreement securing any of the existing Consolidated Debt described on Schedule 7.01(iii) attached hereto (but said Liens may not be increased in principal amount); (d) Customary Permitted Liens; (e) purchase money Liens securing Consolidated Debt (including the interest of a lessee under a Capitalized Lease) in the aggregate principal amount outstanding at any time not to exceed $1,000,000.00; and (f) Liens securing Consolidated Debt permitted under Section 7.01 (vi) above. Section 7.03. Loans, Advances and Investments. The Borrower, its Subsidiaries and its Affiliates shall not, at any time make or suffer to exist or remain outstanding, any loan or advance to, or purchase, acquire or own (beneficially or of record) any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other interest in, or make any capital contribution to or other investment in, any other Person, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (i) Loans and investments existing on the date hereof and listed in Schedule 7.03 attached hereto and extensions, renewals and refinancing thereof on terms no less favorable than those existing immediately before such extension, renewal or refinancing); (ii) Accounts receivable owing to the Borrower, its Subsidiaries and its Affiliates arising from sales of inventory under usual and customary terms in the ordinary course of business and loans and advances extended by the Borrower, its Subsidiaries and/or its Affiliate to subcontractors or suppliers (excluding subcontractors or suppliers who are Subsidiaries or Affiliates) under usual and customary terms in the ordinary course of business; (iii) Loans from the Borrower, a Subsidiary or an Affiliate to either the Borrower, another Subsidiary or another Affiliate; 62 (iv) Loans or advances not to exceed $250,000.00 in the aggregate at any time outstanding made to officers, partners or other employees of the Borrower; its Subsidiaries and/or its Affiliates; (v) Investments in Cash or Cash Equivalents; (vi) Investments in all existing and any new Subsidiaries or Affiliates; and (vii) Loans not to exceed $2,000,000.00 in the aggregate at any time outstanding to Persons whom the Borrower, its Subsidiaries and/or its Affiliates have identified to the Lender in writing are targets of a proposed or contemplated acquisition by the Borrower, its Subsidiaries and/or its Affiliates. Section 7.04. Restricted Junior Payments. The Borrower, its Subsidiaries and its Affiliates shall not declare or make any Restricted Junior Payment. Section 7.05. Transactions with Subsidiaries and Affiliates. The Borrower, its Subsidiaries and its Affiliates shall not directly or indirectly enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Subsidiary or Affiliate, on terms that are less favorable than those that might be obtained in an arm's length transaction at the time from Persons who are not such a Subsidiary or Affiliate. Nothing contained in this Section 7.05 shall prohibit any transaction expressly permitted by Section 7.03 hereof. Section 7.06. Restriction on Fundamental Changes. The Borrower, its Subsidiaries and its Affiliates shall not enter into any merger or consolidation, or liquidate, windup or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or any substantial part of their respective businesses, properties or assets, whether now or hereafter acquired except (i) as permitted by Section 7.02(i) hereof and (ii) mergers of any Subsidiary or Affiliate into (a) the Borrower or (b) another Subsidiary or Affiliate. Section 7.07. ERISA. The Borrower, its Subsidiaries and its Affiliates shall not, and the Borrower shall not permit any of its ERISA Affiliates to, do any of the following to the extent that such act or failure to act would result in the aggregate, after taking into account any other such acts or failure to act, in an obligation to pay a sum of money that is material to the business of the Borrower, its Subsidiaries and its Affiliates: (i) Engage, or permit an ERISA Affiliate to engage, in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which a class exemption is not available or a private exemption has not been obtained from the DOL; (ii) Permit to exist any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived; 63 (iii) Fail, or permit an ERISA Affiliate to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (iv) Terminate, or permit an ERISA Affiliate to terminate, any Benefit Plan which would result in any liability of the Borrower, its Subsidiaries, its Affiliates or an ERISA Affiliate under Title IV of ERISA; or (v) Fail, or permit any ERISA Affiliate to fail, to pay any required installment under section (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment. Section 7.08 Amendment of Articles of Incorporation or By-Laws. The Borrower, its Subsidiaries and its Affiliates shall not materially amend, modify or supplement their respective articles of incorporation, by-laws or partnership agreements, except upon at least ten (10) days' prior express written notice to the Lender. Section 7.09 Margin Regulations. No portion of the proceeds of any credit extended under this Loan Agreement shall be used in any manner which might cause the extension of credit or the application of such proceeds to violate Regulation G, Regulation U or Regulation X or any other regulation of the Federal Reserve Board or to violate the Securities Exchange Act or the Securities Act, in each case as in effect on the date or dates of such Borrowing and such use of proceeds. Section 7.10 Cancellation of Consolidated Debt; Prepayment. The Borrower, its Subsidiaries and its Affiliates shall not cancel any Claim or Consolidated Debt (except for adequate consideration and in the ordinary course of their respective businesses) and shall not prepay any long-term Consolidated Subordinated Debt; provided, however, that the foregoing shall not prohibit the prepayment of the Obligations and the refinance of any Consolidated Subordinated Debt (i) in amounts and on terms and conditions equal to or better than the existing terms and conditions and (ii) in an aggregate amount of up to $1,000,000.00 at any time. Section 7.11 Environmental Liabilities. The Borrower, its Subsidiaries and its Affiliates shall not become subject to any Liabilities and Costs which the Lender deems has or is likely to have a Material Adverse Effect arising out of or related to (i) the Release or threatened Release at any location of any Environmental Concern Material into the Environment, or any Remedial Action in response thereto, or (ii) any violation of any Environmental, health or safety Requirement of Law; provided, however, that this covenant shall not be violated so long as (a) the Borrower, its Subsidiaries and its Affiliates shall have notified the Lender of the assertion of such liability or required expenditures promptly upon receiving written notice of such assertion, (b) the Borrower shall have continued to furnish the Lender with such information concerning such asserted liability or required expenditure as the Lender shall have reasonably requested, or as otherwise provided herein, (c) the Borrower, its Subsidiaries and its Affiliates shall be diligently pursuing indemnification for such liability or required expenditures from any Person which has an obligation to provide such indemnification, and (d) the Lender is satisfied that the imposition of such liability 64 during the pendency of the Borrower's, its Subsidiaries' or its Affiliates' pursuit of indemnification will not materially impair the Borrower's, its Subsidiaries' or its Affiliates' ability to perform its financial obligations under this Loan Agreement. Section 7.12 Guaranties. The Borrower, its Subsidiaries and its Affiliates shall not assume, guaranty, endorse or otherwise be or become directly or contingently responsible or liable, for obligations or liabilities of any Person, except for: (i) guaranties existing on the Closing Date as described on Schedule 7.12(i) attached hereto; (ii) guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (iii) guaranties of direct obligations of either the Borrower, its Subsidiaries and/or its Affiliates. Section 7.13 No Negative Pledges to Other Person. The Borrower, its Subsidiaries and its Affiliates shall not grant to another Person a covenant commonly referred to as a "negative pledge" with respect to their respective assets and properties. 65 ARTICLE VIII FINANCIAL COVENANTS The Borrower covenants and agrees that, on and after the Closing Date and until payment in full of all the Obligations, unless the Lender shall give its prior written consent to the effect otherwise: Section 8.01 Minimum Consolidated Quick Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a Consolidated Quick Ratio, equal to or greater than 1.0 to 1.0 . Section 8.02 Maximum Consolidated Senior Liabilities Leverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a ratio of (i) Consolidated Senior Liabilities (excluding all contingent liabilities under Generally Accepted Accounting Principles)-to- (ii) the sum of (a) Consolidated Tangible Net Worth plus (b) Consolidated Subordinated Debt, equal to or less than 1.0 to 1.0 Section 8.03 Minimum Consolidated Interest Coverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a Consolidated Interest Coverage Ratio equal to or greater than 1.75 to 1.0. Section 8.04 Maximum Consolidated Cash Flow Leverage Ratio. The Borrower shall have on the last day of each Fiscal Quarter and each Fiscal Year (which covenant shall be tested at the end of the periods covered by the quarterly and annual consolidated and consolidating financial statements which are to be provided to the Lender pursuant to Section 5.02 of this Loan Agreement) a Consolidated Cash Flow Leverage Ratio equal to or less than 3.5 to 1.0. 66 ARTICLE IX EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 9.01 Events of Default. The occurrence of any of the following events with the passing of any applicable notice and cure periods shall constitute an "Event of Default" under this Loan Agreement (hereinafter referred to as an "Event of Default"): (i) Any representation or warranty made by the Borrower, the Partnership Guarantors, the Corporate Guarantors or any other Person in any of the Loan Documents furnished in connection with the Equipment Line of Credit/Term Loan Facility, shall prove to have been false, incorrect or misleading in any substantial and material respect on the date as of which made; (ii) The Borrower shall have failed to make any payment of any installment of interest on any of the Equipment Line of Credit/Term Loan Note and/or under this Loan Agreement on their respective due dates; (iii) The Borrower shall have failed to make any payment of principal on any of the Equipment Line of Credit/Term Loan Note and/or under this Loan Agreement on their respective due dates; (iv) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have failed to duly observe or perform any covenant, condition or agreement with respect to the payment of moneys on the part of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors to be observed or performed pursuant to the terms of the Loan Documents, other than the payment of principal and interest which shall be governed by Section 9.01(ii) and (iii) above, and such default shall have remained uncured for a period of thirty (30) days after written notice thereof to the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by the Lender; (v) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have failed to duly observe or perform any covenant, condition or agreement on the part of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors to be observed or performed pursuant to the terms of the Loan Documents other than the payment of moneys which shall be governed by Section 9.01 (ii), (iii) and (iv) above, and such default shall have remained uncured for a period of thirty (30) days after written notice thereof to the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by the Lender; (vi) The Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall have applied for or consented to the appointment of a custodian, receiver, trustee or liquidator of all or a substantial part of their respective assets; a custodian shall have been appointed with or without consent of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors; the Borrower, the Partnership Guarantors and/or the Corporate Guarantors shall generally not be paying their respective Debts as they become due; the Borrower, the Partnership Guarantors and/or 67 the Corporate Guarantors shall have made a general assignment for the benefit of their respective creditors; the Borrower, the Partnership Guarantors and/or the Corporate Guarantors, shall have filed a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with their respective creditors, or shall have taken advantage of any insolvency law, or shall have filed an answer admitting the material allegations of a petition in bankruptcy, reorganization or insolvency proceeding; or a petition in bankruptcy shall have been filed against the Borrower, the Partnership Guarantors and/or the Corporate Guarantors and shall not have been dismissed for a period of sixty (60) consecutive days, or an Order for Relief shall have been entered against the Borrower, the Partnership Guarantors and/or the Corporate Guarantors under the Bankruptcy Code; or an order, judgment or decree shall have been entered without the application, approval or consent of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors by any court of competent jurisdiction appointing a receiver, trustee, custodian or liquidator of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors of a substantial part of their respective assets and such order, judgment or decree shall have continued unstayed and in effect for any period of sixty (60) consecutive days; (vii) A writ of execution or attachment or any similar process shall be issued or levied against all or any part of or interest in any of the Properties of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors or any judgment involving monetary damages shall be entered against the Borrower, the Partnership Guarantors and/or the Corporate Guarantors which shall become a lien on the Borrower's, the Partnership Guarantors' and/or the Corporate Guarantors' Properties or any portion thereof or interest therein and such execution, attachment or similar process is not released, bonded, satisfied, vacated or stayed within thirty (30) days after its entry or levy, and said writ of execution, attachment, levy or judgment shall involve monetary damages aggregating more than $500,000.00; (viii) Seizure or foreclosure of any of the Properties of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors pursuant to process of law or by respect of legal self-help, involving monetary damages aggregating more than $500,000.00, unless said seizure or foreclosure is stayed or bonded within thirty (30) days after the occurrence of same; (ix) The voluntary permanent closing of business or ceasing of operations of the Borrower, the Partnership Guarantors and/or the Corporate Guarantors, the result of which would have a Material Adverse Effect; (x) Default by the Borrower, the Partnership Guarantors and/or the Corporate Guarantors in any of the terms or conditions of any agreement (excluding the Loan Documents) covering the payment of borrowed money from the Lender and/or any other creditor (which with respect to any other creditor shall be in an amount involving not less than $500,000.00), which default has been declared by the Lender or said other creditor, and said Debt with respect to any other creditor has been accelerated; 68 (xi) The occurrence of a material adverse change in the business, financial condition, financial performance, properties or operations of the Borrower, the Partnership Guarantors and the Corporate Guarantors taken as a whole; and (xii) The occurrence of a Reportable Event, the result of which would have a Material Adverse Effect. Section 9.02 Rights and Remedies. (i) Acceleration. Upon the occurrence and during the continuance of any Event of Default described in the foregoing Section 9.01(vi) hereof, the Equipment Line of Credit/Term Loan Facility shall automatically and immediately terminate and the unpaid principal amount of and any and all accrued interest on the Equipment Line of Credit/Term Loans shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower, and the obligation of the Lender to make any Equipment Line of Credit/Term Loans shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default described in Section 9.01 above, the Lender may by written notice to the Borrower, (a) declare that the Equipment Line of Credit/Term Loan Facility is terminated, whereupon the obligation of the Lender to make any Equipment Line of Credit/Term Loans shall immediately terminate and/or (b) declare the unpaid principal amount of and any and all accrued and unpaid interest on the Equipment Line of Credit/Term Loans to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower. (ii) Rights Under Loan Documents and the Collateral Documents. Upon the occurrence and during the continuance of any Event of Default, the Lender may take any lawful action against the Borrower to collect the payments then due and thereafter to become due under the Loan Documents, including any rights in law or equity and any rights provided for in the Collateral Documents. (iii) Setoff. Upon the occurrence and during the continuance of any Event of Default, without prior notice or other action (any such notice being expressly waived by the Borrower; however the Lender shall give the Borrower notice within three (3) days after the Lender has set off any amounts) the Lender may setoff any money owed by the Lender in any capacity to the Borrower or any Property of the Borrower in the possession of the Lender against any of the monetary obligations of the Borrower to the Lender under the Loan Documents, and the Lender shall be deemed to have exercised such right of setoff and to have made a charge against any such money or property immediately, even though the actual book entries may be made at some time subsequent thereto. 69 Section 9.03 Application of Proceeds. (i) All payments and proceeds received under Section 9.02 of this Loan Agreement shall be applied in the following order of priority: (a) First, to the payment of all reasonable fees, costs and expenses (including reasonable attorney's fees and expenses) incurred by the Lender and/or its agents or representatives in connection with the realization of such payments or proceeds; (b) Next, to the payment in full of all unpaid principal, accrued interest and other sums, if any, due and owing under the Equipment Line of Credit/Term Facility; (c) Next, the balance, if any, or such payments, proceeds, or amounts to the Borrower, or, if otherwise determined by a court of competent jurisdiction, to whomever may be entitled thereto. (ii) If the amount of the proceeds received in Section 9.03(i) above shall be insufficient to satisfy in full the amounts referred to in clauses (a) and (b) above, then the Borrower shall remain and be liable for any such deficiency. Section 9.04 No Notices. In order to entitle the Lender to exercise any remedy available to it under Section 9.02 of this Loan Agreement, it shall not be necessary for the Lender to give any notice, other than such notice as may be required expressly in this Loan Agreement or by applicable law. Section 9.05 Agreement to Pay Attorneys' Fees and Expenses. Upon the occurrence and during the continuance of an Event of Default, as a result of which the Lender shall require and employ attorneys or incur other expenses for the collection of payments due or to become due or the enforcement or performance or observance of any obligation or agreement on the part of the Borrower contained herein, the Borrower shall, on demand, pay to the Lender, the reasonable fees of such attorneys and such other expenses so incurred by them. Section 9.06 No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Loan Agreement should be breached by any party and thereafter waived by the other parties, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. Section 9.07 Failure to Exercise Rights. Nothing herein contained shall impose upon the Lender any obligation to enforce any terms, covenants or conditions contained in this Loan Agreement and the other Loan Documents. Failure of the Lender, in any one or more instances, to insist upon strict performance by the Borrower of any terms, covenants or conditions of this Loan Agreement and the other Loan Documents, shall not be considered or taken as a waiver or relinquishment by the Lender of its right to insist upon and to enforce in the future, by injunction or other appropriate legal or equitable remedy, strict compliance by the Borrower with all the terms, covenants and conditions of this Loan Agreement and the other Loan Documents. The consent of 70 the Lender to any act or omission by the Borrower shall not be construed to be a consent to any other or subsequent act or omission or to waive the requirement for the Lender's consent to be obtained in any future or other instance. Section 9.08 Waiver Of Jury Trial. THE BORROWER AND THE LENDER HEREBY WAIVE ANY AND ALL RIGHTS THAT THEY MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN THE BORROWER, THE LENDER OR THEIR SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS. IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDING. THE BORROWER AND THE LENDER RECOGNIZE THAT ANY DISPUTE ARISING IN CONNECTION WITH THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY IS LIKELY TO BE COMPLEX AND CONSEQUENTLY THEY WISH TO STREAMLINE AND MINIMIZE THE COST OF THE DISPUTE RESOLUTION PROCESS BY AGREEING TO WAIVE THEIR RIGHTS TO A JURY TRIAL. Section 9.09 Remedies Cumulative. No remedy herein conferred upon or reserved to the Lender is intended to be exclusive of any other remedy or remedies; but each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder, or now or hereafter existing at law or in equity or by statute. No express or implied waiver by the Lender of any Event of Default hereunder shall in any way be, or construed to be, a waiver of any future or subsequent Event of Default. No delay or omission to exercise any right or power accruing upon any Event of Default continuing as aforesaid, shall impair any such right or power or shall be construed to be a waiver of any such Event of Default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient. 71 ARTICLE X MISCELLANEOUS Section 10.01 Expenses. (i) Generally. The Borrower agrees upon demand to pay, or reimburse the Lender for, all the Lender's reasonable external legal costs and expenses (but not internal legal costs and expenses) and all internal and external audit, appraisal, valuation and investigation expenses and for all other reasonable out-of-pocket costs and expenses of every type and nature (including, without limitation, the reasonable fees, expenses and disbursements of Reed Smith Shaw & McClay and any other external attorneys retained by the Lender, auditors, accountants, appraisers, insurance and environmental advisers, and other consultants) incurred by the Lender in connection with (a) any amendment waiver or consents required or requested by the Borrower hereunder and (b) the protection, collection or enforcement of any of the Obligations. (ii) After Default. The Borrower further agrees to pay, or reimburse the Lender for all reasonable out-of-pocket costs and expenses, including, without limitation, reasonable external attorneys' fees and disbursements, and costs of settlement incurred by the Lender after the occurrence and during the continuance of an Event of Default (a) in enforcing any Obligation or exercising or enforcing any other right or remedy available by reason of such Event of Default, (b) in connection with any refinancing or restructuring of the credit arrangements provided under this Loan Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding, (c) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding relating to the Borrower and related to or arising out of the transactions contemplated thereby or by any of the Loan Documents and (d) in taking any other action in or with respect to any suit or proceeding (whether in bankruptcy or otherwise). Section 10.02 Indemnity. The Borrower further agrees to defend, protect, indemnify, and hold harmless the Indemnified Parties from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated a party thereto), imposed on, incurred by or asserted against the Indemnified Parties (whether direct, indirect or consequential and whether based on any Federal or state Laws or other statutory regulations, including, without limitation, securities and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise, including any liability and costs under Federal, state or local environmental, health or safety laws, regulations, or common law principles, arising from or in connection with the past, present or future environmental condition of the Property, the presence of asbestos-containing materials at the Property, or the Release or threatened Release of any Environmental Concern Material into the Environment from the Property) in any manner relating to the conduct of the business of the Borrower, its Subsidiaries and/or its Affiliates or the use or intended use of the proceeds of the Loans hereunder (collectively, the "Indemnified Matters"); 72 provided, however, that the Borrower shall not have any obligation to an Indemnified Party hereunder with respect to (a) matters for which such Indemnified Party has been compensated pursuant to or for which an exemption is provided in Section 2.06 and Section 2.07 hereof or any other provision of this Loan Agreement and (b) Indemnified Matters caused by or resulting from the willful misconduct or gross negligence of that Indemnified Party, as determined by a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnified Parties. Section 10.03 Amendments and Waivers. No amendment or modification of any provision of this Loan Agreement shall be effective without the written agreement of the Lender and the Borrower, and no termination or waiver of any provision of this Loan Agreement, or consent to any departure by the Borrower therefrom, shall in any event be effective without the written concurrence of the Lender, which the Lender shall have the right to grant or withhold at its sole discretion. Section 10.04 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not expressly permitted by any of such covenants, the fact that it would be implicitly permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. Section 10.05 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by over-night courier service or United States mail and shall be deemed to have been given when delivered in person or by over-night courier service, upon receipt of a telecopy or telex during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). Notices to the Lender pursuant to Article II hereof shall not be effective until received by the Lender. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 10.05) shall be as set forth below each party's name on the signature pages hereof, or, as to each party, at such other address as may be designated by such party in a written notice to the other party. Section 10.06 Survival of Warranties and Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Loan Agreement and the other Loan Documents. Section 10.07 Marshalling; Recourse to Security; Payments Set Aside. The Lender shall not be under any obligation to marshall any assets in favor of the Borrower or any other person or against or in payment of any or all of the obligations. Recourse to security shall not be required at any time. To the extent that the Borrower makes a payment or payments to the Lender, or the 73 Lender enforces its rights and remedies under the Loan Documents or exercises its right of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, right and remedies therefor (to the extent permissible and practicable under the law and the circumstances), shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 10.08 Severability. In case any provision in or obligation under this Loan Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. Section 10.09 Governing Law. This Loan Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania. Section 10.10 Successors and Assigns. This Loan Agreement and the other Loan Documents shall be binding upon the parties hereto and their respective successors and assigns. The Borrower's duties and Obligations hereunder, may not be assigned without the prior express written consent of the Lender. The Lender shall not sell, transfer or otherwise assign its interest in the Equipment Line of Credit/Term Loan Facility to any other Person without the prior express written consent of the Borrower, except (i) where required by applicable banking Law or a change in banking policy at the Lender resulting in the Lender no longer making loans to customers similar to the Borrower and (ii) where the Lender has been acquired or merged into or with another institutional lender. Section 10.11 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE BORROWER WITH RESPECT TO THIS LOAN AGREEMENT AND THE EQUIPMENT LINE OF CREDIT/TERM LOAN NOTE MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF PENNSYLVANIA, AND BY EXECUTION AND DELIVERY OF THIS LOAN AGREEMENT, THE BORROWER ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS LOAN AGREEMENT AND THE EQUIPMENT LINE OF CREDIT/TERM LOAN NOTE FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. THE BORROWER DESIGNATES AND APPOINTS HANNOCH WEISMAN, A PROFESSIONAL CORPORATION AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE 74 BEING HEREBY ACKNOWLEDGED BY SUCH PERSON TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS NOTICE ADDRESS SPECIFIED ON THE SIGNATURE PAGES HEREOF, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ANY OBJECTION (INCLUDING WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY JURISDICTION SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. Section 10.12 Counterparts; Effectiveness; Inconsistencies. This Loan Agreement and any amendments, waivers, consents, or supplements may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Loan Agreement and each of the other Loan Documents shall be construed to the extent reasonable to be consistent one with the other, but to the extent that the terms and conditions of this Loan Agreement are actually inconsistent with the terms and conditions of any other Loan Documents, this Loan Agreement shall govern. Section 10.13 Entire Agreement. This Loan Agreement, taken together with all of the other Loan Documents and all certificates and other documents delivered by the Borrower or any other Person to the Lender, embody the entire agreement and supersede all prior agreements, written and oral, relating to the subject matter hereof. 75 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be executed and delivered by their proper and duly authorized corporate officers as appropriate, and the Borrower has caused its corporate seal to be hereunto affixed and attested pursuant to the resolution of its Board of Directors, all on the day and year first hereinabove written. