-----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, PeM3Sv+cS0jyusM38xgWZI/7/9oe4WhgCBeQ3+kszIXJmpJmyKUtbIlgxQfn5m/O iiwgOOTxGvMCZ2kuloCijQ== 0000950110-99-000936.txt : 19990630 0000950110-99-000936.hdr.sgml : 19990630 ACCESSION NUMBER: 0000950110-99-000936 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08533 FILM NUMBER: 99655254 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9738981500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-8533 ---------- DRS TECHNOLOGIES, INC. ---------- DELAWARE 13-2632319 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054 (973) 898-1500 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $.01 par value American Stock Exchange 9% Senior Subordinated Convertible Debentures due October 1, 2003 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [ ] 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 21, 1999, was approximately $85,000,000. The number of shares of common stock outstanding as of June 21, 1999 was 9,231,669 (exclusive of 385,164 shares of common stock held in the treasury.) DOCUMENTS INCORPORATED BY REFERENCE 1. 1999 Annual Report (for the fiscal year ended March 31, 1999), incorporated in Part II. 2. Definitive Proxy Statement, dated June 28, 1999, for the Annual Meeting of Stockholders, incorporated in Part III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL DRS Technologies, Inc. (DRS) is a leading supplier of defense electronic systems. We provide advanced technology products and services to government and commercial niche markets worldwide. Our company develops and manufactures a broad range of mission critical products--from rugged computers and peripherals to systems and components in the areas of communications, data storage, digital imaging, electro-optics, flight safety and space. Our defense electronics systems and subsystems are sold to all branches of the U.S. military, selected U.S. Government intelligence agencies, major aerospace/defense prime contractors, international military forces and a wide range of commercial customers. We also offer a full complement of technical support and advanced manufacturing services. DRS was incorporated in 1968 and has served the defense industry for over thirty years. We have increased our annual revenues at a compound annual growth rate of approximately 36% over the last five years, and are currently a leading provider of infrared night vision devices, combat display workstations, electronic sensor systems, mission recorders and deployable flight incident recorders. Our operating results directly reflect our strategies of maintaining our reputation for technical excellence, focusing on the development of long-term contracts and acquiring businesses that complement or extend our product lines. We design and manufacture electronic systems for several of the U.S. military's well-funded programs and high-profile platforms. We are organized into four operating groups, three of which compete in the defense industry: o The Electronic Systems Group (ESG) is the leading provider of naval computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustical signal processing and display equipment, and combat control systems for U.S. and international military organizations. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products are also used in the U.S. Army's ongoing battlefield digitization programs. o The Electro-Optical Systems Group (EOSG) produces systems and subsystems for infrared night vision and targeting products used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV) scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures regardless of the ambient light level. The effectiveness of the previous generation of these products was recognized in Operation Desert Storm. This Group is also a leading designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its technology base by expanding into related non-defense markets and is a leading producer of ultra high-speed digital imaging systems. o The Flight Safety and Communications Systems Group (FSCG) is a leading manufacturer of deployable flight emergency or "black box" recording equipment used by military and search and rescue aircraft. FSCG also manufactures shipboard communications and infrared surveillance systems for the U.S., Canadian and other navies. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. FSCG, recognized for its technical expertise and capabilities, also provides advanced manufacturing services for international military and space customers. FSCG products are used on such platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target verification and battle damage assessment. o Consistent with our goal of utilizing our technology in the commercial sector, the Data Systems Group produces consumable magnetic heads used in the production of hard disk drives by some of the world's 1 largest computer manufacturers. Other commercial products provide data retrieval capability for devices such as airplane phones, credit card readers and other electronic scanning equipment. Our profitability in the defense electronics industry is due in part to our focus on managing our financial risk with respect to the development and fabrication of new products. Many of our research and development projects are performed with funding obtained from the military customer under development contracts. In fact, in fiscal year 1999, we received approximately $15,400,000 in research and development funding from our customers. In addition, when a system enters into full production, the terms of many of our production contracts provide for progress payments or milestone payments. This allows us to fund a portion of our working capital requirements from external sources and reduce our financial risk. STRATEGY Our goal is to secure our emerging position as a mid-tier defense technology supplier by maintaining our reputation for technical excellence, focusing on the development of profitable long-term contracts and acquiring businesses that complement or extend our product lines. o LEVERAGE EXISTING CONTRACTS