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation, as the Borrower /s/ NANCY R. PITEK By: /s/ MARK S. NEWMAN - ----------------------------- ---------------------------------- Nancy R. Pitek Mark S. Newman Secretary President & CEO Notice Address: 5 Sylvan Way Parsippany, New Jersey 07054 Attn: Nancy R. Pitek Controller, Treasurer and Secretary With a copy to: Hannoch Weisman, A Professional Corporation 4 Becker Farm Road Roseland, New Jersey 07068 Attn: Nina Laserson Dunn, Esq. MELLON BANK, N.A., as the Lender By: /s/ G. RICHARD BERTOLET ---------------------------------- G. Richard Bertolet Senior Vice President 76 Notice Address: Raritan Plaza One - Raritan Center Edison, New Jersey 08837 Attn: Peter Dontas Vice President With a copy to: Reed Smith Shaw & McClay Princeton Forrestal Village 136 Main Street, Suite 250 P.O. Box 7839 Princeton, New Jersey 08543-7839 Attn: Daniel F. Peck, Jr., Esq. 77 EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 List of Eurodollar Affiliates None 78 EXHIBIT "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Notice of Borrowing To: Mellon Bank, N.A. (hereinafter referred to as the "Lender") in its capacity as lender under that certain Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996 (hereinafter referred to as the "Loan Agreement") entered into by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower") and the Lender. Terms defined in the Loan Agreement and not otherwise expressly defined herein are used herein as therein defined. Pursuant to Section 2.01(ii) of the Loan Agreement, this Notice of Borrowing in respect of an Equipment Line of Credit/Term Loan (hereinafter referred to as the "Notice") represents the request of the Borrower to borrow an Equipment Line of Credit/Term Loan on __________, 19__ (hereinafter referred to as the "Borrowing Date") from the Lender in aggregate principal amount of $________ as a [Prime Rate Loan] [Eurodollar Rate Loan]. In the event the Borrowing is a Eurodollar Rate Loan then the Borrower requests the following Eurodollar Interest Period: [14] [30] [60] or [90] days. Proceeds of such Equipment Line of Credit/Term Loan are to be deposited on the Borrowing Date in the account maintained by the Borrower with the Lender, Account No. ______, in immediately available funds [and immediately thereafter such proceeds shall be wire-transferred to an account maintained with _____, Account Number: ______]. The Equipment acquired with the proceeds of the Equipment Line of Credit/Term Loan will be located at __________________________. The Borrower hereby represents and warrants that said location is one of the locations set forth on Schedule 4.01 (xxviii) or in the event that said location is not set forth on Schedule 4.01 (xxviii), Schedule 4.01 (xxviii) shall be deemed amended and modified hereby to include said location. The Borrower hereby certifies that (i) the representations and warranties of the Borrower set forth in Sections 4.01 and Section 4.02 of the Loan Agreement and in any other Loan Document (except (a) representations and warranties which expressly speak only as of a different date, and (b) representations and warranties that are subject to change as permitted or contemplated by the Loan Documents) are true and correct in all material respects as of the Borrowing Date; (ii) no Event of Default or Potential Event of Default has occurred and is continuing under the Loan Agreement or any other Loan Document or will result from this proposed Borrowing; and (iii) the Borrower shall have performed in all material respects all agreements contained in and satisfied all conditions under Section 3.02 of the Loan Agreement and the other Loan Documents required to be performed by it on or prior to the Borrowing Date. 79 The Borrower hereby represents and warrants and agrees that the proceeds of the Equipment Line of Credit/Term Loan requested by this Notice shall be used for the sole purpose of financing the purchase price and certain costs and expenses incurred by the Borrower in connection with the acquisition of certain Equipment used in the business of designing and manufacturing high technology products. Dated: __________, 19__ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:__________________________________ Name: Title: 80 EXHIBIT "C" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Notice of Conversion/Continuation To: Mellon Bank, N.A. (hereinafter referred to as the "Lender") in its capacity as lender under that certain Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996 (hereinafter referred to as the "Loan Agreement") entered into by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower") and the Lender. Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. Pursuant to Section 2.02(iii) of the Loan Agreement, this Notice of Conversion/Continuation (hereinafter referred to as the "Notice") represents the Borrower's election to [insert one of the following"]: * convert an aggregate principal amount of $____________ of Equipment Line of Credit/Term Loans which are Prime Rate Loans to Eurodollar Rate Loans on __________, 19__. [The initial Eurodollar Interest Period for such Eurodollar Rate Loans is required to be a [fourteen] [thirty ] [sixty] or [ninety] day periods.] ** convert an aggregate principal amount of $_______ of Equipment Line of Credit/Term Loans which are Prime Rate Loans to Fixed Rate Loans on ______, 19___. *** convert an aggregate principal amount of $ of Equipment Line of Credit/Term Loans which are Eurodollar Rate Loans with a current Eurodollar Interest Period ending on _______, 19__, to Prime Rate Loans [on ________, 19__[.]*** - ----------- * Use if converting Prime Rate Loans to Eurodollar Rate Loans. ** Use if converting Prime Rate Loans to Fixed Rate Loans. *** Use if converting Eurodollar Rate Loans to Prime Rate Loans. 81 **** convert an aggregate principal amount of $________ of Equipment Line of Credit/Term Loans which are Eurodollar Rate Loans with a current Eurodollar Interest Period ending on ____, 19__, to Fixed Rate Loans on ______, 19__. ***** convert an aggregate principal amount of $______ of Equipment Line of Credit/Term Loans which are Fixed Rate Loans to Prime Rate Loans on ______, 19__. ****** convert an aggregate principal amount of $______ of Equipment Line of Credit/Term Loans which are Fixed Rate Loans to Eurodollar Rate Loans on _______, 19__. The initial Eurodollar Interest Period for such Eurodollar Rate Loans is required to be a [fourteen] [thirty] [sixty] or [ninety] day periods.] ******* and continue as Eurodollar Rate Loans an aggregate principal amount of $______ of Eurodollar Rate Loans with a current Eurodollar Interest Period ending ______, 19__. The succeeding Eurodollar Interest Period is requested to be a [fourteen], [thirty], [sixty] or [ninety] day periods. The Borrower hereby certifies that no Event of Default or Potential Event of Default has occurred and is continuing under the Loan Agreement. Dated: ___________________, 19 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:________________________________ Name: Title: - ----------- **** Use if converting Eurodollar Rate Loans to Fixed Rate Loans. ***** Use if converting Fixed Rate Loans to Prime Rate Loans. ****** Use if converting Fixed Rate Loans to Eurodollar Rate Loans. ******* Use if continuing as Eurodollar Rate Loans. 82 EXHIBIT "D" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Equipment Line of Credit/Term Loan Note $5,000,000.00 Philadelphia, Pennsylvania As of December 6, 1996 FOR VALUE RECEIVED, the undersigned, DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware (hereinafter referred to as the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (hereinafter referred to as the "Lender") on or before the Equipment Line of Credit/Term Loan Maturity Date, the lesser of (i) the principal sum of FIVE MILLION AND 00/100 ($5,000,000.00) DOLLARS or (ii) the aggregate unpaid principal amount of all Equipment Line of Credit/Term Loans made by the Lender to the Borrower pursuant to the Loan Agreement. The Borrower further promises to pay to the order of the Lender interest on the unpaid principal amount of the Equipment Line of Credit/Term Loans from the date outstanding at the interest rate per annum determined pursuant to Section 2.02 of, or as otherwise provided in, the Loan Agreement payable on the dates set forth in Section 2.02(ii) of, or as otherwise provided in, the Loan Agreement. All payments of principal and interest hereunder shall be due and payable to the Lender not later than 2:00 p.m. (Philadelphia, Pennsylvania time), on the day when due, all as more fully set forth in Section 2.05 of the Loan Agreement. Such payments shall be made in U.S. Dollars in immediately available funds without setoff, counterclaim (other than a compulsory counterclaim) or other deduction of any nature. Except as otherwise provided in the Loan Agreement, if any payment of principal or interest hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next following Business Day and such extension of time shall be included in computing interest in connection with such payment. This Equipment Line of Credit/Term Loan Note is the "Equipment Line of Credit/Term Loan Note" referred to in, and is entitled to the benefits of the Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996, executed by and between the Borrower and the Lender (as the same may be amended, modified or supplemented from time to time, hereinafter referred to as the "Loan Agreement"), which among other things provides for the acceleration of the maturity hereof upon the occurrence of certain events and for prepayments in certain circumstances and 83 upon certain terms and conditions. Terms defined in the Loan Agreement shall have the same meanings herein. The holder of this Equipment Line of Credit/Term Loan Note is authorized to endorse on the Schedule 1 attached hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof (hereinafter referred to as the "Grid") the date and amount of each Equipment Line of Credit/Term Loan made pursuant to Section 2.01 of the Loan Agreement, and the date and amount of each payment or prepayment of principal thereof, which endorsement shall constitute prima facie evidence of the accuracy of the information endorsed; provided, however, that the failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Equipment Line of Credit/Term Loan. The Borrower hereby expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Equipment Line of Credit/Term Note and the Loan Agreement. This Equipment Line of Credit/Term Note shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the Borrower has caused this Equipment Line of Credit/Term Loan Note to be executed and delivered by its proper and duly Authorized Officer and has caused its corporate seal to be hereunto affixed and attested, pursuant to the resolution of its Board of Directors, all on the day and year first hereinabove written. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation By: /s/ MARK S. NEWMAN -------------------------------- Name: /s/ Nancy R. Pitek Name: Mark S. Newman Secretary Title: President and CEO 84 SCHEDULE 1 TO EQUIPMENT LINE OF CREDIT/TERM LOAN NOTE LOANS AND PAYMENTS OF EQUIPMENT LINE OF CREDIT/TERM LOANS - ------------------------------------------------------------------------------ UNPAID AMOUNT OF PRINCIPAL AMOUNT OF PRINCIPAL BALANCE OF NOTATION DATE LOANS REPAID LOANS MADE BY - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 85 EXHIBIT "E" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Opinion Letter See attached 86 EXHIBIT "F" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Officer's Certificate This Officer's Certificate of Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Certificate") is delivered to you pursuant to Section 5.02(vii) of the Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996 (as may be amended from time to time (hereinafter referred to as the "Loan Agreement"), by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower"), and Mellon Bank, N.A. (hereinafter referred to as the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. 1. I am the duly elected, qualified and acting [Chief Financial Officer], [President] or [Chief Accounting Officer] of the Borrower. 2. I have reviewed and am familiar with the contents of this Certificate. I am providing this certificate solely in my capacity as an officer of the Borrower. The matters set forth herein are true to the best of my knowledge, after diligent inquiry, but I express no personal opinion as to any conclusions of law or other legal matters. 3. I have reviewed the terms of the Loan Agreement and the principal Loan Documents and have made, or caused to be made, under our supervision, a review in reasonable detail of the transactions and condition of the Borrower, its Subsidiaries and its Affiliates during the accounting period covered by the attached financial statements and computations attached hereto as Exhibit "F-1" ("Financial Statements"). Such review did not disclose the existence during or at the end of the accounting period covered by the attached Financial Statements, and I have no knowledge of the existence as of the date of this Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, except as set forth below:* 4. I hereby certify in my capacity as [President or Chief Financial Officer or Chief Accounting Officer] and in my capacity as an Authorized Officer that the Financial Statements attached hereto present fairly the financial position of the Borrower, its Subsidiaries and its Affiliates as of the end of such fiscal period and the results of its operations and the changes in its financial position and cash flows for such fiscal period, all in conformity with Generally Accepted Accounting Principles applied in a manner consistent with that of the most recent audited financial statements furnished to the Lender, subject to normal and recurring year-end audit adjustments. IN WITNESS WHEREOF, I execute this Certificate this ___ day of _______, 19__. 87 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation By:________________________________ Name: Title: - ---------- * Describe here (or in a separate attachment to this Certificate) the exceptions, if any, to Paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking and proposes to take with respect to each such condition or event. 88 EXHIBIT "F-1" FORM OF COMPLIANCE CERTIFICATE ---------------------- This Officer's Certificate of Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Certificate") is delivered to you pursuant to Section 5.02(iv) of the Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996 (as may be amended from time to time, hereinafter referred to as the "Loan Agreement") by and between Diagnostic/Retrieval Systems, Inc. (hereinafter referred to as the "Borrower"), and Mellon Bank, N.A., (hereinafter referred to as the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used herein as therein defined. The Borrower hereby delivers to the Lender, together with the financial statements being delivered pursuant to Section 5.02(i) and (iii) of the Loan Agreement, this Certificate for the accounting period from ___________, 19__ to __________, 19__*. For purposes hereof, section and subsection references herein relate to sections and subsections, respectively, of the Loan Agreement, and amounts or ratios refer to the maximum or minimum amounts or ratios required under the relevant sections of the Loan Agreement. I. NEGATIVE COVENANTS A. CONSOLIDATED DEBT (Section 7.01(vi)) B. LIENS (Section 7.02(ii)(e)) Amount of Purchase Money Liens $________________ Permitted Amount $1,000,000.00 at anytime outstanding - ------------- * Insert dates representing the fiscal period covered by this Certificate. 89 C. LOANS, ADVANCES AND INVESTMENTS (Section 7.03) 1. Subsection 7.03(iv) Aggregate demand advances to officers and employees outstanding at any time during the period covered by this Certificate: Outstanding $[___________________] Aggregated maximum $250,000.00 at any permitted to time outstanding officers/employees D. RESTRICTED JUNIOR PAYMENTS (Section 7.04) Actual Amount $__________________ Permitted Amount [$________________] II. FINANCIAL COVENANTS A. MINIMUM CONSOLIDATED QUICK RATIO (Section 8.01) Consolidated Quick Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Quick Ratio _____ to 1.0 Minimum Required Current Ratio 1.0 to 1.0 B. MAXIMUM CONSOLIDATED SENIOR LIABILITIES LEVERAGE RATIO (Section 8.02) Consolidated Leverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Senior Liabilities (exclusive of contingent liabilities) $_____________ Actual Consolidated Tangible Net Worth $_____________ Actual Consolidated Subordinated Debt $_____________ Actual Consolidated Leverage Ratio ______ to 1.0 Maximum Permitted Consolidated Leverage Ratio 1.0 to 1.0 C. MINIMUM CONSOLIDATED INTEREST COVERAGE RATIO (Section 8.03) Consolidated Interest Coverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Net Income $_____________ Actual Interest Expense $_____________ 90 Actual Prepaid Subordinated Debt $_____________ Actual Consolidated Interest Coverage Ratio _____ to 1.0 Minimum Required Consolidated Interest Ratio 1.75 to 1.0 D. MAXIMUM CONSOLIDATED CASH FLOW LEVERAGE RATIO (Section 8.04) Consolidated Cash Flow Leverage Ratio, as determined at the end of the period covered by this Certificate: Actual Consolidated Senior Bank Debt $_____________ Actual Consolidated Subordinated Debt $_____________ Actual EBITDA $_____________ Actual Consolidated Cash Flow Leverage Ratio ____ to 1.0 Maximum Permitted Consolidated Cash Flow Leverage Ratio 3.5 to 1.0 91 I hereby certify, in my capacity as an Authorized Officer of the Borrower, that the information set forth above is accurate as of ________, 19__, to the best of my knowledge after diligent inquiry. Dated: _____________, 19__ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. a Delaware corporation By:_____________________________________ Name: Title: 92 EXHIBIT "G" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Security Agreement [WHERE THE DEBTOR IS THE BORROWER] SECURITY AGREEMENT THIS SECURITY AGREEMENT (including all amendments, modifications and supplements hereinafter referred to as the "Security Agreement") is made this ___ day of __________________, 19___, by and between DIAGNOSTIC/RETRIEVAL 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 5 Sylvan Way, Parsippany, New Jersey 07054 (hereinafter referred to as the "Debtor"), 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 (hereinafter referred to as the "Bank"). W I T N E S S E T H : WHEREAS, the Debtor has requested that the Bank make a secured recourse equipment line of credit/term loan to the Borrower in the aggregate principal amount of Five Million and 00/100 ($5,000,000.00) Dollars, for the purpose of financing the acquisition of certain machinery and equipment by the Debtor and the other "Guarantors", as such term is defined herein (hereinafter referred to as the "Equipment Line of Credit/Term Loan Facility"); and WHEREAS, the Bank agreed to make the Equipment Line of Credit/Term Loan Facility to the Debtor, subject to the terms, conditions and provisions provided for in a certain Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996, executed by and between the Debtor and the Bank (hereinafter referred to as the "Loan Agreement"); and WHEREAS, all words and terms not defined herein shall have the respective meanings and be construed herein as provided for in the Loan Agreement; and 93 WHEREAS, as an inducement to the Bank to make the Equipment Line of Credit/Term Loan Facility to the Debtor, the Bank has required that the Debtor enter into and execute this Security Agreement hereby granting and conveying to the Bank a security interest in all of the personal property described on Schedule "A" attached hereto and made a part hereof. WHEREAS, the Debtor conducts its business at a certain facilities set forth on Schedule "B" attached hereto and made a part hereof (hereinafter referred to collectively as the "Premises"); and NOW, THEREFORE, IN CONSIDERATION OF THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY MADE TO THE BORROWER AND WITH KNOWLEDGE THAT THE BANK WOULD NOT MAKE THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY BUT FOR THE PROMISES OF THE DEBTOR HEREUNDER, THE DEBTOR AND THE BANK, HEREBY AGREE AS FOLLOWS: 1. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due by the Debtor of all obligations and liabilities under the Loan Agreement and all other Loan Documents executed in connection with the Equipment Line of Credit/Term Loan Facility including, without limitation, the following: (i) all indebtedness of the Debtor owed to the Bank arising on or after the date hereof under Loan Agreement, both principal and interest, and any extensions, renewals, refundings, substitutions of or for such indebtedness in whole or in part, (ii) all indebtedness of the Debtor owed to the Bank for reasonable fees and expenses contemplated by the Loan Agreement, (iii) all obligations of the Debtor to the Bank arising under the other Loan Documents, (iv) all other indebtedness, obligations and liabilities of the Debtor owed to the Bank now or hereafter existing, in connection with the Loan Agreement or the other Loan Documents whether or not contemplated by the Bank and/or the Debtor at the date hereof and whether direct or indirect, matured or contingent, joint or several or otherwise, (v) all future advances made by the Bank 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 Bank and (vi) any and all costs and expenses, including costs and expenses of collection, paid or incurred by the Bank 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 any or all of the collateral or the Bank's security interest therein or in connection with the taking of any other action permitted by this Security Agreement (hereinafter referred to as the "Obligations"), the Debtor hereby collaterally assigns, mortgages, hypothecates, conveys, transfers and grants to the Bank a continuing security interest in all of the Debtor's future rights, title and interests in and to the personal property described on Schedule "A" attached hereto and made a part hereof, wherever said personal property may be located, including, without limitation, those addresses set forth on Schedule "B" attached hereto and made a part hereof, as it may hereinafter be amended and modified from time to time (hereinafter referred to as the "Collateral"). 94 2. Payment. The Debtor shall pay and perform all of the Obligations secured by this Security Agreement strictly in accordance with their terms. 3. Representations and Warranties. The Debtor represents and warrants to the Bank that (i) it shall be the sole owner of each item of the Collateral and it shall at all times have good and marketable title thereto, free of all other security interests, liens, encumbrances and claims or rights of others, except any Liens permitted under the Loan Agreement; (ii) it has the full corporate power and authority to execute this Security Agreement, to perform its obligations hereunder and to subject the Collateral to be acquired by it to the security interest created hereby; (iii) no dispute, right of set-off, counterclaim or defenses shall exist with respect to any part of the Collateral; (iv) the security interest granted to the Bank pursuant to this Security Agreement, is a continuing security interest and no notice of the creation or existence of the renewal, extension or modification of the Loan Agreement or any other Loan Documents need be given to the Debtor for the security interest to remain perfected; and (v) no security agreement, financing statement, or lien instrument covering all or any part of the Collateral shall be on file in any public filing or recording office, and, once filed, the filing of the UCC-1 Financing Statements covering the security interest created hereby shall continue in effect, subject to renewal requirements, if any, until released as provided for in Paragraph 23 below; 4. Covenants. Except as more fully and accurately set forth in the Loan Agreement, which Loan Agreement, in the event of any inconsistency herewith, shall control, the Debtor covenants and agrees (i) to deliver to the Bank at such intervals as the Bank may require, such documents, lists, descriptions, certificates, and other information as may be necessary or proper to keep the Bank fully informed with respect to the description of the Collateral, (ii) from time to time to promptly execute and deliver to the Bank, at the sole expense of the Debtor, all such other assignments, certificates, supplemental documents, and financing statements, and do all other acts or things, as the latter may request in order to more fully evidence and perfect the security interest herein created; (iii) to punctually and properly perform all of the Debtor's covenants, duties, and liabilities under any other security agreement, mortgage, deed of trust, collateral pledge agreement or contract of any kind now or hereafter existing as security for or in connection with payment of the Equipment Line of Credit/Term Loan Facility, or any part thereof; (iv) to give written notice to the Bank of the removal of the Debtor's principal place of business, from a county or state where it is now located, which notice shall be given not less than thirty (30) days before such removal; (v) to promptly notify the Bank of any change in any fact or circumstances other than the removal referred to in clause (iv) of this Paragraph 4, which requires the advance notice provided for therein warranted or represented by the Debtor in this Security Agreement or in any other Loan Document furnished by the Debtor to the Bank in connection with the Collateral or the Equipment Line of Credit/Term Loan Facility; (vi) to promptly notify the Bank of any claim, action, or proceeding affecting title to the Collateral, or any part thereof, or the security interest herein, and, at the request of the Bank, to appear in and defend, at the Debtor's expense, any such action or proceeding; (vii) to promptly, after being requested by the Bank, pay to the Bank the amount of all (a) amounts actually incurred by the Bank as court costs hereunder, (b) attorneys fees assessed by a court and incurred by the Bank in enforcing this Security Agreement and (c) lawful fees for filing, recording or releasing this Security Agreement in any public office; and (viii) to do all things necessary or appropriate to enable the Bank to fully 95 exercise its rights under this Paragraph 4. In addition, the Debtor covenants and agrees that (A) during the continuance of an Event of Default, upon notice from the Bank, each Person obligated to make any payment to the Debtor with respect to the Collateral, or any part thereof, is hereby authorized and directed by the Debtor to make payment directly to the Bank; (B) the Debtor shall promptly collect all sums payable in respect to the Collateral; (C) all proceeds of the Collateral received by the Debtor, whether in the form of cash, checks, or otherwise, shall be segregated from all other funds of the Debtor and be held in trust for the Bank, and each item of such proceeds, immediately upon receipt thereof by the Debtor, shall become part of the Collateral, subject to the provisions of Paragraph 23 of this Security Agreement; and (D) the Debtor shall have absolutely no dominion or control over any payment received in respect of the Collateral, or any part thereof, except to deliver such payment immediately to the Bank, properly endorsed, so that the Bank may collect and apply the proceeds in accordance with the terms hereof. The Debtor covenants and agrees that, without the prior express written consent of the Bank, the Debtor shall not except as permitted by the Loan Agreement (1) sell, assign, or transfer any of the Collateral to any person, firm, or corporation (except the Bank), (2) create in favor of anyone, except the Bank, any other security interest in the Collateral, or in any part thereof, or otherwise encumber or permit the same to become subject to any lien, attachment, execution, sequestration, or other legal or equitable process; (3) remove, or permit to be removed, the Debtor's records concerning Collateral from the Premises; or (4) modify, or permit the modification of, or substitute, or permit another Contract to be substituted for, any Contract. 5. Additional Covenants Concerning the Collateral. Except as more fully and accurately set forth in the Loan Agreement, the Debtor further covenants and agrees (i) to retain at all times possession of the Collateral during the existence of this Security Agreement and not to sell, exchange, assign, loan, deliver, lease, mortgage or otherwise dispose of same without the prior express written consent of the Bank, except as may be permitted herein and in the Loan Agreement; (ii) to keep the Collateral located at the site(s) and location(s) described on Schedule "B" attached hereto and made a part hereof, and not to remove same from said location (except as permitted in the Loan Agreement and subparagraph (iii) below) without the prior express written consent of the Bank, unless the Collateral is replaced with items of equal or greater utility and value (which shall then be included as Collateral); (iii) at its own cost and expense (a) to maintain, preserve and keep the Collateral in a manner consistent with the standard operating practices applicable to a business similar to the Debtor, in good and substantial repair, working order and condition, ordinary wear and tear excepted, (b) as reasonably necessary, from time to time to make or cause to be made, all necessary and proper repairs, replacements, renewals, improvements and betterments thereto, and (c) as reasonably necessary, from time to time, to make such substitutions, additions, modifications and improvements as may be necessary and as shall not impair the structural integrity, operating efficiency and economic value of the Collateral; (iv) the Debtor will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Governmental Authority, applicable to the Collateral or any part thereof or to, the operation of the Debtor's business; provided, however, that the Debtor may contest any act, regulation, order, decree or direction in any reasonable manner which shall not in the sole opinion of the Bank adversely affect the Bank's rights or the first priority of its security interest in the Collateral; (v) to pay and discharge promptly all taxes, assessments, governmental charges or levies, or other charges or liens imposed upon it or in respect of any of the Collateral, 96 existing at any time, whether before or after the making of the Equipment Line of Credit/Term Loan Facility, except for those taxes, assessments, governmental charges or levies or other charges or liens then being contested in good faith by the Debtor by appropriate proceedings (provided that such contest shall not result in a lien being placed on the Collateral or any part thereof or result in the Collateral being subject to loss or forfeiture) and for which the Debtor has maintained adequate reserves or accrued the estimated liability on the balance sheet of the Debtor for the payment of same and (vi) to carry insurance on the Collateral in amounts, types and with insurance companies reasonably acceptable to the Bank. All such policies of insurance referred to subparagraph (vi) shall contain loss payable clauses in favor of the Debtor and the Bank as their respective interests may appear, and such policies or certificates evidencing the same shall be deposited with the Bank. The Debtor hereby assigns and sets over unto the Bank all moneys which may become payable on account of such insurance referred to subparagraph (vi), including without limitation, any return of unearned premiums which may be due upon cancellation of any such insurance, and directs the insurers to pay the Bank any amount so due. The Bank, its officers, employees and authorized agents are hereby irrevocably appointed attorney-in-fact of the Debtor to endorse any draft or check which may be payable to the Debtor in order to collect the proceeds of such insurance or any return of unearned premiums. Such proceeds shall be applied to the payment or prepayment of the Obligations related to such Collateral. Any balance of insurance proceeds remaining in the possession of the Bank after payment in full of the Obligations related to such Collateral, provided no Event of Default has occurred and is continuing, shall be paid to the Debtor on demand. If an Event of Default has occurred and is continuing, then the Debtor shall have no right to or claim against the balance of said insurance proceeds. All alterations, replacements, renewals or additions made pursuant to clause (iii) of this Paragraph 5 shall become and constitute a part of the Collateral. The Debtor shall not remove, demolish, materially alter, discontinue the use of, sell, transfer, assign, hypothecate or otherwise dispose of to any Person other than a Subsidiary or an Affiliate, any of the Collateral, other than in the ordinary or usual course of the Debtor's business or as may be permitted in the Loan Agreement. All Collateral which has been substituted for any removed, replaced or disposed of Collateral shall be of a value and quality at least equal to that of the removed, replaced or disposed of Collateral, and shall be subject to the liens of the security interest granted to the Bank hereunder. 