TO WIN NEW BUSINESS. Our experience has shown that high levels of performance on existing contracts provide contractors with valuable exposure to decision makers within the government procurement staff and greatly enhance the prospects of obtaining new or follow-on contracts. We intend to continue to leverage our high level of performance on our extensive range of existing contracts across entire program life cycles to help us obtain new and follow-on contracts. o OBTAIN NEW DEVELOPMENT CONTRACTS. Customer-funded development contracts offer us the opportunity to work with our military customers to design and manufacture new systems and components that provide highly customized solutions to our customers' procurement needs, while minimizing our financial risk. An important element of our success will continue to be our ability to win new development contracts to maintain our backlog of funded programs. o PURSUE SELECTIVE ACQUISITIONS. Historically, we have pursued acquisitions of complementary businesses with leading positions in niche product or market areas that are synergistic with our existing business. We believe that such acquisitions offer the opportunity to acquire new technologies and customers, thereby leveraging our core strengths. The acquisition of existing contracts provides us with both current income and the opportunity for future contract awards based upon our performance. RECENT ACQUISITIONS Our financial results for the year ended March 31, 1999 do not reflect the full impact of two important acquisitions completed in the latter half of the fiscal year: On October 20, 1998, we acquired certain assets of the Second Generation Ground-Based Electro-Optical and Focal Plane Array businesses of Raytheon Company for approximately $45.0 million in cash. As a result of this acquisition, we have become a leading provider of Forward Looking Infra-Red (FLIR) technology. This technology enables an operator to detect, identify and acquire targets in complete darkness and other limited visibility conditions. For fiscal year 1999, these businesses generated approximately $45.6 million in revenue, and as of March 31, 1999 had a funded backlog of approximately $159.5 million, 50% of which is expected to be recognized as revenue during fiscal 2000. On February 19, 1999, we completed our acquisition of NAI Technologies, Inc. (NAI) for approximately 2.9 million shares of DRS common stock. NAI designs, manufactures and markets rugged computer systems, advanced peripheral products, intelligent terminals, radiation-suppressant TEMPEST computer terminals and other electronic equipment. For fiscal year 1999, NAI generated approximately $7.0 million in revenue and as of March 31, 1999, had a funded backlog of approximately $28.5 million, 81% of which is expected to be recognized as revenue during fiscal 2000. 2 COMPANY ORGANIZATION ELECTRONIC SYSTEMS GROUP ESG consists of DRS Electronic Systems, Inc. (DRS ESI), located in Gaithersburg, Maryland, DRS Laurel Technologies (DRS Laurel), located in Johnstown, Pennsylvania, DRS Technical Services, Inc., located in San Diego, California, DRS Technical Services, located in Chesapeake, Virginia, DRS Rugged Systems, Inc., (DRS Rugged Systems) located in Longmont, Colorado, DRS Rugged Systems (Europe) Ltd. (DRS Rugged Systems (Europe)), located in Farnham, Surrey, United Kingdom, DRS Advanced Programs, Inc. (DRS Advanced Programs), located in Columbia, Maryland, and DRS Rugged Systems (Australia) PTY. Ltd. located in Fyshwick, Australia. ESG is a leading provider of naval computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustical signal processing and display equipment, and combat control systems for U.S. and international military organizations. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in the U.S. Army's ongoing battlefield digitization programs. DRS ESI. DRS ESI designs, manufactures and integrates electronic systems using advanced commercial technology to meet the performance and environmental requirements of military customers. Current products include tactical processing and combat information systems for naval ships, submarines and aircraft, surveillance systems for coastal and harbor regions, radar systems for surface ships, and low-cost emulators of legacy military systems for test and training support. Major products and contracts include: o AN/UYQ-70: AN/UYQ-70 Advanced Display Systems are advanced, open-architecture display systems designed for widespread application through software and hardware modification, ultimately for deployment on Aegis and other surface ships, submarines and airborne platforms. These systems are self-contained, microprocessor-based units complete with mainframe interface software and offer 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 legacy systems. These systems were developed for the U.S. Navy under a subcontract with Lockheed Martin Tactical Defense Systems. Based upon the size of the Naval surface fleet and the average number of workstations to be deployed on each ship, we believe that the potential market for these workstations may exceed 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 commercial off-the-shelf (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. We currently deliver these Military Display Emulators for use at land-based training sites for the Aegis and other U.S. Navy programs. o AN/SPS-67: AN/SPS-67 Radar Systems are being deployed on the U.S. Navy's new DDG-51 Aegis class ships and Spanish Navy's F-100 class ships. They provide ocean surveillance and navigation data, including detection and tracking of low flying aircraft and other targets. An integral part of the ships' command and control combat system, the AN/SPS-67 is a below-deck system which we believe has a potential market application on other surface ships in the Navy's fleet, as well as on aircraft carriers and amphibious operation assault ship platforms. o AN/UYQ-65: AN/UYQ-65 Data Processing and Display Sets were the first COTS-based tactical workstations to be qualified by the U.S. Navy and