6. Actions of the Bank. Except as more fully and accurately set forth in the Loan Agreement, which in the event of any inconsistency herewith, shall control, should any covenant, duty, or agreement of the Debtor fail to be performed in accordance with its terms hereunder, the Bank may perform or attempt to perform such covenant, duty or agreement on behalf of the Debtor, and any reasonable amount expended by the Bank in such performance or attempted performance together with interest thereon at the rate then provided for in respect of the Equipment Line of Credit/Term Loan Facility as provided for in the Loan Agreement, shall become a part of the Obligations secured by this Security Agreement, and, at the request of the Bank, the Debtor covenants and agrees to promptly pay such amount to the Bank at its office in Philadelphia, Pennsylvania; provided, that the Bank does not assume and shall never have any liability for the performance of any duties of the Debtor under or in connection with the Collateral, or any part thereof, or under any transaction, agreement, or contract out of which the Collateral, or any part thereof, may arise. 97 7. Repayment of the Bank. The Debtor covenants and agrees that the Bank may from time to time, without giving notice and without impairing or affecting the security interest created by this Security Agreement (i) acquire a security interest in any property in addition to the Collateral, or release any such interest so acquired, or permit any substitution or exchange for such property; (ii) acquire the primary or secondary liability of any party or parties with respect to all or any part of the Equipment Line of Credit/Term Loan Facility or release, modify or compromise the same or any part thereof; (iii) modify, extend or renew for any period any part of the Equipment Line of Credit/Term Loan Facility; and (iv) resort to the Collateral for payment of the Equipment Line of Credit/Term Loan Facility whether or not the Bank shall have resorted to any other collateral or proceeded against any other party primarily or secondarily liable on the Equipment Line of Credit/Term Loan Facility or any of them. 8. Bank's Appointment as Attorney-in-Fact. (i) The Debtor hereby irrevocably constitutes and appoints the Bank and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Bank's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby gives the Bank the power and right, on behalf of the Debtor, without notice to or assent by the Debtor to do the following: (a) upon the occurrence and continuance of an Event of Default as such term is defined in the Loan Agreement, to ask, demand, collect, receive and give acquittances and receipts for any and all moneys due and to become due under any contract and, in the name of the Debtor or its own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any contract or account and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Bank for the purpose of collecting any and all such moneys due under any contract or account whenever payable; (b) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; (c) upon the occurrence and continuance of any Event of Default, (1) to receive payment of and receipt for any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (2) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any part Collateral; (3) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (4) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Debtor may deem appropriate; 98 (5) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Bank were the absolute owner thereof for all purposes, and to do, at the Bank's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Bank reasonably deems necessary to protect, preserve or realize upon the Collateral and the Bank's security interest therein, in order to effect the intent of this Security Agreement, all as fully and effectively as the Debtor might do; and (6) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents relating to any such Collateral. (d) to take such action as the Bank reasonably deems appropriate to maintain, repair, protect and insure the Collateral, to attach, perfect, continue, preserve and protect the Bank's security interest in the Collateral and to perform, keep, observe and render true and correct any and all covenants, agreements, representations and warranties of the Debtor hereunder; (e) to inspect, audit and verify the Collateral, including reviewing all of the Debtor's books and records and copying and making excerpts therefrom; The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (ii) The powers conferred on the Bank hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Bank shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act, except for its own, his or her gross negligence or willful misconduct. (iii) The Debtor also authorizes the Bank, at any time and from time to time when there exists any uncured Event of Default, to execute, in connection with the sale of any Collateral, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 9. Events of Default. The Debtor shall be in default under this Security Agreement if an Event of Default under the Loan Agreement shall have occurred. 10. Remedies, Rights Upon Default. (i) If an Event of Default shall occur and be continuing: (a) All payments received by the Debtor under or in connection with any of the Collateral shall be held by the Debtor in trust for the Bank, shall be segregated from other funds of the Debtor and shall forthwith upon receipt by the Debtor, be turned over to the Bank, in the same form as received by the Debtor (duly endorsed by the Debtor to the Bank, if required); and 99 (b) Any and all such payments so received by the Bank (whether from the Debtor or otherwise) shall, in the sole discretion of the Bank, be held by the Bank as collateral security for, and/or then or at any time thereafter applied in whole or in part by the Bank, against all or any part of the Obligations in such order as the Bank shall elect. Any balance of such payments held by the Bank and remaining after payment in full of all of the Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled to receive the same. (ii) If any Event of Default shall occur and be continuing, the Bank may exercise in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the obligations, all rights and remedies of a secured party under the applicable Uniform Commercial Code. Without limiting the generality of the foregoing, the Debtor expressly agrees that in any such event the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Debtor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange broker's board or at any of the Bank's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is hereby expressly released. The Debtor further agrees, at the Bank's written request, to assemble the Collateral and make it available to the Bank at the Debtor's Premises. The Bank shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorneys' fees and legal expenses, to the payment in whole or in part of the Obligations, in such order as the Bank may elect, the Debtor remaining liable for any deficiency remaining unpaid after such application, and only after so paying over such net proceeds and after the payment by the Bank of any other amount required by any provision of law, including Section 9-504(l)(c) of the applicable Uniform Commercial Code, (or any successor or substitute provision) need the Bank account for the surplus, if any, to the Debtor. To the extent permitted by applicable law, the Debtor waives all claims, damages, and demands against the Bank arising out of the repossession, retention or sale of the Collateral, except for the gross negligence or willful misconduct of the Bank. The Debtor agrees that the Bank shall give at least twenty (20) days' notice (which notification shall be deemed given when mailed, postage prepaid, addressed to the Debtor at its address set forth in Paragraph 16 hereof) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. The Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which the Bank is entitled, the Debtor also being liable for the reasonable fees of any attorneys employed by the Bank to collect such deficiency. 100 (iii) The Debtor also agrees to pay all reasonable costs of the Bank, including attorneys' fees, incurred with respect to the collection of any of the Obligations and the enforcement of any of the Bank's rights hereunder. (iv) The Debtor hereby waives presentment, demand, protest or any notice (to the extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. 11. Limitation on the Bank's Duty in Respect of Collateral. Beyond the safe custody thereof and any other duties imposed by applicable Law, the Bank shall not have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it as to the preservation of rights against prior parties or any other rights pertaining thereto. 12. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. No Waiver of Rights; Cumulative Remedies. Nothing herein contained and no act done or omitted by the Bank pursuant to the powers and rights granted it herein shall be deemed to be a waiver by the Bank of its rights and remedies under the Equipment Line of Credit/Term Loan Note and the Loan Agreement, but this Security Agreement is made and accepted without prejudice to any of the rights and remedies possessed by the Bank under the terms thereof. The right of the Bank to collect said indebtedness and to enforce any other security therefor held by it may be exercised by the Bank either prior to, simultaneously with, or subsequent to any action taken by it hereunder. The Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Bank, and then only to the extent therein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. 14. Successors and Assigns. This Security Agreement and all obligations of the Debtor hereunder shall be binding upon the successors and assigns of the Debtor, and shall, together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. 101 15. Further Indemnification. The Debtor agrees to pay, and to save the Bank harmless from, any and all liabilities with respect to, or resulting from any delay by the Debtor in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Security Agreement. 16. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, sent by confirmed telecopy transmission or sent by over-night courier service or United States mail (registered or certified, with postage prepaid and properly addressed) and shall be deemed to have been given when delivered in person or by overnight courier service, upon receipt of a telecopy or telex during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). All notices shall be sent to the applicable party at the following addresses or in accordance with the last unrevoked written direction from such party to the other parties hereto: If to the Debtor: Diagnostic/Retrieval Systems, Inc. 5 Sylvan Way Parsippany, New Jersey 07054 Attn.: Ms. Nancy R. Pitek Controller, Treasurer and Secretary With a Hannoch Weisman, A Professional Corporation copy to: 4 Becker Farm Road Roseland, New Jersey 07068 Attn.: Nina Laserson Dunn, Esq. If to the Bank: Mellon Bank, N.A. Mellon Bank Center 1735 Market Street Philadelphia, Pennsylvania 19101 Attn.: Loan Administration Dept. With a Reed Smith Shaw and McClay copy to: 136 Main Street Princeton Forrestal Village Princeton, New Jersey 08540 Attn.: Daniel P. Peck, Jr., Esq. and Mellon Financial Services Raritan Plaza One Raritan Center 102 Edison, New Jersey 08837 Attn.: Mr. Peter Dontas Vice President 17. Law Applicable. The Uniform Commercial Code of the State or States having jurisdiction with respect to all or any portion of the Collateral from time to time shall govern the attachment, perfection and the effect of attachment and perfection of the Bank's security interest in the Collateral, and the rights, duties, and obligations of the Bank and the Debtor with respect thereto. This Security Agreement shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and the execution and delivery thereof and, to the extent not inconsistent with the preceding sentence, the terms and provisions hereof shall be governed by and construed in accordance with the laws of the said Commonwealth. 18. Counterparts. This Security Agreement may be executed by one or more parties to this Security Agreement in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 19. Further Assurances. The Debtor agrees that at any time and from time to time upon the written request of the Bank, the Debtor will execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Security Agreement. 20. Obligations Absolute. The obligations of the Debtor under this Security Agreement shall be absolute and unconditional, and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by any circumstance or occurrence whatsoever, including without limitation: (i) any renewal, amendment or modification of or addition or supplement to or deletion from the Obligations, or any assignment or transfer thereof; (ii) any waiver, extension, indulgence or other action or inaction under or in respect or any of the Obligations of this Security Agreement; (iii) any furnishing of additional security to the Bank or its assignee or any acceptance thereof or any release of any security by the Bank or its assignee; (iv) any limitation on any parties' liability or obligations under any of the obligations or any invalidity or inability, in whole or in part, of any of the obligations; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Debtor, any partnership or any other Person or any action taken with respect to this Bank by any trustee or custodian or receiver or by any court in any such proceeding, whether or not the Debtor shall have notice or knowledge of any of the foregoing. 21. Modifications in Writing. This Security Agreement may not be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 22. Security for the Equipment Line of Credit/Term Loan Facility. Notwithstanding any other term, covenant or condition contained in this Security Agreement, the Debtor and the Bank hereby agree that the Collateral shall secure only the Obligations and that the Collateral is 103 not offered as security in connection with any other indebtedness due and owing from the Debtor to the Bank. 23. Release of the Collateral. (i) Provided no Event of Default is existing under this Security Agreement, the Loan Agreement or any other Loan Documents, and the Equipment Line of Credit/Term Loan referred to in the applicable Notice of Borrowing is repaid in full pursuant to Article II, Section 2.01(v) of the Loan Agreement, the Bank agrees to deliver to the Debtor releases of the Collateral acquired with said Equipment Line of Credit/Term Loan for consideration; provided, however, the Bank shall have received from the Debtor fully executed UCC-3 Termination Statement(s) prepared by the Borrower, together with the appropriate filing fees for filing said UCC-3 Termination Statement(s) in the appropriate filing office(s) and accurately describing the Collateral to be released from the lien of this Security Agreement. (ii) Provided no Event of Default is existing under this Security Agreement, the Loan Agreement or any other Loan Documents, in the event the Equipment Line of Credit/Term Loan referred to in the applicable Notice of Borrowing is repaid in full pursuant to Article II, Section 2.04 of the Loan Agreement for whatever reason and from whatever source of monies, the Bank agrees to deliver to the Debtor releases of the Collateral acquired with said repaid Equipment Line of Credit/Term Loan for consideration; provided, however, the Bank shall have received from the Debtor fully executed UCC-3 Termination Statement(s) prepared by the Borrower, together with the appropriate filing fees for filing said UCC-3 Termination Statement(s) in the appropriate filing office(s) and accurately describing the Collateral to be released from the lien of this Security Agreement. 104 IN WITNESS WHEREOF, the Bank and the Debtor have caused this Security Agreement to be signed by their appropriate authorized corporate officers and their corporate seals to be hereunto affixed and attested, pursuant to the resolution of their Boards of Directors, all as of the day and year first above written. [SEAL] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., ATTEST: a Delaware corporation, as the Debtor _______________________________ By:_______________________________ Nancy R. Pitek Mark S. Newman Secretary President and CEO MELLON BANK, N.A., as the Bank By:_______________________________ Name: Title: SCHEDULE "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECURITY AGREEMENT, EXECUTED BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A. DATED _____________________, 19_____ All present and future rights, title and interests of the Debtor in and to: (i) any Equipment acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility; (ii) Chattel Paper; (iii) Contracts; (iv) General Intangibles; and (v) to the extent not otherwise included, all Proceeds and products of any or all of the foregoing. As used in this Security Agreement the above-referenced terms shall have the following meanings, unless the context otherwise requires: "Equipment" shall mean all "equipment", as such term is now or hereafter defined in the applicable Uniform Commercial Code, now or hereafter owned by the Debtor, and shall also mean and include all personal property, including that constituting machinery, equipment, plant, furnishings, fixtures and other fixed assets now owned or hereafter acquired by the Debtor, 105 including, without limitation, all items of machinery and equipment of any kind, nature, and description whether affixed to real property or not, including automobiles, trucks and vehicles of every description, trailers, handling and delivery equipment, fixtures and office furniture, as well as all additions to, substitutions for, replacements of or accessions to any of the items recited as aforesaid and all attachments, components, parts (including spare parts) and accessories whether installed thereon or affixed thereto and all fuel for any thereof. Supplementing the foregoing and without limiting the generality of the foregoing the Equipment shall and is hereby declared to include, without being limited to, all screens, awnings, storm windows and doors, window shades, blinds, drapery and curtain rods, brackets, electric and other signs, dynamos, generators, engines, ducts, switchboards, controls, motors, belting, gas and electric fixtures, bulbs, wiring, conduits and other gas and electric equipment, apparatus, machinery, fittings, appliances and appurtenances, elevators, escalators, power and machinery plants for running and operation of elevators and escalators, fire prevention and extinguishing apparatus, bathtubs, sinks, water closets, basins, faucets, tanks, burners, furnaces, heaters, air conditioners, boilers, pipes, pumps, radiators, fans and other power, heating, plumbing, hot water, sanitary, drainage and ventilating apparatus and equipment, air conditioning and cooling systems and equipment, watercooling and condensing apparatus and equipment, apparatus for exclusion and extermination of vermin and insects, vacuum and other cleaning systems, dust removal apparatus, lifting and housekeeping machinery, apparatus and equipment, call systems and other communications systems, ash and fuel conveyors incinerators, incinerating fixtures and equipment, laundry machinery, apparatus and equipment, laundry disposal equipment, cleaning and pressing apparatus and equipment, valet shop equipment, store fixtures and equipment, murals, mirrors attached to walls, doors and other facilities, wall-to-wall carpets, linoleum, inlaid floor coverings, wall beds, radio and television apparatus and equipment, electronic apparatus and equipment, trees, shrubs, plants, planter and flower boxes, blackboards, bulletin boards, stanchions, easels, platforms, bars, bar equipment, beverage equipment, dining room and restaurant equipment, kitchen cabinets, gas electric and other stoves, ovens and ranges, fireless cookers, dishwashers, glasswashers, refrigerators, ice boxes, compressors, coils, water coolers and other refrigerating and cooking apparatus and equipment, medicine chests, commodes, hospital equipment, cornices, mantels, paneling, partitions, drafting tables, drawing boards, drawing cases, safes, cabinets, lockers, shelving, printing equipment and apparatus, public address systems, spotlight equipment, and all other articles, equipment, appliances, implements, devices and accessories or things whatsoever (including any and all accessions to, proceeds of replacements of and substitutions for the equipment), used or to be used, or placed or to be placed, in the rooms, halls, lounges, offices, lobbies, lavatories, basement cellars, vaults and other portions of the real property, whether herein enumerated or not, and whether or not affixed to the real property, and which are used or useful in the operation and maintenance thereof or in the business conducted therein. "Chattel Paper" shall mean all "chattel paper", as such term is now or hereafter defined in the applicable Uniform Commercial Code, now or hereafter owned by the Debtor, relating to any Equipment being acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility. 106 "Contracts" shall mean all contracts, licenses, instruments, undertakings, documents or other agreements in or under which the Borrower may now or hereafter have any rights, title or interests, including, without limitation, (i) any claim arising thereunder from misrepresentation or breach of warranty, and (ii) all such agreements which pertain to the lease, sale, construction, design, manufacture or other disposition of any Equipment being acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility, other than such contracts, instruments, undertakings, documents or other agreements which specifically prohibit their assignment as security, provided, that notwithstanding any such prohibition such contracts, instruments, undertakings, documents or other agreements shall be deemed to be Contracts to the extent that such prohibition is inconsistent with the provisions of the applicable Uniform Commercial Code. "General Intangibles" shall mean all "general intangibles", as such term is now or hereafter defined in the applicable Uniform Commercial Code relating to any Equipment. 107 SCHEDULE "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECURITY AGREEMENT, EXECUTED BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A. DATED _________________, 19____ Location of Collateral 108 [WHERE THE DEBTOR IS NOT THE BORROWER] --- SECURITY AGREEMENT THIS SECURITY AGREEMENT (including all amendments, modifications and supplements hereinafter referred to as the "Security Agreement") is made this ___ day of __________________, 19___, by and between ____________________________________________, a ____________________ duly organized, validly existing and in good standing under the laws of the State of _______________, having its principal office located at ________________________________________ (hereinafter referred to as the "Debtor"), 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 (hereinafter referred to as the "Bank"). W I T N E S S E T H : WHEREAS, Diagnostic/Retrieval Systems, Inc., a Delaware corporation (hereinafter referred to as the "Borrower") has requested that the Bank make a secured recourse equipment line of credit/term loan to the Borrower in the aggregate principal amount of Five Million and 00/100 ($5,000,000.00) Dollars, for the purpose of financing the acquisition of certain machinery and equipment by the Borrower, the Debtor and the other "Guarantors", as such term is defined herein (hereinafter referred to as the "Equipment Line of Credit/Term Loan Facility"); and WHEREAS, the Bank agreed to make the Equipment Line of Credit/Term Loan Facility to the Borrower, subject to the terms, conditions and provisions provided for in a certain Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996, executed by and between the Borrower and the Bank (hereinafter referred to as the "Loan Agreement"); and WHEREAS, pursuant to the terms and conditions of a certain Agreement of Guaranty dated [AS OF DECEMBER 6, 1996] [__________, 19__ ] (hereinafter referred to as the "Agreement of Guaranty"), executed by the Debtor, as a guarantor, and the other guarantors, in favor of the Bank, as the lender, the Debtor agreed, on a joint and several basis with the other guarantors, to guaranty the "Liabilities of the Borrower" (as such term is defined in the Agreement of Guaranty); and 109 WHEREAS, all words and terms not defined herein shall have the respective meanings and be construed herein as provided for in the Loan Agreement; and WHEREAS, as an inducement to the Bank to make the Equipment Line of Credit/Term Loan Facility to the Borrower, the Bank has required that the Debtor enter into and execute this Security Agreement hereby granting and conveying to the Bank a security interest in all of the personal property described on Schedule "A" attached hereto and made a part hereof. WHEREAS, the Debtor conducts its business at [a certain facility] [certain facilities] set forth on Schedule "B" attached hereto and made a part hereof (hereinafter referred to [collectively] as the "Premises"); and NOW, THEREFORE, IN CONSIDERATION OF THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY MADE TO THE BORROWER AND WITH KNOWLEDGE THAT THE BANK WOULD NOT MAKE THE EQUIPMENT LINE OF CREDIT/TERM LOAN FACILITY BUT FOR THE PROMISES OF THE DEBTOR HEREUNDER, THE DEBTOR AND THE BANK, HEREBY AGREE AS FOLLOWS: 1. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due by the Debtor of all obligations and liabilities under the Agreement of Guaranty and all other Loan Documents executed in connection with the Equipment Line of Credit/Term Loan Facility including, without limitation, the following: (i) all indebtedness of the Debtor owed to the Bank 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 the Debtor owed to the Bank for reasonable fees and expenses contemplated by the Agreement of Guaranty, (iii) all obligations of the Debtor to the Bank arising under the other Loan Documents, (iv) all other indebtedness, obligations and liabilities of the Debtor owed to the Bank now or hereafter existing, in connection with the Agreement of Guaranty or the other Loan Documents whether or not contemplated by the Bank and/or the Debtor at the date hereof and whether direct or indirect, matured or contingent, joint or several or otherwise, (v) all future advances made by the Bank 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 Bank and (vi) any and all costs and expenses, including costs and expenses of collection, paid or incurred by the Bank 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 any or all of the collateral or the Bank's security interest therein or in connection with the taking of any other action permitted by this Security Agreement (hereinafter referred to as the "Obligations"), the Debtor hereby collaterally assigns, mortgages, hypothecates, conveys, transfers and grants to the Bank a continuing security interest in all of the Debtor's future rights, title and interests in and to the personal property described on Schedule "A" attached hereto and made a part hereof, wherever said personal property may be located, including, without limitation, those addresses set forth on Schedule "B" 110 attached hereto and made a part hereof, as it may hereinafter be amended and modified from time to time (hereinafter referred to as the "Collateral"). 2. Payment. The Debtor shall pay and perform all of the Obligations secured by this Security Agreement strictly in accordance with their terms. 3. Representations and Warranties. The Debtor represents and warrants to the Bank that (i) it shall be the sole owner of each item of the Collateral and it shall at all times have good and marketable title thereto, free of all other security interests, liens, encumbrances and claims or rights of others, except any Liens permitted under the Loan Agreement; (ii) it has the full corporate or partnership power and authority, as the case may be, to execute this Security Agreement, to perform its obligations hereunder and to subject the Collateral to be acquired by it to the security interest created hereby; (iii) no dispute, right of set-off, counterclaim or defenses shall exist with respect to any part of the Collateral; (iv) the security interest granted to the Bank pursuant to this Security Agreement, is a continuing security interest and no notice of the creation or existence of the renewal, extension or modification of the Agreement of Guaranty, the Loan Agreement or any other Loan Documents need be given to the Debtor for the security interest to remain perfected; and (v) no security agreement, financing statement, or lien instrument covering all or any part of the Collateral shall be on file in any public filing or recording office, and, once filed, the filing of the UCC-1 Financing Statements covering the security interest created hereby shall continue in effect, subject to renewal requirements, if any, until released as provided for in Paragraph 23 below; 4. Covenants. Except as more fully and accurately set forth in the Loan Agreement, which Loan Agreement, in the event of any inconsistency herewith, shall control, the Debtor covenants and agrees (i) to deliver to the Bank at such intervals as the Bank may require, such documents, lists, descriptions, certificates, and other information as may be necessary or proper to keep the Bank fully informed with respect to the description of the Collateral, (ii) from time to time to promptly execute and deliver to the Bank, at the sole expense of the Debtor, all such other assignments, certificates, supplemental documents, and financing statements, and do all other acts or things, as the latter may request in order to more fully evidence and perfect the security interest herein created; (iii) to punctually and properly perform all of the Debtor's covenants, duties, and liabilities under any other security agreement, mortgage, deed of trust, collateral pledge agreement or contract of any kind now or hereafter existing as security for or in connection with payment of the Equipment Line of Credit/Term Loan Facility, or any part thereof; (iv) to give written notice to the Bank of the removal of the Debtor's principal place of business, from a county or state where it is now located, which notice shall be given not less than thirty (30) days before such removal; (v) to promptly notify the Bank of any change in any fact or circumstances other than the removal referred to in clause (iv) of this Paragraph 4, which requires the advance notice provided for therein warranted or represented by the Debtor in this Security Agreement or in any other Loan Document furnished by the Debtor to the Bank in connection with the Collateral or the Equipment Line of Credit/Term Loan Facility; (vi) to promptly notify the Bank of any claim, action, or proceeding affecting title to the Collateral, or any part thereof, or the security interest herein, and, at the request of the Bank, to appear in and defend, at the Debtor's expense, any such action or proceeding; (vii) to promptly, after being requested by the 111 Bank, pay to the Bank the amount of all (a) amounts actually incurred by the Bank as court costs hereunder, (b) attorneys fees assessed by a court and incurred by the Bank in enforcing this Security Agreement and (c) lawful fees for filing, recording or releasing this Security Agreement in any public office; and (viii) to do all things necessary or appropriate to enable the Bank to fully exercise its rights under this Paragraph 4. In addition, the Debtor covenants and agrees that (A) during the continuance of an Event of Default, upon notice from the Bank, each Person obligated to make any payment to the Debtor with respect to the Collateral, or any part thereof, is hereby authorized and directed by the Debtor to make payment directly to the Bank; (B) the Debtor shall promptly collect all sums payable in respect to the Collateral; (C) all proceeds of the Collateral received by the Debtor, whether in the form of cash, checks, or otherwise, shall be segregated from all other funds of the Debtor and be held in trust for the Bank, and each item of such proceeds, immediately upon receipt thereof by the Debtor, shall become part of the Collateral, subject to the provisions of Paragraph 23 of this Security Agreement; and (D) the Debtor shall have absolutely no dominion or control over any payment received in respect of the Collateral, or any part thereof, except to deliver such payment immediately to the Bank, properly endorsed, so that the Bank may collect and apply the proceeds in accordance with the terms hereof. The Debtor covenants and agrees that, without the prior express written consent of the Bank, the Debtor shall not except as permitted by the Loan Agreement (1) sell, assign, or transfer any of the Collateral to any person, firm, or corporation (except the Bank), (2) create in favor of anyone, except the Bank, any other security interest in the Collateral, or in any part thereof, or otherwise encumber or permit the same to become subject to any lien, attachment, execution, sequestration, or other legal or equitable process; (3) remove, or permit to be removed, the Debtor's records concerning Collateral from the Premises; or (4) modify, or permit the modification of, or substitute, or permit another Contract to be substituted for, any Contract. 5. Additional Covenants Concerning the Collateral. Except as more fully and accurately set forth in the Loan Agreement, the Debtor further covenants and agrees (i) to retain at all times possession of the Collateral during the existence of this Security Agreement and not to sell, exchange, assign, loan, deliver, lease, mortgage or otherwise dispose of same without the prior express written consent of the Bank, except as may be permitted herein and in the Loan Agreement; (ii) to keep the Collateral located at the site(s) and location(s) described on Schedule "B" attached hereto and made a part hereof, and not to remove same from said location (except as permitted in the Loan Agreement and subparagraph (iii) below) without the prior express written consent of the Bank, unless the Collateral is replaced with items of equal or greater utility and value (which shall then be included as Collateral); (iii) at its own cost and expense (a) to maintain, preserve and keep the Collateral in a manner consistent with the standard operating practices applicable to a business similar to the Debtor, in good and substantial repair, working order and condition, ordinary wear and tear excepted, (b) as reasonably necessary, from time to time to make or cause to be made, all necessary and proper repairs, replacements, renewals, improvements and betterments thereto, and (c) as reasonably necessary, from time to time, to make such substitutions, additions, modifications and improvements as may be necessary and as shall not impair the structural integrity, operating efficiency and economic value of the Collateral; (iv) the Debtor will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Governmental Authority, applicable to the Collateral or any part thereof or to, the operation of the Debtor's business; provided, however, that the Debtor may 112 contest any act, regulation, order, decree or direction in any reasonable manner which shall not in the sole opinion of the Bank adversely affect the Bank's rights or the first priority of its security interest in the Collateral; (v) to pay and discharge promptly all taxes, assessments, governmental charges or levies, or other charges or liens imposed upon it or in respect of any of the Collateral, existing at any time, whether before or after the making of the Equipment Line of Credit/Term Loan Facility, except for those taxes, assessments, governmental charges or levies or other charges or liens then being contested in good faith by the Debtor by appropriate proceedings (provided that such contest shall not result in a lien being placed on the Collateral or any part thereof or result in the Collateral being subject to loss or forfeiture) and for which the Debtor has maintained adequate reserves or accrued the estimated liability on the balance sheet of the Debtor for the payment of same and (vi) to carry insurance on the Collateral in amounts, types and with insurance companies reasonably acceptable to the Bank. All such policies of insurance referred to subparagraph (vi) shall contain loss payable clauses in favor of the Debtor and the Bank as their respective interests may appear, and such policies or certificates evidencing the same shall be deposited with the Bank. The Debtor hereby assigns and sets over unto the Bank all moneys which may become payable on account of such insurance referred to subparagraph (vi), including without limitation, any return of unearned premiums which may be due upon cancellation of any such insurance, and directs the insurers to pay the Bank any amount so due. The Bank, its officers, employees and authorized agents are hereby irrevocably appointed attorney-in-fact of the Debtor to endorse any draft or check which may be payable to the Debtor in order to collect the proceeds of such insurance or any return of unearned premiums. Such proceeds shall be applied to the payment or prepayment of the Obligations related to such Collateral. Any balance of insurance proceeds remaining in the possession of the Bank after payment in full of the Obligations related to such Collateral, provided no Event of Default has occurred and is continuing, shall be paid to the Debtor on demand. If an Event of Default has occurred and is continuing, then the Debtor shall have no right to or claim against the balance of said insurance proceeds. All alterations, replacements, renewals or additions made pursuant to clause (iii) of this Paragraph 5 shall become and constitute a part of the Collateral. The Debtor shall not remove, demolish, materially alter, discontinue the use of, sell, transfer, assign, hypothecate or otherwise dispose of to any Person other than a Subsidiary or an Affiliate, any of the Collateral, other than in the ordinary or usual course of the Debtor's business or as may be permitted in the Loan Agreement. All Collateral which has been substituted for any removed, replaced or disposed of Collateral shall be of a value and quality at least equal to that of the removed, replaced or disposed of Collateral, and shall be subject to the liens of the security interest granted to the Bank hereunder. 6. Actions of the Bank. Except as more fully and accurately set forth in [the Agreement of Guaranty and/or] the Loan Agreement, which in the event of any inconsistency herewith, shall control, should any covenant, duty, or agreement of the Debtor fail to be performed in accordance with its terms hereunder, the Bank may perform or attempt to perform such covenant, duty or agreement on behalf of the Debtor, and any reasonable amount expended by the Bank in such performance or attempted performance together with interest thereon at the rate then provided for in respect of the Equipment Line of Credit/Term Loan Facility as provided in the [Agreement of Guaranty and/or] the Loan Agreement, shall become a part of the Obligations secured by this Security Agreement, and, at the request of the Bank, the Debtor 113 covenants and agrees to promptly pay such amount to the Bank at its office in Philadelphia, Pennsylvania; provided, that the Bank does not assume and shall never have any liability for the performance of any duties of the Debtor under or in connection with the Collateral, or any part thereof, or under any transaction, agreement, or contract out of which the Collateral, or any part thereof, may arise. 7. Repayment of the Bank. The Debtor covenants and agrees that the Bank may from time to time, without giving notice and without impairing or affecting the security interest created by this Security Agreement (i) acquire a security interest in any property in addition to the Collateral, or release any such interest so acquired, or permit any substitution or exchange for such property; (ii) acquire the primary or secondary liability of any party or parties with respect to all or any part of the Equipment Line of Credit/Term Loan Facility or release, modify or compromise the same or any part thereof; (iii) modify, extend or renew for any period any part of the Equipment Line of Credit/Term Loan Facility; and (iv) resort to the Collateral for payment of the Equipment Line of Credit/Term Loan Facility whether or not the Bank shall have resorted to any other collateral or proceeded against any other party primarily or secondarily liable on the Equipment Line of Credit/Term Loan Facility or any of them. 8. Bank's Appointment as Attorney-in-Fact. (i) The Debtor hereby irrevocably constitutes and appoints the Bank and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Bank's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby gives the Bank the power and right, on behalf of the Debtor, without notice to or assent by the Debtor to do the following: (a) upon the occurrence and continuance of an Event of Default as such term is defined in the Agreement of Guaranty, to ask, demand, collect, receive and give acquittances and receipts for any and all moneys due and to become due under any contract and, in the name of the Debtor or its own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any contract or account and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Bank for the purpose of collecting any and all such moneys due under any contract or account whenever payable; (b) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; (c) upon the occurrence and continuance of any Event of Default, (1) to receive payment of and receipt for any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (2) to commence and prosecute any 114 suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any part Collateral; (3) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (4) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Debtor may deem appropriate; (5) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Bank were the absolute owner thereof for all purposes, and to do, at the Bank's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Bank reasonably deems necessary to protect, preserve or realize upon the Collateral and the Bank's security interest therein, in order to effect the intent of this Security Agreement, all as fully and effectively as the Debtor might do; and (6) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents relating to any such Collateral. (d) to take such action as the Bank reasonably deems appropriate to maintain, repair, protect and insure the Collateral, to attach, perfect, continue, preserve and protect the Bank's security interest in the Collateral and to perform, keep, observe and render true and correct any and all covenants, agreements, representations and warranties of the Debtor hereunder; (e) to inspect, audit and verify the Collateral, including reviewing all of the Debtor's books and records and copying and making excerpts therefrom; The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (ii) The powers conferred on the Bank hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Bank shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act, except for its own, his or her gross negligence or willful misconduct. (iii) The Debtor also authorizes the Bank, at any time and from time to time when there exists any uncured Event of Default, to execute, in connection with the sale of any Collateral, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 9. Events of Default. The Debtor shall be in default under this Security Agreement if an Event of Default under the Agreement of Guaranty and/or the Loan Agreement shall have occurred. 10. Remedies, Rights Upon Default. (i) If an Event of Default shall occur and be continuing: 115 (a) All payments received by the Debtor under or in connection with any of the Collateral shall be held by the Debtor in trust for the Bank, shall be segregated from other funds of the Debtor and shall forthwith upon receipt by the Debtor, be turned over to the Bank, in the same form as received by the Debtor (duly endorsed by the Debtor to the Bank, if required); and (b) Any and all such payments so received by the Bank (whether from the Debtor or otherwise) shall, in the sole discretion of the Bank, be held by the Bank as collateral security for, and/or then or at any time thereafter applied in whole or in part by the Bank, against all or any part of the Obligations in such order as the Bank shall elect. Any balance of such payments held by the Bank and remaining after payment in full of all of the Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled to receive the same. (ii) If any Event of Default shall occur and be continuing, the Bank may exercise in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the obligations, all rights and remedies of a secured party under the applicable Uniform Commercial Code. Without limiting the generality of the foregoing, the Debtor expressly agrees that in any such event the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Debtor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange broker's board or at any of the Bank's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is hereby expressly released. The Debtor further agrees, at the Bank's written request, to assemble the Collateral and make it available to the Bank at the Debtor's Premises. The Bank shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorneys' fees and legal expenses, to the payment in whole or in part of the Obligations, in such order as the Bank may elect, the Debtor remaining liable for any deficiency remaining unpaid after such application, and only after so paying over such net proceeds and after the payment by the Bank of any other amount required by any provision of law, including Section 9-504(l)(c) of the applicable Uniform Commercial Code, (or any successor or substitute provision) need the Bank account for the surplus, if any, to the Debtor. To the extent permitted by applicable law, the Debtor waives all claims, damages, and demands against the Bank arising out of the repossession, retention or sale of the Collateral, except for the gross negligence or willful misconduct of the Bank. The Debtor agrees that the Bank shall give at least twenty (20) days' notice (which notification shall be deemed given when mailed, postage prepaid, addressed to the 116 Debtor at its address set forth in Paragraph 16 hereof) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. The Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which the Bank is entitled, the Debtor also being liable for the reasonable fees of any attorneys employed by the Bank to collect such deficiency. (iii) The Debtor also agrees to pay all reasonable costs of the Bank, including attorneys' fees, incurred with respect to the collection of any of the Obligations and the enforcement of any of the Bank's rights hereunder. (iv) The Debtor hereby waives presentment, demand, protest or any notice (to the extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. 11. Limitation on the Bank's Duty in Respect of Collateral. Beyond the safe custody thereof and any other duties imposed by applicable Law, the Bank shall not have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it as to the preservation of rights against prior parties or any other rights pertaining thereto. 12. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. No Waiver of Rights; Cumulative Remedies. Nothing herein contained and no act done or omitted by the Bank pursuant to the powers and rights granted it herein shall be deemed to be a waiver by the Bank of its rights and remedies under the Equipment Line of Credit/Term Loan Note and the Loan Agreement, but this Security Agreement is made and accepted without prejudice to any of the rights and remedies possessed by the Bank under the terms thereof. The right of the Bank to collect said indebtedness and to enforce any other security therefor held by it may be exercised by the Bank either prior to, simultaneously with, or subsequent to any action taken by it hereunder. The Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Bank, and then only to the extent therein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. 117 14. Successors and Assigns. This Security Agreement and all obligations of the Debtor hereunder shall be binding upon the successors and assigns of the Debtor, and shall, together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. 15. Further Indemnification. The Debtor agrees to pay, and to save the Bank harmless from, any and all liabilities with respect to, or resulting from any delay by the Debtor in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Security Agreement. 16. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, sent by confirmed telecopy transmission or sent by over-night courier service or United States mail (registered or certified, with postage prepaid and properly addressed) and shall be deemed to have been given when delivered in person or by overnight courier service, upon receipt of a telecopy or telex during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). All notices shall be sent to the applicable party at the following addresses or in accordance with the last unrevoked written direction from such party to the other parties hereto: If to the Debtor: ___________________ ___________________ ___________________ Attn.:_____________ ___________________ With a Hannoch Weisman, A Professional Corporation copy to: 4 Becker Farm Road Roseland, New Jersey 07068 Attn.: Nina Laserson Dunn, Esq. If to the Bank: Mellon Bank, N.A. Mellon Bank Center 1735 Market Street Philadelphia, Pennsylvania 19101 Attn.: Loan Administration Dept. With a Reed Smith Shaw and McClay copy to: 136 Main Street Princeton Forrestal Village Princeton, New Jersey 08540 Attn.: Daniel P. Peck, Jr., Esq. and 118 Mellon Financial Services Raritan Plaza One Raritan Center Edison, New Jersey 08837 Attn.: Mr. Peter Dontas Vice President 17. Law Applicable. The Uniform Commercial Code of the State or States having jurisdiction with respect to all or any portion of the Collateral from time to time shall govern the attachment, perfection and the effect of attachment and perfection of the Bank's security interest in the Collateral, and the rights, duties, and obligations of the Bank and the Debtor with respect thereto. This Security Agreement shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and the execution and delivery thereof and, to the extent not inconsistent with the preceding sentence, the terms and provisions hereof shall be governed by and construed in accordance with the laws of the said Commonwealth. 18. Counterparts. This Security Agreement may be executed by one or more parties to this Security Agreement in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 19. Further Assurances. The Debtor agrees that at any time and from time to time upon the written request of the Bank, the Debtor will execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Security Agreement. 20. Obligations Absolute. The obligations of the Debtor under this Security Agreement shall be absolute and unconditional, and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by any circumstance or occurrence whatsoever, including without limitation: (i) any renewal, amendment or modification of or addition or supplement to or deletion from the Obligations, or any assignment or transfer thereof; (ii) any waiver, extension, indulgence or other action or inaction under or in respect or any of the Obligations of this Security Agreement; (iii) any furnishing of additional security to the Bank or its assignee or any acceptance thereof or any release of any security by the Bank or its assignee; (iv) any limitation on any parties' liability or obligations under any of the obligations or any invalidity or inability, in whole or in part, of any of the obligations; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Debtor, any partnership or any other Person or any action taken with respect to this Bank by any trustee or custodian or receiver or by any court in any such proceeding, whether or not the Debtor shall have notice or knowledge of any of the foregoing. 119 21. Modifications in Writing. This Security Agreement may not be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 22. Security for the Equipment Line of Credit/Term Loan Facility. Notwithstanding any other term, covenant or condition contained in this Security Agreement, the Debtor and the Bank hereby agree that the Collateral shall secure only the Obligations and that the Collateral is not offered as security in connection with any other indebtedness due and owing from the Debtor to the Bank. 23. Release of the Collateral. (i) Provided no Event of Default is existing under this Security Agreement, the Agreement of Guaranty, the Loan Agreement or any other Loan Documents, and the Equipment Line of Credit/Term Loan referred to in the applicable Notice of Borrowing is repaid in full pursuant to Article II, Section 2.01(v) of the Loan Agreement, the Bank agrees to deliver to the Debtor releases of the Collateral acquired with said Equipment Line of Credit/Term Loan for consideration; provided, however, the Bank shall have received from the Debtor fully executed UCC-3 Termination Statement(s) prepared by the Borrower, together with the appropriate filing fees for filing said UCC-3 Termination Statement(s) in the appropriate filing office(s) and accurately describing the Collateral to be released from the lien of this Security Agreement. (ii) Provided no Event of Default is existing under this Security Agreement, the Agreement of Guaranty, the Loan Agreement or any other Loan Documents, in the event the Equipment Line of Credit/Term Loan referred to in the applicable Notice of Borrowing is repaid in full pursuant to Article II, Section 2.04 of the Loan Agreement for whatever reason and from whatever source of monies, the Bank agrees to deliver to the Debtor releases of the Collateral acquired with said repaid Equipment Line of Credit/Term Loan for consideration; provided, however, the Bank shall have received from the Debtor fully executed UCC-3 Termination Statement(s) prepared by the Borrower, together with the appropriate filing fees for filing said UCC-3 Termination Statement(s) in the appropriate filing office(s) and accurately describing the Collateral to be released from the lien of this Security Agreement. 120 IN WITNESS WHEREOF, the Bank and the Debtor have caused this Security Agreement to be signed by their appropriate authorized corporate officers and their corporate seals to be hereunto affixed and attested, pursuant to the resolution of their Boards of Directors, all as of the day and year first above written. WITNESS/ATTEST: ____________________________________, a ____________________, as the Debtor, _______________________________ By:_______________________________ Name: Name: Title: Title: MELLON BANK, N.A., as the Bank By:_______________________________ Name: Title: 121 SCHEDULE "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECURITY AGREEMENT, EXECUTED BY AND BETWEEN ______________________________ AND MELLON BANK, N.A. DATED _____________________, 19_____ All present and future rights, title and interests of the Debtor in and to: (i) any Equipment acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility; (ii) Chattel Paper; (iii) Contracts; (iv) General Intangibles; and (v) to the extent not otherwise included, all Proceeds and products of any or all of the foregoing. As used in this Security Agreement the above-referenced terms shall have the following meanings, unless the context otherwise requires: "Equipment" shall mean all "equipment", as such term is now or hereafter defined in the applicable Uniform Commercial Code, now or hereafter owned by the Debtor, and shall also mean and include all personal property, including that constituting machinery, equipment, plant, furnishings, fixtures and other fixed assets now owned or hereafter acquired by the Debtor, including, without limitation, all items of machinery and equipment of any kind, nature, and description whether affixed to real property or not, including automobiles, trucks and vehicles of every description, trailers, handling and delivery equipment, fixtures and office furniture, as well as all additions to, substitutions for, replacements of or accessions to any of the items recited as aforesaid and all attachments, components, parts (including spare parts) and accessories whether installed thereon or affixed thereto and all fuel for any thereof. Supplementing the foregoing and without limiting the generality of the foregoing the Equipment shall and is hereby declared to include, without being limited to, all screens, awnings, storm windows and doors, window shades, blinds, drapery and curtain rods, brackets, electric and other signs, dynamos, generators, engines, ducts, switchboards, controls, motors, belting, gas and electric fixtures, bulbs, wiring, conduits and other gas and electric equipment, apparatus, machinery, fittings, appliances and appurtenances, elevators, escalators, power and machinery plants for running and operation of elevators and escalators, fire prevention and extinguishing apparatus, bathtubs, sinks, water closets, basins, faucets, tanks, burners, furnaces, heaters, air conditioners, boilers, pipes, pumps, radiators, fans and other power, heating, plumbing, hot water, sanitary, drainage and ventilating apparatus and equipment, air conditioning and cooling systems and equipment, watercooling and condensing apparatus and equipment, apparatus for exclusion and extermination of vermin and insects, vacuum and other cleaning systems, dust removal apparatus, lifting and housekeeping machinery, apparatus and equipment, call systems and other communications systems, ash and fuel conveyors incinerators, incinerating fixtures and equipment, laundry machinery, apparatus and equipment, laundry disposal equipment, cleaning and pressing apparatus and equipment, valet shop equipment, store fixtures and equipment, murals, mirrors attached to walls, doors and other facilities, wall-to-wall carpets, linoleum, inlaid floor coverings, wall beds, radio and television apparatus and equipment, electronic apparatus and equipment, trees, shrubs, plants, planter and flower boxes, blackboards, bulletin boards, stanchions, easels, platforms, bars, bar equipment, beverage equipment, dining room and restaurant equipment, kitchen cabinets, gas electric and other stoves, ovens and ranges, fireless cookers, dishwashers, glasswashers, refrigerators, ice boxes, compressors, coils, water coolers and other refrigerating and cooking apparatus and equipment, medicine chests, commodes, hospital equipment, cornices, mantels, paneling, partitions, drafting tables, drawing boards, drawing cases, safes, cabinets, lockers, shelving, printing equipment and apparatus, public address systems, spotlight equipment, and all other articles, equipment, appliances, implements, devices and accessories or things whatsoever (including any and all accessions to, proceeds of replacements of and substitutions for the equipment), used or to be used, or placed or to be placed, in the rooms, halls, lounges, offices, lobbies, lavatories, basement cellars, vaults and other portions of the real property, whether herein enumerated or not, and whether or not affixed to the real property, and which are used or useful in the operation and maintenance thereof or in the business conducted therein. "Chattel Paper" shall mean all "chattel paper", as such term is now or hereafter defined in the applicable Uniform Commercial Code, now or hereafter owned by the Debtor, relating to any Equipment being acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility. "Contracts" shall mean all contracts, licenses, instruments, undertakings, documents or other agreements in or under which the Borrower may now or hereafter have any rights, title or interests, including, without limitation, (i) any claim arising thereunder from misrepresentation or breach of warranty, and (ii) all such agreements which pertain to the lease, sale, construction, design, manufacture or other disposition of any Equipment being acquired with any portion of the proceeds of the Equipment Line of Credit/Term Loan Facility, other than such contracts, instruments, undertakings, documents or other agreements which specifically prohibit their assignment as security, provided, that notwithstanding any such prohibition such contracts, instruments, undertakings, documents or other agreements shall be deemed to be Contracts to the extent that such prohibition is inconsistent with the provisions of the applicable Uniform Commercial Code. "General Intangibles" shall mean all "general intangibles", as such term is now or hereafter defined in the applicable Uniform Commercial Code relating to any Equipment. SCHEDULE "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN SECURITY AGREEMENT, EXECUTED BY AND BETWEEN _______________________________ AND MELLON BANK, N.A. DATED _________________, 19____ Location of Collateral EXHIBIT "H" ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Form of Agreement of Guaranty THIS AGREEMENT OF GUARANTY (including all amendments, modifications and supplements is hereinafter referred to as the "Agreement of Guaranty"), made this ___ day of _____________, 19__ by ____________________________________________________________________, a [CORPORATION] [GENERAL PARTNERSHIP] [LIMITED PARTNERSHIP] [OTHER] duly organized, validly existing and in good standing under the laws of the State of _________________, having its principal office located at _____________________________________________ (hereinafter referred to as the Guarantor") IN FAVOR OF 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 (hereinafter referred to as the "Lender"). W I T N E S S E T H: WHEREAS, pursuant to a certain Equipment Line of Credit/Term Loan Agreement dated as of December 6, 1996, executed by and between Diagnostic/Retrieval Systems, Inc., a Delaware corporation (hereinafter referred to as the "Borrower"), as the borrower, and the Lender, as the lender (hereinafter said Equipment Line of Credit Term Loan Agreement, as it may be amended, modified, extended, renewed and/or supplemented shall be referred to as the "Loan Agreement"), the Lender agreed to make to the Borrower a secured recourse equipment line of credit/term loan in the aggregate principal amount of Five Million and 00/100 ($5,000,000.00) Dollars for the purpose of financing the acquisition of certain machinery and equipment by the Borrower and the Guarantor (hereinafter referred to as the "Loan"), which Loan is evidenced by a certain Equipment Line of Credit/Term Loan Note dated as of December 6, 1996, in the aggregate principal amount of the Loan (hereinafter said Equipment Line of Credit/Term Loan Note, as it may be amended, modified, extended, renewed and/or supplemented shall be referred to as the "Note"); and WHEREAS, the Guarantor is [A SUBSIDIARY] [AN AFFILIATE] of the Borrower and therefore the Guarantor has a common ownership interest with the Borrower; and WHEREAS, all words and terms not defined herein shall have the respective meanings and be construed herein as provided for in the Note and the Loan Agreement; and WHEREAS, as an inducement to the Lender to make the Loan to the Borrower, the Lender has required that the Guarantor, said Guarantor being affiliated with the Borrower and thus will directly or indirectly benefit from the Loan, personally and unconditionally enter into and execute this Agreement of Guaranty, hereby guarantying the full, prompt and unconditional payment when due of any "Liabilities of the Borrower" (as said term is defined in Paragraph 1 hereof) due and owing to the Lender in connection with the Loan, and the full and complete performance of all other obligations of the Borrower with respect to the Loan. NOW, THEREFORE, IN CONSIDERATION OF THE LOAN MADE TO THE BORROWER AND WITH KNOWLEDGE THAT THE LENDER WOULD NOT MAKE THE LOAN BUT FOR THE PROMISES OF THE GUARANTOR HEREUNDER, THE GUARANTOR HEREBY ABSOLUTELY AND UNCONDITIONALLY, REPRESENTS, WARRANTS AND COVENANTS AS FOLLOWS: 1. The Guarantor hereby irrevocably guaranties, on a joint and several basis with all other existing and all future guarantors that now or hereafter have or may enter into guaranties of the Loan with the Lender, the full, prompt and unconditional payment when due, of each and every Liability of the Borrower owing to the Lender, when and as the same shall become due, whether at the stated maturity date, by acceleration or otherwise, and the full, prompt, and unconditional performance of each and every term and condition of any transaction to be kept and performed by the Borrower under the Note and under the Loan Agreement. This Agreement of Guaranty is a primary obligation of the Guarantor and shall be a continuing inexhaustible Agreement of Guaranty. In the event any of the Liabilities of the Borrower shall not be paid according to their terms, then, upon the written request of the Lender, the Guarantor shall immediately pay the same, this Agreement of Guaranty being a guaranty of full payment and not collectibility. The term "Liability of the Borrower" or "Liabilities of the Borrower" shall include all liabilities of the Borrower owed to the Lender in connection with the Loan, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing, due or to become due, to, and all liabilities of any successor of the Borrower owed to the Lender in connection with the Loan, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing, due or to become due, to, or held by, the Lender. 2. The Guarantor represents and warrants that the representations and warranties set forth in Article IV of the Loan Agreement, with respect to the Guarantor, are true, correct and complete, and the Guarantor hereby expressly confirms and affirms each representation and warranty concerning itself, as set forth in Article IV, Section 4.01 and 4.02 of the Loan Agreement, as if restated in full herein. * CHOOSE THE CORRECT P. #3 BELOW AND DELETE THE OTHER CHOICE [3. (i) The Guarantor represents and warrants that (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, (b) is duly qualified to conduct business as a foreign corporation and in good standing under the laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) it has all requisite power and authority to own, operate and encumber its properties and assets and conduct its business as presently conducted or proposed to be conducted in connection with and following the consummation of the transactions contemplated by this Agreement of Guaranty. (ii)(a) The Guarantor has the requisite corporate authority (1) to execute, deliver and perform this Agreement of Guaranty and (2) to file any documents required to be filed by it, if any, under this Agreement of Guaranty with the appropriate Governmental Authority. (b) The execution, delivery and performance under (or filing as the case may be) of this Agreement of Guaranty and any other Loan Document to which it is a party and the consummation of the transactions contemplated herein, have been duly authorized by the Board of Directors the Guarantor and no further corporate proceedings on the part of the Guarantor are necessary to consummate such transactions. (c) This Agreement of Guaranty has been duly executed and delivered by the Guarantor and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.] [3. (i) The Guarantor represents and warrants that (a) it is a [general] [limited] partnership duly organized, validly existing and in good standing under the laws of the State of its formation, (b) is duly qualified to do business and in good standing under the laws of each jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified and (c) it has all requisite power and authority to own, operate and encumber its properties and assets and to conduct its business as presently conducted or proposed to be conducted in connection with and following the consummation of the transactions contemplated by this Agreement of Guaranty. (ii)(a) The Guarantor has the requisite partnership authority (1) to execute, deliver and perform this Agreement of Guaranty and (2) to file any documents required to be filed by it, if any, under this Agreement of Guaranty with the appropriate Governmental Authority. (b) The execution, delivery and performance under (or filing as the case may be) of this Agreement of Guaranty and any other Loan Document to which it is a party and the consummation of the transactions contemplated herein, have been duly authorized in accordance with the partnership agreement of the Guarantor and no further proceedings on the part of the Guarantor are necessary to consummate such transactions. (c) This Agreement of Guaranty has been duly executed and delivered by the Guarantor and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.] 4. The Guarantor represents and warrants that (i) the assumption by it of its obligations hereunder will result in material benefits to it and (ii) this Agreement of Guaranty when executed and delivered by it will constitute a legal, valid and binding obligation on its part, enforceable against it in accordance with its terms, subject, as to enforcement of remedies only, to any applicable bankruptcy, insolvency, reorganization, moratorium, similar laws of general application at the time in effect and general principles of equity. 5. The Guarantor waives notice of acceptance of this Agreement of Guaranty and notice of any Liability of the Borrower to which it may apply, and waives notice of default, non-payment, partial payment, presentment, demand, protest, notice of protest or dishonor and all other notices to which the guarantor might otherwise be entitled, or which might be required by law and required to be given by the Lender. 6. The Guarantor's liability hereunder shall be in no way affected, diminished or released by (i) any amendment, change or modification of the provisions of the Note, the Loan Agreement or any other Loan Document made to or with the Lender by the Borrower, (ii) any extensions of time for performance required thereby, (iii) the release of the Borrower from performance or observation of any of the agreements, covenants, terms or conditions contained in any of said instruments by the Lender or by operation of law, whether made with or without notice to the Guarantor, (iv) acceptance by the Lender of additional security or any increase, substitution or changes therein or (v) the release by the Lender of any security or any withdrawal thereof or decrease therein. 7. Without incurring responsibility to the Guarantor and without impairing or releasing the obligations of the Guarantor hereunder, the Lender may at any time and from time to time without the consent of, or notice to the Guarantor, upon any terms or conditions and in whole or in part: (i) change the manner, place or terms of payment and/or change or extend the time for payment or renew or alter, any Liability of the Borrower or any security therefor, and the guaranty herein made shall apply to the Liabilities of the Borrower as so changed, extended, renewed or altered; (ii) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged, mortgaged or in which a security interest is given to secure, or howsoever securing, the Liabilities of the Borrower; (iii) exercise or refrain from exercising any rights against the Borrower or others (including the Guarantor) or against the security, or otherwise act or refrain from acting; (iv) settle or compromise any Liability of the Borrower, dispose of any security therefor, with or without consideration, or any liability incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any Liability of the Borrower (whether due or not) to creditors of the Borrower other than the Lender and the Guarantor; and (v) apply any sums by whomsoever paid or howsoever realized to any Liability of the Borrower. 8. No invalidity, irregularity or unenforceability of all or any part of any Liability of the Borrower or the impairment or loss of any security therefor, that is not caused by any actions or inactions of the Lender, shall affect, impair or be a defense to this Agreement of Guaranty. 9. Upon the occurrence of an "Event of Default" as such term is defined in the Loan Agreement, the Lender shall be immediately entitled (i) to enforce the obligation of the Guarantor hereunder and (ii) to set-off any money owed by the Lender in any capacity to the Guarantor or any property of the Guarantor in the possession of the Lender against any of the monetary obligations of the Guarantor to the Lender under this Agreement of Guaranty, without first giving prior notice to the Guarantor (any such notice being expressly waived by the Guarantor; however, the Lender shall give the Guarantor notice within three (3) days after the Lender has set off any amounts), and the Lender shall be deemed to have exercised such right of set-off and to have made a charge against any such money or property immediately upon the occurrence of such Event of Default, even through the actual book entries may be made at some time subsequent thereof. Upon any default by the Guarantor with respect to any of its covenants and agreements under this Agreement of Guaranty, the Lender may (but shall not be so obligated), without waiving or releasing the Guarantor from any of its obligations hereunder, and without prejudice to any other right or remedy of the Lender hereunder, whether or not expressly set forth herein, perform such covenant or agreement in respect of which there shall be a default hereunder and in that regard pay such money as may be required or as the Lender may reasonably deem expedient. Any such monies paid by the Lender as aforesaid, together with interest thereon at the rate then applicable (or which would then have been applicable) under the Note and/or the Loan Agreement shall be obligations of the Borrower under the Note and/or the Loan Agreement which shall be due and payable by the Guarantor to the Lender for the account of the Borrower on demand. l0. The Guarantor hereby waives any right or claim of right to cause a marshalling of the Borrower's assets or to cause the Lender to proceed against any of the security or collateral held by the Lender before proceeding against the Guarantor, and the Guarantor hereby waives any and all legal requirement that the Lender shall institute any action at law or in equity against the Borrower, or anyone else, with respect to the Note, the Loan Agreement or with respect to any other Loan Documents or with respect to any security held by the Lender, as a condition precedent to bringing any action against the Guarantor upon this Agreement of Guaranty. 11. The Guarantor hereby irrevocably and unconditionally waives and relinquishes any and all statutory, contractual, common law, equitable or other claims and rights (i) to seek reimbursement, contribution, indemnification, set-off or other recourse from or against the Borrower in connection with any payments made by the Guarantor under this Agreement of Guaranty and (ii) to be subrogated to the Lender's rights under the Loan Documents upon the Guarantor's performance under this Agreement of Guaranty. 12. Until termination, this Agreement of Guaranty is made and shall continue as to any Liability of the Borrower to the Lender without regard to the existence of other collateral or security or guaranties, if any, or to the validity or effectiveness of any or all thereof; and any or all such collateral and security and guaranties may, from time to time, without notice to or consent of the Guarantor, be sold, released, surrendered, exchanged, settled, compromised, waived, subordinated or modified, with or without consideration, on such terms and conditions as may be acceptable to Lender without in any manner affecting or impairing the liability of the Guarantor. The Guarantor's obligations under this Agreement of Guaranty shall extend to any and all monies advanced by the Lender pursuant to the Note and/or the Loan Agreement. 13. The Guarantor covenants and agrees that the covenants set forth in Articles VI and VII of the Loan Agreement are true, correct and complete and the Guarantor hereby expressly confirms and affirms each covenant in Article VI, Sections 6.01 through 6.12 and Article VII, Sections 7.01 through 7.13 of the Loan Agreement as if restated in full herein. 14. The Guarantor covenants and agrees that it shall indemnify, protect, defend and hold harmless the Lender as well as the Lender's directors, officers, employees, agents, attorneys and shareholders (hereinafter referred to collectively as the "Indemnified Parties" and individually as an "Indemnified Party") from and against any and all losses, damages, expenses or liabilities of any kind or nature and from any suits, claims, or demands, including reasonable counsel fees incurred in investigating or defending such claim, suffered by any of them and caused by, relating to, arising out of, resulting from, or in any way connected or in any manner relating to the conduct of the business of the Borrower and/or the Guarantor or the use or intended use of the proceeds of the Loans provided, however, the Guarantor shall not be obligated to indemnify, protect, defend and save harmless an Indemnified Party, if the loss, damage, expense or liability was caused by or resulted from said Indemnified Party's own gross negligence or willful misconduct. In case any action shall be brought against an Indemnified Party based upon any of the above and in respect to which indemnity may be sought against the Guarantor, said Indemnified Party against whom such action was brought, shall promptly notify the Guarantor in writing, and the Guarantor shall assume the defense thereof, including the employment of counsel selected by the Guarantor and reasonably satisfactory to said Indemnified Party, the payment of all costs and expenses and the right to negotiate and consent to any settlement. Upon reasonable determination made by said Indemnified Party against whom such action was brought, said Indemnified Party, shall have the right to employ separate counsel in any such action and to participate in the defense thereof; provided, however, that said Indemnified Party shall pay the costs and expenses incurred in connection with the employment of separate counsel. The Guarantor shall not be liable for any settlement of any such action effected without its consent, but if settled with the Guarantor's consent, or if there is a final judgment for the claimant in any such action, the Guarantor agrees to indemnify and save harmless said Indemnified Party against whom such action was brought, from and against any loss or liability by reason of such settlement or judgment. The provisions of this Paragraph 14 shall survive the termination of the Loan and the repayment of the indebtedness evidenced by the Note. 15. If claim is ever made upon the Lender for repayment or recovery of any amount or amounts received by the Lender in payment for, or on account of, any of the Liabilities of the Borrower, and the Lender repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over the Lender or any of its property or (ii) any settlement or compromise of any such claim affected by the Lender with any such claimant (including the Borrower), then, and in such event, the Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon the Guarantor, notwithstanding the cancellation of any note or any other instrument evidencing any Liability of the Borrower, and the Guarantor shall be and remain liable to the Lender hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by the Lender. 16. Settlement of any claim by the Lender against the Borrower, whether in any proceeding or not, and whether voluntary or involuntary, shall not reduce the amount due under the terms of this Agreement of Guaranty except to the extent of the amount paid by the Borrower in connection with the settlement. 17. No delay on the part of the Lender in exercising any of its rights, powers or privileges or partial or single exercise thereof under the Note, this Agreement of Guaranty or any other document made to or with the Lender by the Borrower shall operate as a waiver of any such privileges, powers or rights. No waiver of any of its rights hereunder, and no modification or amendment of this Agreement of Guaranty, shall be deemed to be made by the Lender unless the same shall be in writing, duly signed on behalf of the Lender, by a duly authorized officer, and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of the Lender or the obligations of the Guarantor to the Lender in any other respect at any other time. 18. All rights, powers and remedies afforded to the Lender by reason of this Agreement of Guaranty are separate and cumulative remedies and no one of such remedies whether or not exercised by the Lender shall be deemed to exclude any of the other remedies available to the Lender nor prejudice availability of any other legal or equitable remedy which the Lender may have with respect to the Loan. 19. This Agreement of Guaranty shall be governed by and construed and interpreted in accordance with, the laws of the Commonwealth of Pennsylvania and no defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereon unless such defense is also given or allowed by the laws of the Commonwealth of Pennsylvania. The Lender may bring any action or proceeding to enforce or arising out of this Agreement of Guaranty in any state or federal court of competent jurisdiction in the Commonwealth of Pennsylvania. If the Lender commences such an action in a court located in the Commonwealth of Pennsylvania, or any United States District court in Pennsylvania, the Guarantor hereby agrees that it will submit to the personal jurisdiction of such courts and will not attempt to have such action dismissed, abated or transferred on the ground of forum non conveniens, and in furtherance of such agreement the Guarantor hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over it in any such action or proceeding may be obtained within or without the jurisdiction of any court located in Pennsylvania and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the Guarantor by registered mail to or by personal service at the last known address of the Guarantor; provided, however, that nothing contained herein shall prohibit the Guarantor from seeking, by appropriate motion, to remove an action brought in Pennsylvania state court to the United States District Court for the Eastern District of Pennsylvania. If such action is so removed, however, the Guarantor shall not seek to transfer such action to any other district, nor shall the Guarantor seek to transfer to any other district any action which Lender originally commences in such federal court. Any action or proceeding brought by the Guarantor arising out of this Agreement of Guaranty shall be brought solely in a court of competent jurisdiction located in the Commonwealth of Pennsylvania, or in a United States District Court for the Eastern District of Pennsylvania. The Guarantor hereby waives any right to seek removal of any action or proceeding other than as permitted according to this Paragraph 19. 20. This Agreement of Guaranty shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 21. This Agreement of Guaranty shall terminate upon the termination of the Note in accordance with its terms. The Borrower or the Guarantor may terminate this Agreement of Guaranty and the Note and all other obligations of the Borrower or the Guarantor to the Lender under the Note or this Agreement of Guaranty, by paying to the Lender all sums due and owing to the Lender hereunder and under the Note or this Agreement of Guaranty. 22. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, or sent by overnight courier service or United States mail and shall be deemed to have been given when delivered in person or by overnight courier service, upon receipt of a confirmed telecopy transmission during normal business hours or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). Notices to the Lender shall not be effective until received by the Lender. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered shall be as set forth below, or, as to each party, at such other address as may be designated by such party in a written notice to the other party. If to the Guarantor: _____________________ _____________________ _____________________ Attn:________________ _____________________ With a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, New Jersey 07068 Attn: Nina Laserson Dunn, Esq. If to the Lender: Mellon Bank, N.A. Raritan Plaza One Raritan Center Edison, New Jersey 08837 Attn: Mr. Peter Dontas Vice President With a copy to: Reed Smith Shaw & McClay Princeton Forrestal Village 136 Main Street, Suite 250 P.O. Box 7839 Princeton, New Jersey 08543-7839 Attn: Daniel F. Peck, Jr., Esq. All notices, payments, requests, reports, information or demands so given shall be deemed effective upon receipt or, if mailed, upon receipt or the expiration of the fourth (4th) Business Day following the date of mailing, whichever occurs first, except that any notice of change in address shall be effective only upon receipt by the party to whom said notice is addressed. A failure to send the requisite copies does not invalidate an otherwise properly sent notice to the Guarantor and/or the Lender. 23. In case of any proceedings to collect any liabilities of the Guarantor owed to the Lender hereunder, the Guarantor shall pay all costs and expenses of every kind for collection, sale or delivery of any collateral or assets or properties of the Guarantor, including reasonable attorneys' fees, and after deducting such costs and expenses from the proceeds of sale or collection, the Lender may apply any residue to the liabilities of the Guarantor who shall continue liable for any deficiency, with interest at the rate provided for in the Note and/or the Loan Agreement. 24. In all references herein to any parties, persons, entities or corporations, the use of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the text of the within instrument may require. 25. The Guarantor hereby acknowledges and agrees that they shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial condition and business operations as the Guarantor may require, and that the Lender has no duty at any time to disclose to the Guarantor any information relating to the business operations or financial condition of the Borrower. 26. This Agreement of Guaranty may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 27. The Guarantor hereby acknowledges and agrees that in accordance with and as provided for in Article VI, Section 6.12 of the Loan Agreement additional guarantors will agree to guaranty, on a joint and several basis, with the Guarantor, all the Liabilities of the Borrower. The Guarantor hereby confirms and reaffirms that the addition from time to time of any new guarantor(s) shall not affect the enforceability and validity of this Agreement of Guaranty against the Guarantor. This Agreement of Guaranty shall remain in full force and effect and binding against the Guarantor as a continuing guaranty of the Liabilities of the Borrower, subject to the termination provisions herein, without any additional act(s) or documentation by the Guarantor at the time of the addition of said new guarantor(s). IN WITNESS WHEREOF, the Guarantor has caused this Agreement of Guaranty to be duly executed and delivered by its appropriate authorized [GENERAL PARTNER(S)] [CORPORATE OFFICERS], [AND, IF APPLICABLE, ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED AND ATTESTED, PURSUANT TO THE RESOLUTION OF ITS BOARD OF DIRECTORS,] all as of the day and year first above written. WITNESS/ATTEST: ____________________________, a __________________, as the Guarantor _______________________ By: __________________ Name: Name: Title: Title: SCHEDULE 2.01(I) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 List of Subsidiaries and/or Affiliates Who May Borrow All Corporate Guarantors and Partnership Guarantors SCHEDULE 4.01(III) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Existing Issued and Authorized Capital Stock of the Borrower 1. Preferred Stock Par Value: $10.00 per share Authorized: 20,000,000 shares Issued: 0 shares Outstanding: 0 shares 2. Common Stock Par Value: $0.01 per share Authorized: 20,000,000 shares Issued: 5,986,366 shares Outstanding: 5,565,690 shares (420,676 shares held in treasury) 3. Options per 1991 Stock Option Plan Number of Shares Subject to Options: 281,500 shares common stock 4. Options per 1991 Non-Qualified Stock Option Plan Number of Shares Subject to Options: 120,000 shares common stock 5. % Senior Subordinated Convertible Debentures Due 2003 Number of Shares Issuable Upon Conversion: 2,824,858 shares common stock 6. 8.5% Convertible Subordinated Debentures Due 1998 Number of Shares Issuable Upon Conversion: 332,800 shares common stock 7. 1996 Omnibus Plan Number of Shares Issuable Upon Conversion: 0 shares common stock SCHEDULE 4.01(VII) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Pending Actions, Suits, Proceedings, Governmental Investigations or Arbitrations NONE SCHEDULE 4.01(XV) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Environmental Disclosure NONE SCHEDULE 4.01(XVI) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 ERISA SCHEDULE 4.01(XX) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 List of Joint Ventures 1. DRS Medical Systems 2. Laurel Technologies Partnership SCHEDULE 4.01(XXI) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Existing Insurance Policies, Programs and Claims See Attached Certificates of Insurance. Also see attached list of claims. SCHEDULE 4.01(XXVII) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Labor Unions/Collective Bargaining Agreements NONE SCHEDULE 4.01(XXVIII) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Location of Collateral 1. Diagnostic/Retrieval Systems, Inc. (i) 5 Sylvan Way Parsippany, New Jersey 07054 (ii) 1215 Jefferson Davis Highway Arlington, Virginia 22202 (iii) DRS Military Systems (a Division of DRS, Inc.) 138 Bauer Drive Oakland, New Jersey 07436 (iv) DRS Military Systems - Los Alamos 127 East Gate Drive Los Alamos, New Mexico 87544 2. Technology Applications & Service Company (i) 200 Professional Drive Gaithersburg, Maryland 20879 (ii) Technical Services Division 4055 Hancock Street, Suite 125 San Diego, California 92110 (iii) Technical Services Division 5721 Thurston Avenue Virginia Beach, Virginia 23455 3. DRS Systems Management Corp. c/o Laurel Technologies 423 Walters Avenue Johnstown, Pennsylvania 15904 4. DRS/MS, Inc. DRS Medical Systems (formerly Universal Sonics Corp.) 31 Industrial Avenue Mahwah, New Jersey 07430 5. Precision Echo, Inc. 3105 Patrick Henry Drive Santa Clara, California 95054 6. Ahead Technology Acquisition Corp. MEC Technology 686 Mendelssohn Avenue Golden Valley, Minnesota 55427 7. Ahead Wisconsin Acquisition Corp. Vikron Technology, Inc. 520 Blanding Woods Road South St. Croix Falls, Wisconsin 54024 8. Nortronics Acquisition Corporation Nortronics, Inc. 145 South Third Street Dassel, Minnesota 55325 9. OMI Acquisition Corp. (d/b/a OMI Corp.) 2330 Commerce Park Drive, N.E. Palm Bay, Florida 32905 10. Pacific Technologies, Inc. 2535 Camino Del Rio Suite 300 San Diego, California 92108 SCHEDULE 6.05 ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Insurance Policies and Programs See attached Certificate of Insurance SCHEDULE 7.01(III) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Permitted Existing Consolidated Debt 1. 9% Senior Subordinated Convertible Debentures due October 1, 2003 Principal amount outstanding: $25,000,000.00 2. 8.5% Convertible Subordinated Debentures due August 1, 1998 Principal amount outstanding: $4,992,000.00 3. Suffolk County Industrial Development Agency 1991 Variable Rate Demand Industrial Development Revenue Refunding Bonds (Photronics Corp. Facility) Principal amount outstanding: $1,695,000.00 4. Covenant and Agreement Not to Compete Dated October 28, 1994 Between Ahead Technology, Inc. and Robert F. Van Houtten Amount outstanding: $333,000.00 ($9,000.00 per month) 5. Assumption and Assignment of License Agreement Dated as of July 7, 1995 Among Carl Zeiss Stiftung, Opto Mechanik, Inc., OMI Acquisition Corp. and Photronics Corp. Amount outstanding: $58,851.00 (varying installments through April 28, 1997) 6. Term Note to Technology Development and Education Corporation Principal amount outstanding: $70,695.00 (monthly installments through March 1, 2000) 7. Term Note to Southern Alleghenies Planning and Development Commission Principal amount outstanding: $53,690.00 (monthly installments through March 1, 2000) 8. The following 3 Letters of Credit (i) Irrevocable Letter of Credit, No. PB-284327, issued by Morgan Guaranty Trust Company of New York for the account of Photronics Corp. for the benefit of Manufacturers and Traders Trust Company in the Stated Amount of $1,726,781.25, issued on December 19, 1991 and expiring no later than January 19, 1998. (ii) Irrevocable Standby Letter of Credit, No. 531876, issued by Comerica Bank - California for the account of Precision Echo, Inc.for the benefit of Chung Shan Institute of Science and Technology (Taiwan) in the Stated Amount of $268,200.00, issued on March 18, 1996 and expiring no later than April 8, 1997. (iii) Irrevocable Standby Letter of Credit, No. 531883, issued by Comerica Bank - California for the account of Precision Echo, Inc. for the benefit of Chung Shan Institute of Science and Technology (Taiwan) in the Stated Amount of $44,700.00 issued on March 18, 1996 and expiring no later than August 8, 1997. NOTE: All principal amounts are as of December 2, 1996. SCHEDULE 7.03 ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 Existing Loans and Investments I. Loans: 1. Amended and Restated Promissory Note from Mark S. Newman (Chairman of the Board, President and Chief Executive Officer) to the Company, dated as of May 26, 1995; $104,100 principal amount; 8% per annum interest rate 2. Loan Receivable from Paul G. Casner, Jr. (President - DRS Electronic Systems Group); $50,000 current principal balance; no stated interest rate (interest is imputed annually based on Internal Revenue Code and IRS regulations) II. Investments: 1. Excess corporate cash balances are currently invested in the following: (i) The Pierpont Money Market Fund (J.P. Morgan) (ii) Merrill Lynch Institutional Fund SCHEDULE 7.12(I) ATTACHED TO AND MADE A PART OF THAT CERTAIN EQUIPMENT LINE OF CREDIT/TERM LOAN AGREEMENT BY AND BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND MELLON BANK, N.A., DATED AS OF DECEMBER 6, 1996 List of Existing Guaranties 1. That certain Agreement of Guaranty dated May 31, 1996, executed by the Corporate Guarantors in favor of the Lender, as amended and modified by that certain First Amendment and Modification Agreement dated as of December 6, 1996, executed by and between the Borrower, the Corporate Guarantors and the Lender, pursuant to which the Corporate Guarantors agreed to guaranty, on a joint and several basis, the "Liabilities of the Borrower" (as said term is defined in said Agreement of Guaranty) in connection with an unsecured recourse revolving line of credit loan from the Lender to the Borrower in the aggregate principal amount of $15,000,000.00 EX-11 8 COMPUTATION OF EARNINGS PER SHARE
Exhibit 11 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES D.B.A. DRS TECHNOLOGIES, INC. Computation of Earnings per Share Year Ended March 31, Year Ended March 31, Year Ended March 31, -------------------------- ---------------------------- ------------------------- 1997 1996 1995 -------------------------- ---------------------------- -------------------------- Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted ---------- ------------- -------------- ------------- ----------- ------------- Shares: Weighted average number of shares of common stock outstanding 5,524,803 5,524,803 5,470,028 5,470,028 5,108,296 5,108,296 Effect of dilutive common stock options 227,804 248,817 177,475 186,486 123,038 131,613 Effect of 8-1/2% convertible subordinated debenbentures(1) -- 332,800 -- -- -- -- Effect of 9% senior subordinated convertible debentures -- 2,824,859 -- 1,373,839 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted shares 5,752,607 8,931,279 5,647,503 7,030,353 5,231,334 5,239,909 ========== ========== ========== ========== ========== ========== Net Earnings: Net earnings for the year $5,663,000 $5,663,000 $4,103,000 $4,103,000 $2,604,000 $2,604,000 Effect of assumed conversion of 8-1/2% convertible subordinated debentures (1) -- 259,000 -- -- -- -- Effect of assumed conversion of 9% senior subordinated convertible debentures -- 1,536,000 -- 748,000 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted net earnings $5,663,000 $7,458,000 $4,103,000 $4,851,000 $2,604,000 $2,604,000 ========== ========== ========== ========== ========== ========== Earnings per share (adjusted net earnings divided by adjusted shares) $ 0.98 $ 0.84 $ 0.73 $ 0.69 $ 0.50 $ 0.50 ========== ========== ========== ========== ========== ========== - ----------------- (1) The 8-1/2% convertible subordinated debentures are excluded from the calculation of fully diluted earnings per share for fiscal years 1996 and 1995, as they would have an antidilutive effect on earnings per share.
EX-13 9 ANNUAL REPORT 16 SELECTED FINANCIAL DATA Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc.
YEARS ENDED MARCH 31, 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------------- Summary of Operations Revenues $ 143,578,000 $ 101,454,000 $ 69,930,000 $ 57,820,000 Cost and expenses 130,996,000 92,907,000 64,836,000 54,372,000 ---------------------------------------------------------------------------------------------------- Operating income 12,582,000 8,547,000 5,094,000 3,448,000 Interest and related expenses (3,592,000) (2,681,000) (1,372,000) (1,574,000) Interest and other income, net 698,000 971,000 655,000 802,000 Minority interest (404,000) (110,000) (121,000) 32,000 ---------------------------------------------------------------------------------------------------- Earnings before income taxes 9,284,000 6,727,000 4,256,000 2,708,000 Income taxes 3,621,000 2,624,000 1,652,000 1,093,000 ---------------------------------------------------------------------------------------------------- NET EARNINGS $ 5,663,000 $ 4,103,000 $ 2,604,000 $ 1,615,000 Per-share Data* Primary earnings per share $ .98 $ .73 $ .50 $ .30 Fully diluted earnings per share $ .84 $ .69 $ .50 $ .30 Book value per share $ 5.90 $ 4.86 $ 4.16 $ 3.70 Summary of Financial Position Working capital $ 32,838,000 $ 33,990,000 $ 20,317,000 $ 19,803,000 Net property, plant and equipment $ 19,987,000 $ 16,191,000 $ 9,849,000 $ 8,893,000 Total assets $ 97,673,000 $ 97,251,000 $ 64,590,000 $ 58,836,000 Long-term debt, excluding current installments $ 30,801,000 $ 32,608,000 $ 11,732,000 $ 14,515,000 Net stockholders' equity $ 32,987,000 $ 26,566,000 $ 22,509,000 $ 19,759,000 Financial Ratios Pretax return on revenues 6.5% 6.6% 6.1% 4.7% After tax return on revenues 3.9% 4.0% 3.7% 2.8% Return on average stockholders' equity 19.0% 16.7% 12.3% 8.5% Current ratio 2.2 2.0 1.9 2.1 Long-term debt, excluding current installments, to capitalization 48.3% 55.1% 34.3% 42.3% Supplemental Information Capital expenditures $ 5,228,000 $ 6,331,000 $ 2,543,000 $ 988,000 Depreciation and amortization $ 5,027,000 $ 3,170,000 $ 2,480,000 $ 2,558,000 Internal research and development $ 3,852,000 $ 649,000 $ 795,000 $ 537,000 Employees** 1,107 809 565 548 Revenues per employee*** $ 129,000 $ 137,000 $ 130,000 $ 137,000
YEARS ENDED MARCH 31, 1993 ----------------------------------------------- Summary of Operations Revenues $ 47,772,000 Cost and expenses 45,461,000 ----------------------------------------------- Operating income 2,311,000 Interest and related expenses (1,735,000) Interest and other income, net 1,224,000 Minority interest -- ----------------------------------------------- Earnings before income taxes 1,800,000 Income taxes 715,000 ----------------------------------------------- NET EARNINGS $ 1,085,000 Per-share Data* Primary earnings per share $ .20 Fully diluted earnings per share $ .20 Book value per share $ 3.40 Summary of Financial Position Working capital $ 17,994,000 Net property, plant and equipment $ 9,768,000 Total assets $ 51,948,000 Long-term debt, excluding current installments $ 17,290,000 Net stockholders' equity $ 18,115,000 Financial Ratios Pretax return on revenues 3.8% After tax return on revenues 2.3% Return on average stockholders' equity 6.2% Current ratio 2.4 Long-term debt, excluding current installments, to capitalization 48.8% Supplemental Information Capital expenditures $ 922,000 Depreciation and amortization $ 3,202,000 Internal research and development $ 470,000 Employees** 296 Revenues per employee*** $ 164,000 * No cash dividends have been distributed in any of the years in the five-year period ended March 31, 1997. ** Indicates the number of employees at March 31 for each of the fiscal years presented. Included in fiscal 1997, 1996 and 1995 are approximately 188, 155 and 46 employees, respectively, from new operations. (See Note 10 of Notes to Consolidated Financial Statements.) *** Based upon average number of employees. 17 [LOGO] DRS TECHNOLOGIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc. The following is management's discussion and analysis of the consolidated financial condition and results of operations of DRS Technologies, Inc. and subsidiaries (hereinafter, the Company or DRS) as of March 31, 1997 and 1996, and for each of the fiscal years in the three-year period ended March 31, 1997. 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. Forward looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that such forward looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from the results suggested by these forward looking statements. Factors that could cause actual results to differ materially from the forward looking statements include, without limitation, the effect of the Company's acquisition strategy on future operating results; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to the Company's products and services; the effects of government regulation or shifts in government policy, as they may relate to the Company's products and services; competition; and other matters referred to in this report. Business Overview DRS is a diversified, high-technology Company serving government and commercial niche markets worldwide. At the close of this fiscal year, the Company introduced its new trade name, DRS Technologies, Inc., emphasizing the increased diversity of the Company's products and services, as well as its technological focus. The Company develops and manufactures a variety of leading edge systems and components used for the processing, display and storage of data. DRS provides its customers with a broad range of products, including electronic sensor, electronic imaging and electro-optical systems, and offers a full complement of technical support services. The Company's defense electronics products serve all branches of the armed forces. Its commercial and industrial products are used mainly by the airline, banking, computer disk drive, security, transportation, retail sales and broadcast industries. The fiscal year ended March 31, 1997 marked the fifth consecutive year of growth for the Company. Over these past five fiscal years, revenues and net earnings have grown at compounded average annual rates of approximately 32% and 51%, respectively. This growth has been achieved while operating in an industry characterized by consolidation, reduced spending and technological transition. To address the challenges of its business environment, DRS has employed a four-part strategy of: expanding its core technological capabilities in electronic processing and display, data storage and electro-optical systems; designing new products and adapting existing products for use by all branches of the military; transferring technologies from the defense sector to commercial and industrial markets; and acquiring new businesses which provide a strategic complement to the Company's existing products and technological capabilities. Company Organization and Products The Company is organized into three groups: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG) and the Data Systems Group (DSG). ESG specializes in the design, manufacture and marketing of high-technology electronic signal processors, display workstations, and trainer and combat emulation systems for military use. In addition, the Group provides field service, software engineering and systems support to the military through DRS Technical Services, Inc. ESG's products and services accounted for approximately 58.9%, 47.2% and 53.7% of the Company's consolidated revenues in fiscal 1997, 1996 and 1995, respectively. With a focus on sighting, targeting and optical alignment systems, EOSG provides a variety of electro-optical systems, primarily for military use. The Group's product lines include a generic boresighting system, adaptable for use on multiple military airborne platforms, which are used to align and harmonize aircraft navigation, targeting and weapons systems. Other significant product lines include night-vision and eye-safe laser range finder systems. In addition, EOSG designs and manufactures electro-optical systems, assemblies and components used for military weapon fire control devices, test equipment and "smart" munitions. EOSG's products and services accounted for approximately 17.5%, 21.8% and 18.2% of the Company's consolidated revenues in fiscal 1997, 1996 and 1995, respectively. DSG provides both military and commercial customers with data storage products. DSG manufactures several digital and analog recording systems used for military mission data recording applications. In addition, DSG is a supplier of consumable magnetic heads used in the production of computer disk drives. This Group also specializes in the manufacture and refurbishment of broadcast video and audio heads, heads used in commercial flight data recorders, and heads used in a variety of industries for reading, writing and verifying data on magnetic cards, tapes and inks. DSG's products and services accounted for approximately 18 23.6%, 31.0% and 28.1% of the Company's consolidated revenues in fiscal 1997, 1996 and 1995, respectively. Acquisitions and Related Activities On November 17, 1994, DRS Ahead Technology, Inc. (Ahead Technology), a second-tier subsidiary of the Company, acquired the net assets of Ahead Technology Corporation (Ahead) for approximately $1.1 million in cash. In addition, Ahead Technology entered into a Covenant and Agreement Not to Compete (the Covenant Agreement), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant Agreement, Ahead Technology agreed to pay a total of approximately $.9 million in cash, consisting of approximately $.4 million paid on the date of the agreement and an additional $.5 million payable in equal monthly installments over a period of five years from the date of the agreement. The acquisition has been accounted for using the purchase method of accounting and, accordingly, Ahead's operating results have been included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $.9 million and is being amortized on a straight-line basis over five years, or approximately $.2 million annually. Ahead Technology, now located in San Jose, California, designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. Its products include burnish heads, glide heads and specialty test heads. On July 5, 1995, DRS Optronics, Inc. (Optronics), a second-tier subsidiary of the Company, acquired substantially all of the assets of Opto-Mechanik, Inc. (OMI), pursuant to a related asset acquisition agreement, for a total of $5.5 million, consisting of $3.7 million in cash and $1.8 million in notes payable (the OMI Asset Acquisition). Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. The acquisition of the assets of OMI has been accounted for using the purchase method of accounting. The cost of the acquisition has been allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. The operating results of Optronics, the acquiring corporation, have been included in the Company's reported operating results since the date of acquisition. Optronics, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. On February 6, 1996, a wholly-owned subsidiary of the Company entered into a partnership with Universal Sonics Corporation and its shareholders (DRS Medical Systems or the Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the Partnership consisted of $.4 million in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in DRS Medical Systems. On February 9, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. (Mag-Head), pursuant to an asset purchase agreement, for approximately $.4 million in cash. Mag-Head produces audio and flight recorder heads. On June 18, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash. The acquisition has been accounted for using the purchase method of accounting. Accordingly, Vikron's results of operations from April 1, 1996 (the effective date of acquisition) have been included in the Company's reported operating results. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. The acquisition has been accounted for using the purchase method of accounting. Accordingly, Nortronics' results of operations from July 1, 1996 (the effective date of acquisition) have been included in the Company's reported operating results. Located in Dassel, Minnesota, Nortronics manufactures data and recording heads. On October 30, 1996, Pacific Technologies, Inc. (PTI), a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $.5 million. The merger has been accounted for using the purchase method of accounting. Accordingly, PTI's results of operations from July 1, 1996 (the effective date of the merger) have been included in the Company's reported operating results. Based in San Diego, California, PTI provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. The financial position and results of operations of the aforementioned acquired businesses were not significant to those of the Company as of their respective effective dates of acquisition. Effective February 26, 1997, Ahead Technology and all its subsidiaries were merged to form a single legal entity. The Company currently is integrating these operations in order to gain operational efficiencies and to further streamline its manufacturing operations. The Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in preliminary discussions regarding several other potential acquisitions. There can be no assurance, however, that definitive agreements will be reached or that any further acquisitions will be consummated. 19 Results of Operations The following table sets forth items in the Consolidated Statements of Earnings as a percentage of revenues and the percentage increase or decrease of those items as compared with the prior period. Percent of Revenues Percent Changes 1997 1996 YEARS ENDED vs vs MARCH 31, 1997 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 41.5% 45.1% Costs and expenses 91.2% 91.6% 92.7% 41.0% 43.3% - ------------------------------------------------------------ Operating income 8.8% 8.4% 7.3% 47.2% 67.8% Interest and related expenses (2.5)% (2.6)% (2.0)% 34.0% 95.4% Interest and other income, net 0.5% 1.0% 1.0% (28.1)% 48.2% Minority interest (0.4)% (0.2)% (0.2)% 267.3% (9.1)% - ------------------------------------------------------------ Earnings before income taxes 6.4% 6.6% 6.1% 38.0% 58.1% Income taxes 2.5% 2.6% 2.4% 38.0% 58.8% - ------------------------------------------------------------ Net earnings 3.9% 4.0% 3.7% 38.0% 57.6% Comparison of Fiscal 1997 with Fiscal 1996 Revenues for the fiscal year ended March 31, 1997 increased 42% percent to $143.6 million from $101.5 million in fiscal 1996. The revenue growth was attributable primarily to increased shipments of the Company's military display workstations and electro-optical systems and to increases in certain commercial product sales, the latter resulting, in part, from acquisitions completed during the fiscal year in line with DRS's plan to broaden its participation in targeted strategic commercial product areas. Operating income for fiscal 1997 increased 47% to $12.6 million, compared with $8.5 million reported a year earlier. Operating income as a percentage of revenues was 9% and 8% for the fiscal years ended March 31, 1997 and 1996, respectively. The improvement was due primarily to the overall increase in revenues and to higher profits generated by certain of the Company's commercial product lines. Interest and related expenses increased 34% to $3.6 million for the fiscal year ended March 31, 1997, as compared with $2.7 million in the prior fiscal year. The increase was due to the issuance of the Company's $25.0 million aggregate principal amount of 9% Senior Subordinated Convertible Debentures due 2003 (the 9% Debentures), which were outstanding throughout fiscal 1997 and for only a portion of fiscal 1996. A portion of the proceeds from the issuance of the 9% Debentures were used to repurchase approximately $5.0 million of the 8 1/2% Convertible Subordinated Debentures due 1998 (the 8 1/2% Debentures) in the fourth quarter of fiscal 1996, partially offsetting the increase in interest relating to the 9% Debentures. Interest and other income, net decreased by approximately $.3 million or 28% in fiscal 1997 to $.7 million. This decrease principally was due to the change in interest earned on lower average cash balances, which resulted from a net use of cash in fiscal 1997, mostly for acquisitions and capital expenditures. Minority interest increased from $.1 million in fiscal 1996 to $.4 million in fiscal 1997. The increase was due to the growth of the DRS Laurel Technologies partnership (Laurel), in which the Company has an 80% interest. Laurel manufactures many of the Company's military display workstations. The Company's effective tax rate for the fiscal years ended March 31, 1997 and 1996 was 39%. The provision for income taxes includes all estimated income taxes payable to federal and state governments, as applicable. As a result of the above, net earnings for this fiscal year were approximately $5.7 million, up 38 percent from $4.1 million generated in fiscal 1996. Fully diluted earnings per share of $.84 were 22 percent higher than $.69 per share earned a year ago, and reflect the dilutive effect from the assumed conversion of the 9% Debentures issued in fiscal 1996. Comparison of Fiscal 1996 with Fiscal 1995 Revenues for the fiscal year ended March 31, 1996 increased 45% to $101.5 million from $69.9 million in fiscal 1995. The revenue growth was due primarily to increased shipments of data storage, display workstation and electro-optical systems, the latter as a result of the OMI Asset Acquisition, as well as to increases in commercial product sales. Operating income for the fiscal year ended March 31, 1996 increased 68% to $8.5 million from $5.1 million in fiscal 1995. Operating income as a percentage of revenues was 8% for the fiscal year ended March 31, 1996, as compared with 7% for the comparable prior-year period. Higher operating income was due primarily to the overall increase in revenues, together with higher margins on the Company's commercial product lines. Interest and related expenses increased 95% to $2.7 million for the fiscal year ended March 31, 1996, as compared with $1.4 million in the prior fiscal year. The increase for the period was primarily due to the private placement of the Company's 9% Debentures, offset in part by a reduction in interest resulting from repurchases of the Company's 8 1/2% Debentures, in satisfaction of the August 1, 1995 sinking fund requirement for this debt. Interest and other income, net increased 48% to approximately $1.0 million for the fiscal year ended March 31, 1996 from approximately $.7 million in the prior year. This increase was due primarily to interest earned on higher average cash balances provided by the net proceeds from the offering of the 9% Debentures. Minority interest was approximately $.1 million in fiscal 1996 and 1995, and the Company's effective tax rate was 39% in both fiscal years. 20 As a result of the above, net earnings for the 1996 fiscal year were approximately $4.1 million, up 58 percent from $2.6 million in fiscal 1995. Fully diluted earnings per share rose from the $.50 per share earned in fiscal 1995 to $.69, an increase of 38%. The increase in fully diluted earnings per share is net of the dilutive effect from the assumed conversion of the 9% Debentures issued in fiscal 1996. Financial Condition and Liquidity Cash and Cash Flow: Cash and cash equivalents at March 31, 1997 and March 31, 1996 represented approximately 10% and 23%, respectively, of total assets. During the fiscal year ended March 31, 1997, cash decreased $13.3 million. This decrease was primarily due to the following uses of cash: (i) approximately $6.3 million for acquisitions and related activities; (ii) approximately $3.6 million for capital expenditures, and (iii) approximately $1.9 million for debt repayments. In addition, approximately $1.7 million was used in support of operations, primarily to settle prior-year accounts payable balances and to support higher inventory levels. Working capital as of March 31, 1997 was approximately $32.8 million, as compared with $34.0 million at March 31, 1996. The decrease was primarily due to the net effect of lower cash and accounts payable balances, offset in part by higher inventory levels. In addition, the change in working capital reflects the effect of the increase in current installments of long-term debt attributable to the Company's 1991 Variable Rate Industrial Revenue Bonds due January 1, 1998 (Bonds). The $1.6 million outstanding balance on the Bonds was classified as a current liability at March 31, 1997. On May 31, 1996, the Company entered into a revolving line of credit loan agreement with Mellon Bank, N.A. (Mellon Bank) for a three-year $15 million unsecured revolving line of credit (the Line of Credit). The Line of Credit is being used for working capital and letters of credit, as well as to refinance certain debt obligations of the Company at more favorable interest rates. As of March 31, 1997, approximately $5.3 million was outstanding against the Line of Credit, of which $2.3 million was contingently payable under letters of credit. In addition, on December 6, 1996, the Company entered into a $5 million secured equipment line of credit/term loan agreement (the Equipment Facility) with Mellon Bank. The Equipment Facility is available for equipment purchases made through June 30, 1999. Through March 31, 1997, no borrowings were made under the Equipment Facility. The Company believes that its current working capital position and available bank financing are sufficient to support operational needs, as well as its near-term business objectives. Accounts Receivable and Inventories: Accounts receivable increased approximately $1.4 million in the fiscal year ended March 31, 1997, primarily due to the addition of $1.2 million in accounts receivable from entities acquired during the fiscal year. The Company receives progress payments on certain contracts from the U.S. Government of between 75-100% of allowable costs incurred. The remainder, including profits and incentive fees, is billed to its customers based upon delivery and final acceptance of products and services. The Company also may bill its customers based upon units delivered. Generally, there are no contract provisions for retainage, and all accounts receivable are expected to be collected within one year. Inventories increased by approximately $5.7 million in fiscal 1997, primarily due to the growth of the Company's commercial product lines. In addition, increased material procurement at fiscal year-end in anticipation of production requirements on several military programs contributed to the higher inventory balance. Included in the increase is approximately $1.1 million of inventory from entities acquired this fiscal year. Long-Term Debt: Long-term debt outstanding decreased by approximately $1.8 million during the fiscal year ended March 31, 1997 to $30.8 million, primarily due to the upcoming maturity of the Company's $1.6 million of outstanding Bonds. Stockholders' Equity: Net stockholders' equity increased by approximately $6.4 million during the fiscal year ended March 31, 1997 to approximately $33.0 million, primarily as a result of net earnings for the fiscal year. Also included in this change was approximately $.5 million associated with the reissuance of shares from treasury to effect the PTI merger. Backlog: Backlog at March 31, 1997 was approximately $118.4 million, versus $145.6 million a year ago. The decrease was due primarily to shipments of the Company's AN/UYQ-65 display workstations. In addition, there has been a recent shift in the Company's backlog to include a higher percentage of commercial product orders and Commercial Off-The-Shelf (COTS)-based systems for the military, both of which favor shorter lead times. Due to the general nature of defense procurement and contracting, however, 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. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues, may not be indicative of future results. New contract awards of approximately $113.2 million were booked in fiscal 1997. Significant awards include approximately $24.4 million in additional production and engineering contracts for the AN/UYQ-70 Advanced Display System and $11.3 million for Multi-Platform Boresighting Equipment for use on the Apache and Cobra helicopter platforms. Other awards included $4.5 million for combat systems for Navy training sites; $3.9 million for mobile, land-based, sensor processing systems for the protection of coastlines; and $3.2 million for digital imaging systems used to record the release of weapons from aircraft. The Company received approximately $23.2 million in new orders for its 21 specialty magnetic head products in fiscal 1997. The change in backlog for the year also reflects the effect of increased revenues, net of approximately $3.3 million of acquired backlog, principally from the Vikron and Nortronics asset acquisitions. Internal Research and Development: In addition to customer-sponsored research and development, the Company also engages in internal research and development (IR&D). Expenditures for IR&D in fiscal 1997, 1996 and 1995 were $3.9 million, $.6 million and $.8 million, respectively. The increase in IR&D expenditures in fiscal 1997 reflects the Company's investment in new technology and the diversification of its products. Business Considerations: The Company primarily is engaged in the design and manufacture of high-technology systems and products used for the processing, display and storage of electronic data. Although DRS has diversified into commercial products and markets, a significant portion of the Company's revenues continue to be derived directly or indirectly from defense industry contracts with the U.S. Government. In recent years, the Federal defense budget has been reduced dramatically in inflation-adjusted terms. However, the overall level of spending for defense electronics has increased, given the nature of modern warfare and its increasing reliance on sophisticated weaponry and support systems. In addition, the U.S. Government has determined that it is often more cost effective to retrofit and upgrade existing weapons platforms than to replace them. These factors have affected the nature and extent of defense procurement and have precipitated a consolidation of the defense industry focused 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, in addition to its emphasis on 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 of 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. Relatedly, 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. Although the outcome of such investigations cannot be predicted, management is not aware of any current findings or pending claims which would have a material adverse impact on the Company's business, its consolidated financial position or its results of operations. DRS has continued to grow despite these circumstances and conditions. However, future growth will be dependent on the Company's ability to adapt to these and other changing market and industry conditions. Inflation: The Company has experienced the effects of inflation through increased costs of labor, services and raw materials. Although a majority of the Company's revenues are derived from long-term contracts, the selling prices of such contracts generally reflect estimated costs to be incurred in the applicable future periods. Accounting Standards Earnings per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement simplifies the current standards for computing earnings per share (EPS), as specified in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under SFAS 128, the presentation of primary EPS will be replaced by the presentation of basic EPS. For companies with complex capital structures, the presentation of fully diluted EPS will be replaced by diluted EPS. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB 15. The Company will adopt this standard in fiscal 1998, beginning with the fiscal quarter ending December 31, 1997, and its adoption is not expected to have a material impact on reported earnings per share for future or restated prior periods. 22 CONSOLIDATED BALANCE SHEETS Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc.
MARCH 31, 1997 1996 Assets ------------------------------------------------------------------------------------------- Current assets Cash and cash equivalents $ 9,455,000 $ 22,785,000 Accounts receivable, net (Notes 2 and 6) 24,343,000 22,942,000 Inventories, net of progress payments (Note 3) 25,169,000 19,449,000 Prepaid expenses and other current assets 1,389,000 1,464,000 ------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 60,356,000 66,640,000 ------------------------------------------------------------------------------------------- Property, plant and equipment, at cost (Notes 4 and 6) 48,286,000 41,935,000 Less accumulated depreciation and amortization 28,299,000 25,744,000 ------------------------------------------------------------------------------------------- Net property, plant and equipment 19,987,000 16,191,000 ------------------------------------------------------------------------------------------- Intangible assets, less accumulated amortization of $4,827,000 and $4,027,000 at March 31, 1997 and 1996, respectively 10,915,000 8,498,000 Other assets 6,415,000 5,922,000 ------------------------------------------------------------------------------------------- TOTAL ASSETS $ 97,673,000 $ 97,251,000 Liabilities and Stockholders' Equity Current liabilities Current installments of long-term debt (Notes 6 and 10) $ 2,255,000 $ 726,000 Accounts payable and other current liabilities (Note 5) 25,263,000 31,924,000 ------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 27,518,000 32,650,000 Long-term debt, excluding current installments (Notes 6 and 10) 30,801,000 32,608,000 Deferred income taxes (Note 7) 3,367,000 2,607,000 Other liabilities (Notes 8, 9 and 10) 3,000,000 2,820,000 ------------------------------------------------------------------------------------------- TOTAL LIABILITIES 64,686,000 70,685,000 ------------------------------------------------------------------------------------------- Stockholders' equity (Notes 6 and 8) Common Stock, $.01 par value per share. Authorized 20,000,000 shares; issued 6,007,786 at March 31, 1997 60,000 -- Class A Common Stock, $.01 par value per share. Authorized 10,000,000 shares; issued 3,739,963 shares at March 31, 1996 -- 37,000 Class B Common Stock, $.01 par value per share. Authorized 20,000,000 shares; issued 2,223,603 shares at March 31, 1996 -- 22,000 Additional paid-in capital 14,208,000 13,639,000 Retained earnings 20,685,000 15,022,000 ------------------------------------------------------------------------------------------- 34,953,000 28,720,000 Treasury stock, at cost: 420,893 shares of Common Stock at March 31, 1997; 432,639 shares of Class A Common Stock and 65,795 shares of Class B Common Stock at March 31, 1996 (1,622,000) (1,918,000) Unamortized restricted stock compensation (344,000) (236,000) ------------------------------------------------------------------------------------------- NET STOCKHOLDERS' EQUITY 32,987,000 26,566,000 ------------------------------------------------------------------------------------------- Commitments and contingencies (Note 9) ------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,673,000 $ 97,251,000
See accompanying Notes to Consolidated Financial Statements. 23 CONSOLIDATED STATEMENTS OF EARNINGS [LOGO] DRS TECHNOLOGIES Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc.
YEARS ENDED MARCH 31, 1997 1996 1995 --------------------------------------------------------------------------------------- Revenues $ 143,578,000 $ 101,454,000 $ 69,930,000 Costs and expenses (Note 3) 130,996,000 92,907,000 64,836,000 --------------------------------------------------------------------------------------- Operating income 12,582,000 8,547,000 5,094,000 Interest and related expenses (3,592,000) (2,681,000) (1,372,000) Interest and other income, net 698,000 971,000 655,000 Minority interest (404,000) (110,000) (121,000) --------------------------------------------------------------------------------------- Earnings before income taxes 9,284,000 6,727,000 4,256,000 Income taxes (Note 7) 3,621,000 2,624,000 1,652,000 --------------------------------------------------------------------------------------- NET EARNINGS $ 5,663,000 $ 4,103,000 $ 2,604,000 --------------------------------------------------------------------------------------- EARNINGS PER SHARE OF COMMON STOCK Primary $ .98 $ .73 $ .50 Fully diluted $ .84 $ .69 $ .50 --------------------------------------------------------------------------------------- Weighted average number of shares of common stock outstanding Primary 5,753,000 5,648,000 5,231,000 Fully diluted 8,931,000 7,030,000 5,240,000
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc.
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 Common Stock Additional (Note 8) Paid-In Retained Shares Amount Capital Earnings --------------------------------------------------------------------------------- Balances at March 31, 1994 5,780,491 $ 58,000 $ 12,970,000 $ 8,315,000 Net earnings -- -- -- 2,604,000 Stock options exercised 82,725 1,000 188,000 -- Compensation relating to stock options, net -- -- 388,000 -- Purchase of treasury stock -- -- -- -- Sale of treasury stock -- -- (111,000) -- --------------------------------------------------------------------------------- Balances at March 31, 1995 5,863,216 59,000 13,435,000 10,919,000 Net earnings -- -- -- 4,103,000 Stock options exercised 100,350 -- 250,000 -- Compensation relating to stock options, net -- -- 30,000 -- Other -- -- (76,000) -- --------------------------------------------------------------------------------- Balances at March 31, 1996 5,963,566 59,000 13,639,000 15,022,000 Net earnings -- -- -- 5,663,000 Stock options exercised 44,220 1,000 101,000 -- Compensation relating to stock options, net -- -- (29,000) -- Restricted stock bonus awards -- -- 167,000 -- Shares reissued from treasury for acquisitions -- -- 330,000 -- --------------------------------------------------------------------------------- Balances at March 31, 1997 6,007,786 $ 60,000 $ 14,208,000 $20,685,000 Unamortized Treasury Stock Restricted Net (Note 8) Stock Stockholders' Shares Amount Compensation Equity --------------------------------------------------------------------------------- Balances at March 31, 1994 444,859 $(1,579,000) $ (5,000) $ 19,759,000 Net earnings -- -- -- 2,604,000 Stock options exercised -- -- -- 189,000 Compensation relating to stock options, net -- -- (282,000) 106,000) Purchase of treasury stock 704,399 (2,900,000) -- (2,900,000 Sale of treasury stock (695,000) 2,862,000 -- 2,751,000 --------------------------------------------------------------------------------- Balances at March 31, 1995 454,258 (1,617,000) (287,000) 22,509,000 Net earnings -- -- -- 4,103,000 Stock options exercised -- -- -- 250,000 Compensation relating to stock options, net -- -- 51,000 81,000 Other 44,176 (301,000) -- (377,000) --------------------------------------------------------------------------------- Balances at March 31, 1996 498,434 (1,918,000) (236,000) 26,566,000 Net earnings -- -- -- 5,663,000 Stock options exercised 300 (3,000) -- 99,000 Compensation relating to stock options, net -- -- 109,000 80,000 Restricted stock bonus awards (34,575) 133,000 (217,000) 83,000 Shares reissued from treasury for acquisitions (43,266) 166,000 -- 496,000 --------------------------------------------------------------------------------- Balances at March 31, 1997 420,893 $(1,622,000) $ (344,000) $ 32,987,000
See accompanying Notes to Consolidated Financial Statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc.
YEARS ENDED MARCH 31, 1997 1996 1995 -------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 5,663,000 $ 4,103,000 $ 2,604,000 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation and amortization 5,027,000 3,170,000 2,480,000 Deferred income taxes 701,000 (159,000) 26,000 Other, net (215,000) (1,003,000) (77,000) Changes in assets and liabilities, net of effects from business combinations: (Increase) in accounts receivable (200,000) (4,640,000) (1,415,000) (Increase) in inventories (5,485,000) (4,926,000) (6,408,000) (Increase) decrease in prepaid expenses and other current assets 779,000 (265,000) (7,000) Increase (decrease) in accounts payable and other current liabilities (6,894,000) 8,630,000 3,640,000 Other, net (1,090,000) (59,000) 1,643,000 -------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,714,000) 4,851,000 2,486,000 -------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (3,634,000) (5,942,000) (2,543,000) Sales of capital assets 151,000 2,638,000 255,000 Payments pursuant to business combinations, net of cash acquired (6,285,000) (4,669,000) (1,514,000) Other, net -- -- 8,000 -------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (9,768,000) (7,973,000) (3,794,000) -------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Payments on long-term debt (840,000) (1,112,000) (275,000) Repurchases of convertible subordinated debentures -- (7,212,000) (2,667,000) Net proceeds from issuance of senior subordinated convertible debentures -- 23,127,000 -- Other borrowings (repayments), net (1,107,000) (163,000) 20,000 Purchase of treasury stock -- -- (2,900,000) Sale of treasury stock -- -- 2,862,000 Other, net 99,000 70,000 -- -------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,848,000) 14,710,000 (2,960,000) -------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,330,000) 11,588,000 (4,268,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 22,785,000 11,197,000 15,465,000 -------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,455,000 $ 22,785,000 $ 11,197,000
See accompanying Notes to Consolidated Financial Statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO] DRS TECHNOLOGIES Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc. NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Presentation The Consolidated Financial Statements include the accounts of Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc., its subsidiaries, all of which are wholly owned, a joint venture consisting of an 80% controlling partnership interest and a joint venture consisting of a 90% controlling partnership interest (the Company). All significant intercompany transactions and balances have been eliminated in consolidation. Certain items in the fiscal 1996 and 1995 consolidated financial statements have been reclassified to conform to the fiscal 1997 presentation. B. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. In fiscal 1996, the Company obtained a standby letter of credit to secure progress payments received under a certain contract. As of March 31, 1996, this letter of credit was collateralized by $1.2 million in cash. In fiscal 1997, this letter of credit was replaced with an uncollateralized letter of credit, issued in connection with the closing of the Company's revolving line of credit (see Note 6). C. Revenue Recognition Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as shipments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues for commercial product sales also are recognized upon shipment. Revenues on contracts with significant engineering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total contract costs at completion (cost-to-cost) with consideration given for risk of performance and estimated profit. Revenues related to incentive-type contracts also are determined on a percentage-of-completion basis measured by the cost-to-cost method. Revenues from cost-reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Revenues recognized under the cost-to-cost percentage-of-completion basis during fiscal 1997, 1996 and 1995 approximated 7%, 10% and 16% of total revenues, respectively, with remaining revenues recognized as delivery of finished units is made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1997, 1996 and 1995 were $12,995,000, $12,051,000 and $18,771,000, respectively, of customer-sponsored research and development. Revisions in profit estimates are reflected in the year in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 71%, 78% and 84% of the Company's revenues in fiscal 1997, 1996 and 1995, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government (principally the U.S. Navy). D. Inventories Commercial and other non-contract inventories are stated at the lower of cost (which includes material, labor and manufacturing overhead) or net realizable value. Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expenses which include research and development costs, where such costs are recoverable under customer contracts. In accordance with industry practice, inventories include amounts relating to contracts having production cycles longer than one year, and a portion thereof will not be realized within one year. E. Depreciation and Amortization of Plant and Equipment Depreciation and amortization have been provided on the straight-line method. The ranges of estimated useful lives are: office furnishings, motor vehicles and equipment, 3-10 years; building and building improvements, 15-40 years; and leasehold improvements, over the shorter of the estimated useful lives or the life of the lease. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. The cost of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in results of operations. 26 F. Intangible Assets Substantially all intangible assets consist of intangibles resulting from acquisitions and represent the excess of cost of the investments over the fair values of the underlying net assets at the dates of investment. All intangibles are being amortized on the straight-line method over three to thirty years. G. Income Taxes In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. H. Fair Value of Financial Instruments In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (SFAS 107). SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash and cash equivalents, accounts receivable, accounts payable and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values as of March 31, 1997 of the Company's 8 1/2% Debentures and 9% Debentures, which are convertible into shares of the Company's Common Stock, are disclosed herein (see Note 6). I. Impairment of Long-Lived and Intangible Assets In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). The Company adopted SFAS 121 effective April 1, 1996, and its adoption did not have a material impact on the Company's financial position or results of operations. SFAS 121 requires that long-lived assets, certain identifiable intangible assets and goodwill related to those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Consistent with SFAS 121, the Company's policy is to evaluate the realizability of acquisition-related intangible assets at each balance sheet date, based upon the expectations of non-discounted cash flows and operating income for each subsidiary or acquired business having a material acquisition-related intangible asset balance. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. Based upon its analysis in fiscal 1997, the Company concluded that no impairment to acquisition-related assets had occurred as of March 31, 1997. J. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123). This statement requires, among other matters, that companies make pro forma disclosures of net earnings and earnings per share as if the fair value-based method of accounting for stock options, as defined in the statement, had been applied. As permitted under SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost has been recognized for its stock options in the financial statements only as it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company's Common Stock as of the date of grant. K. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. L. Earnings per Share Earnings per share of Common Stock is computed by dividing net earnings by the sum of the weighted averages of all classes of Common Stock outstanding during each period. The computation of primary and fully diluted earnings per share includes the effect of shares from the assumed exercise of dilutive stock options, computed using the treasury stock method. The computation of fully diluted earnings per share for all periods presented includes the effect of the assumed conversion of the Company's 9% Senior Subordinated Convertible Debentures due 2003 (the 9% Debentures). In addition, beginning with the fiscal quarter ended March 31, 1996, the computation of fully diluted earnings per share includes the effect of the assumed conversion of the Company's 8 1/2% Convertible Subordinated Debentures due 1998 (the 8 1/2% Debentures). The 8 1/2% Debentures were not included in the computation for any of the prior periods presented, as their effect on earnings per share was antidilutive. 27 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement simplifies the current standards for computing earnings per share (EPS), as specified in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under SFAS 128, the presentation of primary EPS will be replaced by the presentation of basic EPS. For companies with complex capital structures, the presentation of fully diluted EPS will be replaced by diluted EPS. Diluted EPS is computed similarly to fully diluted EPS, pursuant to APB 15. The Company will adopt this standard in fiscal 1998 beginning with the fiscal quarter ending December 31, 1997, and its adoption is not expected to have a material impact on reported earnings per share for future or restated prior periods. NOTE 2: ACCOUNTS RECEIVABLE The component elements of accounts receivable, net are as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- U.S. GOVERNMENT: Amounts billed $ 4,062,000 $ 6,126,000 Recoverable costs and accrued profit on progress completed, not billed 2,817,000 2,200,000 - -------------------------------------------------------------------------------- 6,879,000 8,326,000 - -------------------------------------------------------------------------------- OTHER DEFENSE CONTRACTS: Amounts billed 10,777,000 5,224,000 Recoverable costs and accrued profit on progress completed, not billed 952,000 6,453,000 - -------------------------------------------------------------------------------- 11,729,000 11,677,000 - -------------------------------------------------------------------------------- OTHER TRADE RECEIVABLES: 5,735,000 2,939,000 - -------------------------------------------------------------------------------- TOTAL $24,343,000 $22,942,000 - -------------------------------------------------------------------------------- Generally, no accounts receivable arise from retainage provisions in contracts. The Company receives progress payments on certain contracts from the U.S. Government of between 75-100% of allowable costs incurred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final acceptance of the product. In addition, the Company may bill based upon units delivered. NOTE 3: INVENTORIES Inventories are summarized as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- Work-in-process $ 38,601,000 $ 44,795,000 Raw material 4,013,000 3,680,000 - -------------------------------------------------------------------------------- 42,614,000 48,475,000 Less progress payments (17,445,000) (29,026,000) - -------------------------------------------------------------------------------- TOTAL $ 25,169,000 $ 19,449,000 General and administrative costs included in work-in-process were $9,449,000 and $9,865,000 at March 31, 1997 and 1996, respectively. General and administrative costs included in costs and expenses amounted to $31,599,000, $21,956,000 and $17,681,000 in fiscal 1997, 1996 and 1995, respectively. Included in those amounts are expenditures for internal research and development, amounting to approximately $3,852,000, $649,000 and $795,000 in fiscal 1997, 1996 and 1995, respectively. 28 NOTE 4: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1997 and 1996 are summarized as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- Land $ 1,350,000 $ 1,350,000 Building and building improvements 2,427,000 2,389,000 Office furnishings and equipment 4,165,000 3,916,000 Laboratory and production equipment 25,075,000 19,946,000 Motor vehicles 127,000 226,000 Computer equipment 8,878,000 7,534,000 Leasehold improvements 6,264,000 6,574,000 - -------------------------------------------------------------------------------- TOTAL $48,286,000 $41,935,000 Depreciation and amortization of plant and equipment amounted to $3,542,000, $2,311,000 and $1,833,000 in fiscal 1997, 1996 and 1995, respectively. In fiscal 1997 and 1996, the Company financed approximately $1,594,000 and $389,000, respectively, of capital expenditures with long-term notes and other available lines of credit (see Note 6). NOTE 5: ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES The component elements of accounts payable and other current liabilities are as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- Payrolls, other compensation and related expenses $ 4,427,000 $ 3,955,000 Short-term bank debt 1,994,000 1,000,000 Income taxes payable 1,959,000 1,887,000 Losses and future costs accrued on uncompleted contracts 2,204,000 3,850,000 Other 4,516,000 5,474,000 - -------------------------------------------------------------------------------- 15,100,000 16,166,000 Accounts payable 10,163,000 15,758,000 - -------------------------------------------------------------------------------- TOTAL $25,263,000 $31,924,000 The weighted average interest rate on short-term bank debt was 7.3% and 9.3% at March 31, 1997 and 1996, respectively (see Note 6). NOTE 6: LONG-TERM DEBT A summary of long-term debt is as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- 9% senior subordinated convertible debentures due October 1, 2003 $25,000,000 $25,000,000 8 1/2% convertible subordinated debentures due August 1, 1998 4,992,000 4,992,000 Variable rate industrial revenue bonds due January 1, 1998 1,595,000 1,695,000 Other obligations 1,469,000 1,647,000 - -------------------------------------------------------------------------------- 33,056,000 33,334,000 Less current installments of long-term debt 2,255,000 726,000 - -------------------------------------------------------------------------------- TOTAL $30,801,000 $32,608,000 The 9% Debentures were issued in fiscal 1996 for an aggregate principal amount of $25,000,000. These Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock (see Note 8), unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. As of October 1, 1998, the 9% Debentures will be redeemable at the option of the Company, in whole or in part, together with accrued interest to the redemption date, at a redemption price of 105% of face value, diminishing by one percent each year to 100% on or after the fifth anniversary of such initial redemption date. There is no sinking fund requirement associated with the 9% Debentures. 29 The 9% Debentures are subordinated to the prior payment of principal and interest on all senior indebtedness of the Company, and are senior in right of payment to the Company's 8 1/2% Debentures. The indenture for the 9% Debentures contains certain restrictions, including a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. Under the indenture, the Company also is required to maintain a minimum level of consolidated net worth. As of March 31, 1997, the Company was in compliance with these covenants. The 8 1/2% Debentures are convertible at their face amount any time prior to maturity into shares of Common Stock of the Company (see Note 8), unless previously redeemed, at a conversion price of $15.00 per share, subject to adjustment under certain conditions. The 8 1/2% Debentures currently are redeemable at the option of the Company, in whole or in part, at face value, together with interest accrued to the redemption date. As of March 31, 1997, the Company had repurchased $20,008,000 of the 8 1/2% Debentures and has satisfied all sinking fund requirements under the related indenture. The 8 1/2% Debentures are subordinate to the prior payment in full of the principal and interest on all senior indebtedness of the Company. The indenture contains certain dividend payment and other restrictions. As of March 31, 1997, the Company was in compliance with these covenants. The 8 1/2% Debentures and the 9% Debentures are listed for trading on the American Stock Exchange. As of March 31, 1997, the aggregate market values, based on closing prices, of the principal amount of the outstanding 8 1/2% Debentures and 9% Debentures were approximately $5,004,000 and $34,000,000, respectively. The variable rate demand industrial development revenue refunding bonds (Bonds) were issued to refinance a prior bond issue, which provided funds for the construction of the manufacturing facilities of DRS Photronics, Inc. (Photronics), a wholly-owned subsidiary of the Company. All property, plant and equipment acquired or constructed from the proceeds of the original bonds collateralizes the obligation, and payment of the principal and interest and premium (if any) on the Bonds is further secured by the unconditional guaranty of the Company. The Bonds are supported by an irrevocable, direct-pay letter of credit. The Company has collateralized the letter of credit with accounts receivable and also has agreed to certain financial covenants. A default under the Bonds constitutes a default on the 8 1/2% Debentures and the 9% Debentures. As a result of the issuance of the $25,000,000 aggregate principal amount of 9% Debentures in fiscal 1996, the ratio of consolidated tangible net worth to total debt (Debt Ratio), as defined under the related letter of credit agreement, was below the required minimum ratio at March 31, 1997 and 1996. The Company has obtained a waiver, expiring on the maturity date of the Bonds, from the issuing bank of the required Debt Ratio and is in compliance with all covenants under the letter of credit. Interest on the Bonds is payable at a daily rate determined to be necessary under prevailing market conditions to enable the Bonds to be sold at a price equal to 100% of the principal amount thereof plus accrued interest. Such rate was 3.2% and 3.1% at March 31, 1997 and 1996, respectively. At the option of the Company, the interest rate payable on the Bonds may be changed to a weekly or fixed rate. On May 31, 1996, the Company entered into a revolving line of credit loan agreement with Mellon Bank, N.A. (Mellon Bank) for a three-year $15 million unsecured revolving line of credit (Line of Credit), available for working capital borrowings and letters of credit. As of March 31, 1997, approximately $5.3 million was outstanding against the Line of Credit, of which $2.3 million was contingently payable under letters of credit. Approximately $560,000 of debt outstanding under the Line of Credit was classified as long-term debt at March 31, 1997. On December 6, 1996, the Company entered into a $5 million secured equipment line of credit/term loan agreement with Mellon Bank (Equipment Facility). The Equipment Facility is available for equipment purchases made through June 30, 1999. At March 31, 1997, there were no outstanding borrowings against the Equipment Facility. The Line of Credit and the Equipment Facility contain certain covenants and 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. As of March 31, 1997, the Company was in compliance with these covenants. Cash payments for interest during fiscal 1997, 1996 and 1995 were $3,032,000, $1,169,000 and $1,237,000, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2002 are as follows: 1998, $2,255,000; 1999, $5,571,000; 2000, $230,000; 2001, $0; and 2002, $0. 30 NOTE 7: INCOME TAXES Income tax expense consists of: YEARS ENDED MARCH 31, 1997 1996 1995 - -------------------------------------------------------------------------------- CURRENT: Federal $ 2,673,000 $ 2,421,000 $ 1,498,000 State 247,000 362,000 128,000 - -------------------------------------------------------------------------------- 2,920,000 2,783,000 1,626,000 - -------------------------------------------------------------------------------- DEFERRED: Federal 596,000 602,000 172,000 State 105,000 (761,000) (146,000) - -------------------------------------------------------------------------------- 701,000 (159,000) 26,000 - -------------------------------------------------------------------------------- TOTAL $ 3,621,000 $ 2,624,000 $ 1,652,000 Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1997 and 1996 are as follows: MARCH 31, 1997 1996 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS: State net operating loss carryforwards $ 2,774,000 $ 2,786,000 Inventory capitalization 1,361,000 2,316,000 Costs accrued on uncompleted contracts 1,063,000 1,470,000 Other 1,443,000 1,063,000 - -------------------------------------------------------------------------------- Total gross deferred tax assets 6,641,000 7,635,000 Less valuation allowance (1,411,000) (1,419,000) - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS 5,230,000 6,216,000 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Depreciation and amortization 4,012,000 3,834,000 General and administrative costs 3,584,000 4,035,000 Federal impact of the state benefits 727,000 731,000 Other 487,000 495,000 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 8,810,000 9,095,000 - -------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITIES $ 3,580,000 $ 2,879,000 A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company has established a valuation allowance for a portion of the deferred tax asset attributable to state net operating loss carryforwards, due to the uncertainty of future Company earnings attributable to various states and the status of applicable statutory regulation that could limit or preclude utilization of these benefits in future periods. A deferred tax liability of $213,000 and $272,000 is included in Accounts Payable and Other Current Liabilities in the Consolidated Balance Sheets as of March 31, 1997 and 1996, respectively. At March 31, 1997, approximately $28,389,000 of state net operating loss carryforwards, which will expire between fiscal years 1998 and 2012, were available in various tax jurisdictions. A reconciliation of the statutory Federal income tax rate to the effective tax rate follows: YEARS ENDED MARCH 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Statutory tax rate 34% 34% 34% State income tax, net of Federal income tax benefit 3 4 3 Amortization of intangible assets 1 1 1 Other 1 -- 1 - -------------------------------------------------------------------------------- TOTAL 39% 39% 39% The provision for income taxes includes all estimated income taxes payable to Federal and state governments, as applicable. Cash payments for income taxes during fiscal 1997, 1996 and 1995 amounted to $2,813,000, $2,809,000 and $1,723,000, respectively. 31 NOTE 8. COMMON STOCK, STOCK OPTION PLANS AND EMPLOYEE BENEFIT PLANS Prior to April 1, 1996, the Company had three authorized classes of stock: a class consisting of 10,000,000 shares of Class A Common Stock, a class consisting of 20,000,000 shares of Class B Common Stock, and a class consisting of 2,000,000 shares of Preferred Stock (none of which has been issued). The holders of Class A and Class B Common Stock were entitled to one vote per share and one-tenth vote per share, respectively. On March 26, 1996, the stockholders of the Company approved an Amended and Restated Certificate of Incorporation (the Restated Certificate), which amended and restated the Company's certificate primarily to effect a reclassification (the Reclassification) of each share of Class A and Class B Common Stock into one share of Common Stock of the Company. The Reclassification became effective April 1, 1996. The following table presents the capital structure of the Company prior to the Reclassification. The summarized totals have been used in the Consolidated Statements of Stockholders' Equity for presentation purposes to give effect to the Reclassification as if it had been completed on March 31, 1994:
Number of Shares ----------------------------------------------------- Common Stock, $.01 par Value Authorized Issued Held in Treasury Outstanding ------------------------------------------------------------------------------------ As of March 31, 1994 Class A 10,000,000 3,674,963 423,419 3,251,544 Class B 20,000,000 2,105,528 21,440 2,084,088 ------------------------------------------------------------------------------------ 30,000,000 5,780,491 444,859 5,335,632 As of March 31, 1995 Class A 10,000,000 3,699,963 432,639 3,267,324 Class B 20,000,000 2,163,253 21,619 2,141,634 ------------------------------------------------------------------------------------ 30,000,000 5,863,216 454,258 5,408,958 As of March 31, 1996 Class A 10,000,000 3,739,963 432,639 3,307,324 Class B 20,000,000 2,223,603 65,795 2,157,808 ------------------------------------------------------------------------------------ 30,000,000 5,963,566 498,434 5,465,132
As a result of the Reclassification, the 8 1/2% Debentures and 9% Debentures are now convertible into an equivalent number of shares of Common Stock. Also, options granted under the Company's 1991 Stock Option Plan are now exercisable for an equivalent number of shares of Common Stock. On February 7, 1991, the Board adopted the 1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000 shares of Common Stock. The Stock Option Plan was approved by the Company's stockholders on August 8, 1991. Under the terms of the Stock Option Plan, options to purchase shares of Common Stock may be granted to key employees, directors and consultants of the Company. Options granted under the Stock Option Plan are at the discretion of the Board (Stock Option Committee) and may be incentive stock options or non-qualified stock options, except that incentive stock options may be granted only to employees. The option price is determined by the Stock Option Committee and must be a price per share which is not less than the par value per share of the Common Stock, and in the case of an incentive stock option, may not be less than the fair-market value of the Common Stock on the date of the grant. Options may be exercised during the exercise period, as determined by the Stock Option Committee, except that no option may be exercised within six months of its grant date, and in the case of an incentive stock option, generally, the exercise period may not exceed ten years from the date of the grant. As of March 31, 1997, 149,550 shares were reserved for future grants under the Stock Option Plan. 32 On June 17, 1996, the Board adopted, and on August 7, 1996, the stockholders approved, the 1996 Omnibus Plan (Omnibus Plan). An aggregate of 500,000 shares of Common Stock is reserved for issuance under this plan, subject to adjustment under certain circumstances. Awards under the Omnibus Plan are at the discretion of the Stock Option Committee and may be made in the form of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) phantom stock, (vi) stock bonuses, and (vii) other awards. Awards may be granted to employees, officers, directors and consultants of the Company. The total number of shares of the Company's stock subject to awards granted to any participant of this plan during any tax year of the Company may not exceed 200,000 shares. The Omnibus Plan also provides for automatic grants of non-qualified stock options to non-employee directors of the Company. Unless the Stock Option Committee expressly provides otherwise, options granted under the Omnibus Plan are not exercisable prior to one year after the date of grant and become exercisable as to 25% of the shares granted on each of the first four anniversaries of the date of grant. The Stock Option Committee will determine each option's expiration date provided, however, that no incentive stock option may be exercised more than ten years after the date of grant. Additionally, the Stock Option Committee will establish the option price provided, however, that in the case of an incentive stock option, the option price may not be set below the market value of a share of the Company's Common Stock on the date of grant. As of March 31, 1997, 334,100 shares were reserved for future grants under the Omnibus Plan. Pursuant to the terms of exercise under the grant, the excess of the fair-market value of shares under option at the date of grant over the option price may be charged to unamortized restricted stock compensation or to earnings as compensation expense and credited to additional paid-in capital. The unamortized restricted stock compensation, if any, is charged to expense as the options become exercisable, in accordance with the terms of the grant. The amount of compensation charged to earnings in fiscal 1997, 1996 and 1995 was $80,000, $81,000 and $106,000, respectively, and related solely to options granted under the Stock Option Plan. When stock is issued on exercise of options, the par value of each share ($.01) is credited to Common Stock and the remainder of the option price is credited to paid-in capital. No charge is made to operations. A summary of all transactions under the Stock Option and Omnibus Plans follows:
Number of Shares Weighted Average of Common Stock Exercise Price ------------------------------------------------------------------------------ Outstanding at March 31, 1994 (of which 159,913 shares were exercisable) 339,350 $2.25 Granted 150,000 $3.30 Exercised (82,725) $2.22 Expired (17,000) $1.68 ------------------------------------------------------------------------------ Outstanding at March 31, 1995 (of which 185,425 shares were exercisable) 389,625 $2.68 Granted 159,000 $7.56 Exercised (100,350) $2.40 Expired (11,475) $2.66 ------------------------------------------------------------------------------ Outstanding at March 31, 1996 (of which 137,100 shares were exercisable) 436,800 $4.52 Granted 165,900 $9.88 Exercised (44,220) $2.29 Expired (17,700) $5.03 ------------------------------------------------------------------------------ Outstanding at March 31, 1997 (of which 218,280 shares were exercisable) 540,780 $6.33
33 Information regarding all options outstanding at March 31, 1997 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 Less than $5.00 232,880 $ 2.94 1.9 years 149,480 $2.93 $5.00 - $9.99 297,900 $ 8.83 8.9 years 68,800 $7.75 Greater than $9.99 10,000 $ 10.88 9.8 years -- $ -- ------------------------------------------------------------------------------------------------------- Total 540,780 $ 6.33 5.9 years 218,280 $4.45
Pro forma information regarding net earnings and earnings per share, as required by SFAS No. 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 for fiscal 1997 and 1996: risk-free interest rate of 6.5%; dividend yield of 0%; volatility factor related to the expected market price of the Company's Common Stock of .2764; and weighted-average expected option life of five years. The weighted-average fair values of options granted during fiscal 1997 and 1996 were $3.68 and $3.31, 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 1997 and 1996 presented below include 49% and 6%, 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 follows: 1997 1996 - -------------------------------------------------------------------------------- Pro forma net earnings $ 5,446 $ 4,077 Pro forma earnings per common share Primary $ .95 $ .72 Fully diluted $ .81 $ .69 The Company also maintains defined contribution plans covering substantially all full-time eligible employees. The Company's contributions to these plans for fiscal 1997, 1996 and 1995 amounted to $629,000, $414,000 and $365,000, respectively. On February 1, 1996, the Company established a Supplemental Executive Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant to the SERP, the Company will provide retirement benefits to each key executive, based on years of service and final average annual compensation as defined therein. In addition, the Company will advance premiums for life insurance policies providing a death benefit equal to five times the participants' salary at time of death. In the event of a change in control, as defined therein, benefits become fully vested. The SERP is non-contributory and unfunded. Benefits under the SERP currently are being funded from working capital. As of March 31, 1997 and 1996, the Company's liability for benefits accrued under the SERP was approximately $1,060,000 and $876,000, respectively, and is included in Other Liabilities in the Consolidated Balance Sheets. Charges of $270,000 and $45,000 relating to the SERP were included in the results of operations for fiscal 1997 and 1996, respectively. 34 NOTE 9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS At March 31, 1997, the Company was party to various noncancellable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: - -------------------------------------------------------------------------------- 1998 $ 3,065,000 1999 2,762,000 2000 2,451,000 2001 1,471,000 2002 762,000 Thereafter 1,779,000 - -------------------------------------------------------------------------------- TOTAL $12,290,000 It is not certain as to whether the Company will negotiate new leases as existing leases expire. Determinations to that effect will be made as existing leases approach expiration and will be based on an assessment of the Company's capacity requirements at that time. Total rent expense aggregated $3,237,000, $3,115,000 and $2,490,000 in fiscal 1997, 1996 and 1995, respectively. In April 1984, the Board of Directors approved a lease agreement with LDR Realty Co. (wholly owned by the former Chairman of the Board of Directors and former President) for additional office and manufacturing space for the Company. The current LDR lease is for a ten-year term expiring May 31, 1998 at a net annual rental of $233,000. The Company is required to pay all real-estate taxes, maintenance and repairs to the facility. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the Gross Agreement) and a Stock Purchase Agreement (the Stock Purchase Agreement) with David E. Gross, who retired as President and Chief Technical Officer of the Company on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross will receive a total of $600,000 as compensation for his services under a five-year consulting agreement with the Company and $750,000 as consideration for a five-year non-compete arrangement. The payments are being charged to expense over the five-year term as services are performed and obligations are fulfilled by Mr. Gross. He also will receive, at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period as deferred compensation. The approximate net present value of the deferred compensation payments to be made to Mr. Gross is included in Other Liabilities in the Consolidated Balance Sheets. On July 28, 1994, pursuant to the Stock Purchase Agreement, the Company purchased 659,220 shares of Class A Common Stock and 45,179 shares of Class B Common Stock owned by Mr. Gross for $4.125 and $4.00 per share, respectively, totaling approximately $2.9 million in cash (the Buy-back). These shares subsequently were sold, pursuant to a related registration statement filed with the SEC, at prices of $4.00-$4.125 per share for proceeds totaling approximately $2.9 million. The Stock Purchase Agreement also includes certain provisions regarding the sale and voting of Mr. Gross' remaining shares of stock in the Company, as well as the adjustment which would have been made in the purchase price paid to Mr. Gross pursuant to the Buy-back should a change in control of the Company occur within three years from the date of the Stock Purchase Agreement. On March 28, 1996, the Company entered into an Employment, Non-Competition and Termination Agreement with Leonard Newman, a co-founder, former Chairman and Chief Executive Officer of the Company (the Newman Agreement). Pursuant to the Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0 million, of which approximately $1.5 million was charged to operations in fiscal 1995. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five-year period and also has agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with Mr. Newman. In March 1996, Mr. Leonard Newman and certain members of his immediate family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an investment adviser to several accounts. In connection with this sale, the Company entered into a registration rights agreement with the buyer and filed a registration statement relating to these shares. 35 The Company is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Since a substantial amount of the Company's revenues are derived from contracts or subcontracts with the U.S. Government, future revenues and profits will be dependent upon continued contract awards, Company performance and volume of Government business. The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency. NOTE 10. BUSINESS COMBINATIONS On November 17, 1994, DRS Ahead Technology, Inc. (Ahead Technology), a second-tier subsidiary of the Company, acquired the net assets of Ahead Technology Corporation (Ahead) for approximately $1.1 million in cash. In addition, Ahead Technology entered into a Covenant and Agreement Not to Compete (the Covenant Agreement), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant Agreement, Ahead Technology agreed to pay a total of approximately $.9 million in cash, consisting of approximately $.4 million paid on the date of the agreement and an additional $.5 million payable in equal monthly installments over a period of five years from the date of the agreement. The acquisition has been accounted for using the purchase method of accounting and, accordingly, Ahead's operating results have been included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $.9 million and is being amortized on a straight-line basis over five years, or approximately $.2 million annually. Ahead Technology, now located in San Jose, California, designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. Its products include burnish heads, glide heads and specialty test heads. On July 5, 1995, DRS Optronics, Inc. (Optronics), a second-tier subsidiary of the Company, acquired substantially all of the assets of Opto-Mechanik, Inc. (OMI), pursuant to a related asset acquisition agreement, for a total of $5.5 million, consisting of $3.7 million in cash and $1.8 million in notes payable (the OMI Asset Acquisition). Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. The acquisition of the assets of OMI has been accounted for using the purchase method of accounting. The cost of the acquisition has been allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. The operating results of Optronics, the acquiring corporation, have been included in the Company's reported operating results since the date of acquisition. Optronics, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. On February 6, 1996, a wholly-owned subsidiary of the Company entered into a partnership with Universal Sonics Corporation and its shareholders (DRS Medical Systems or the Partnership) for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the Partnership consisted of $.4 million in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in DRS Medical Systems. 36 On February 9, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. (Mag-Head), pursuant to an asset purchase agreement, for approximately $.4 million in cash. Mag-Head produces audio and flight recorder heads. On June 18, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash. The acquisition has been accounted for using the purchase method of accounting. Accordingly, Vikron's results of operations from April 1, 1996 (the effective date of acquisition) have been included in the Company's reported operating results. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. The acquisition has been accounted for using the purchase method of accounting. Accordingly, Nortronics' results of operations from July 1, 1996 (the effective date of acquisition) have been included in the Company's reported operating results. Located in Dassel, Minnesota, Nortronics manufactures data and recording heads. On October 30, 1996, Pacific Technologies, Inc. (PTI), a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $.5 million. The merger has been accounted for using the purchase method of accounting. Accordingly, PTI's results of operations from July 1, 1996 (the effective date of the merger) have been included in the Company's reported operating results. Based in San Diego, California, PTI provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. The financial position and results of operations of the aforementioned acquired businesses were not significant to those of the Company as of their respective effective dates of acquisition. Effective February 26, 1997, Ahead Technology and all its subsidiaries were merged to form a single legal entity. The Company currently is integrating these operations in order to gain operational efficiencies and to further streamline its manufacturing operations. The Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in preliminary discussions regarding several other potential acquisitions. There can be no assurance, however, that definitive agreements will be reached or that any further acquisitions will be consummated. 37 NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for fiscal 1997 and 1996: First Quarter 1997 1996 - -------------------------------------------------------------------------------- Revenues $27,423,000 $17,279,000 Operating income $ 2,468,000 $ 1,314,000 Income taxes $ 716,000 $ 420,000 Net earnings $ 1,120,000 $ 656,000 Net earnings per share of common stock Primary $ .20 $ .12 Fully diluted $ .18 $ .12 Second Quarter 1997 1996 - -------------------------------------------------------------------------------- Revenues $33,440,000 $22,786,000 Operating income $ 3,032,000 $ 1,844,000 Income taxes $ 893,000 $ 584,000 Net earnings $ 1,396,000 $ 915,000 Net earnings per share of common stock Primary $ .24 $ .16 Fully diluted $ .21 $ .16 Third Quarter 1997 1996 - -------------------------------------------------------------------------------- Revenues $38,379,000 $25,563,000 Operating income $ 3,254,000 $ 2,181,000 Income taxes $ 898,000 $ 590,000 Net earnings $ 1,406,000 $ 924,000 Net earnings per share of common stock Primary $ .24 $ .16 Fully diluted $ .21 $ .16 Fourth Quarter 1997 1996 - -------------------------------------------------------------------------------- Revenues $44,336,000 $35,826,000 Operating income $ 3,828,000 $ 3,208,000 Income taxes $ 1,114,000 $ 1,030,000 Net earnings $ 1,741,000 $ 1,608,000 Net earnings per share of common stock Primary $ .30 $ .28 Fully diluted $ .24 $ .23 COMMON STOCK Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc. FISCAL 1997 Fiscal 1996 - -------------------------------------------------------------------------------- As traded on the Class A Class B American Stock ------------------ -------------------- Exchange HIGH LOW High Low High Low - -------------------------------------------------------------------------------- First Quarter 11 5/8 7 1/4 6 5/8 4 3/4 6 13/16 4 7/8 Second Quarter 11 5/8 8 3/8 7 13/16 6 3/16 7 7/8 5 3/4 Third Quarter 12 1/2 9 1/4 8 7 7 7/8 6 3/4 Fourth Quarter 13 10 1/8 8 11/16 7 7/16 8 3/4 7 3/8 Effective April 1, 1996, the stockholders of the Company approved a reclassification of each share of the Company's Class A and Class B Common Stock into one share of Common Stock (the Reclassification). (See Note 8 of Notes to Consolidated Financial Statements.) The purpose of the Reclassification was to simplify the Company's capital structure, streamline the Company's voting procedures and enhance the marketability and liquidity of and maximize investor interest in the Company's capital stock. In addition, the Company believes that, as a result of the Reclassification, the Company is in a more flexible position to raise capital and effect mergers and acquisitions using its Common Stock. However, there can be no assurance that the Reclassification will have such effects. As of June 3, 1997, the Common Stock of the Company was held by 321 stockholders of record. 38 INDEPENDENT AUDITORS' REPORT Diagnostic/Retrieval Systems, Inc. and Subsidiaries d.b.a. DRS Technologies, Inc. [LOGO] KPMG Peat Marwick LLP To the Board of Directors and Stockholders, Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries d.b.a. DRS Technologies, Inc. as of March 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diagnostic/Retrieval Systems, Inc. and subsidiaries d.b.a. DRS Technologies, Inc. as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey May 9, 1997 EX-21 10 SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1997 Exhibit 21 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES D.B.A DRS TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1997 Subsidiary State of Incorporation - ---------- ---------------------- DRS Precision Echo, Inc. Delaware DRS Photronics, Inc. New York DRS Electronic Systems, Inc. Delaware DRS Systems Management Corporation Delaware DRS Ahead Technology, Inc. Delaware DRS Optronics, Inc. Delaware DRS/MS, Inc. Delaware EX-23.1 11 ACCOUNTANTS' CONSENT Exhibit 23.1 ACCOUNTANTS' CONSENT The Board of Directors Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc.: We consent to the incorporation by reference in the registration statements (No. 2-87303, No. 2-99986, and No. 333-14487) on Form S-8 and (No. 2-97784, No. 33-33125, No. 33-42886, No. 33-64641, and No. 333-04929) on Form S-3 of Diagnostic/Retrieval Systems, Inc. of our reports dated May 9, 1997, relating to the consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries d.b.a. DRS Technologies, Inc. as of March 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended March 31, 1997, which reports appear or are incorporated by reference in the March 31, 1997 Annual Report on Form 10-K of Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc. KPMG Peat Marwick LLP Short Hills, New Jersey June 27, 1997 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. d.b.a. DRS TECHNOLOGIES, INC. FORM 10-K FOR THE ANNUAL PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 9,455,000 0 24,343,000 0 25,169,000 60,356,000 48,286,000 28,299,000 97,673,000 27,518,000 30,801,000 0 0 60,000 32,927,000 97,673,000 143,578,000 143,578,000 130,996,000 130,996,000 0 0 3,592,000 9,284,000 3,621,000 0 0 0 0 5,663,000 0.98 0.84
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