were designed to comply with the stringent 3 requirements of the Aegis shipbuilding program. Replacing the sensor displays in the SQQ-89 anti-submarine warfare (ASW) combat suite, the AN/UYQ-65 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. These systems currently are provided to EDO Corporation under subcontract for international allied navies. o AN/SQR-17A(V)3: The Mobile In-shore Undersea Warfare (MIUW) systems are multi-sensor processing systems that are 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. These systems currently are being procured for use in 22 field installations. We are under contract to provide the system's underwater sensor string arrays and other upgrades to these field installations. DRS ESI also produces a line of lightweight portable display workstations for the collection, display, storage and communication of data in the field, replacement data storage systems for program loading and data archiving on P-3C aircraft, and flat panel display products, display subsystems and other computer peripherals for integration primarily with military tactical display workstations. DRS LAUREL. We own 80% of DRS Laurel through a partnership formed in December 1993 with Sunburst Management, Inc. DRS Laurel serves as a cost-efficient manufacturing operation for us and other prime defense contractors. DRS Laurel primarily manufactures and integrates electronic systems, providing turn-key production, and performs related electronic and electromechanical assembly and associated test services. In addition, DRS Laurel specializes in cable and wire harness interconnect products, primarily for large industrial customers involved in the military and commercial aerospace industries. DRS Laurel currently produces both the AN/UYQ-65 and AN/UYQ-70 workstations and provides electronic manufacturing services to Northrop Grumman for the Air Force's E-8C Joint STARS aircraft and to United Defense for the M-2 Bradley fighting vehicles. DRS TECHNICAL SERVICES, INC. AND DRS TECHNICAL SERVICES. These units 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. The facilities are located in close proximity to U.S. Naval bases in Norfolk, Virginia and San Diego, California. Services, including equipment and field change installation, configuration audit, repair, testing and maintenance, are performed for the U.S. Navy and, to a lesser extent, commercial customers. DRS Technical Services also has performed work for foreign navies, including those of Australia, Egypt, Greece, the Republic of China and Turkey. DRS RUGGED SYSTEMS. DRS Rugged Systems designs, develops and manufactures rugged high-performance computer workstation systems and associated peripherals for customers that require operation in severe environment situations. In addition to supplying products such as flat panel displays, portable and transportable integrated workstations, rack-mounted computer systems and mass storage expansion units, DRS Rugged Systems also provides rugged integrated computer systems for specific rugged requirement applications, including ground mobile, airborne, naval surface and underwater applications. DRS Rugged Systems participates in the U.S. Army's Common Hardware/Software (CHS-2) program, which is providing the basic hardware/software infrastructure for the Force XXI "digitization of the battlefield" initiative. DRS RUGGED SYSTEMS (EUROPE). DRS Rugged Systems (Europe) specializes in the design, development and implementation of rugged COTS hardware for land, sea and airborne forces. DRS Rugged Systems (Europe) is the rugged hardware systems integrator for the British Army Attack Helicopter (Apache) ground support system, and it also supplies the integrated rugged hardware solution in support of the Royal Air Force Chinook Helicopter Fleet's generic health and usage monitoring system. It is also a primary supplier of rugged COTS systems to the Swedish Army, which utilizes rugged multi-platform computers in different configurations, in related mobile tactical communications and information systems, TS9000 and ATLE IS, respectively. The Flat Panel Rugged (FPR) 20-inch rugged flat panel display is utilized in the Royal Navy's Command Support System (CSS), and the rugged hardware for the Royal Navy's Submarine Fleet's DCG Re-host tactical support system was designed, developed, tested and installed under contract to BAeSEMA. 4 The Explorer (often referred to as the CCU, Compact Computer Unit) provides the full capabilities of the CHS-2 products in a portable, self-contained unit with its own power source and an integrated flat panel display. The unit uses the same exchangeable media (hard disks and tape units) and provides total compatibility of all information and system security. The unit shares its design with the DRS Rugged Systems (Europe's) Explorer 2 and is being complemented with an upgraded version with a larger display and greater upgrade capabilities. The Genesis 300 rugged multi-platform computer, a variant of the Genesis SR (short rack), will feature an integrated 12-inch screen and keyboard. Since its launch in 1997, the Genesis SR, which supports applications such as mission planning, tactical communications, combat support and logistics support, has been sold into military programs in Europe, Scandinavia and Southeast Asia. The OPUS 16 rugged flat panel with computer, a 16-inch flat panel display with a single board Intel(TM) computer housed in a rugged rackmount or portable enclosure, will join the extensive FPR range of rugged flat panel color displays. DRS Rugged Systems (Europe)'s fixed, rackmount or portable FPR panels with 12-, 13-, 16- and 20-inch displays currently operate in a variety of land, airborne, surface vessel and submarine environments. DRS RUGGED SYSTEMS (AUSTRALIA) PTY. LTD. DRS Rugged Systems (Australia) PTY. Ltd., a subsidiary of DRS Rugged Systems (Europe), was established in 1997. The division is under contract to provide maintenance support to the Australian Army Tactical Command Support System (AUSTACSS) and to manufacture Explorer II workstations for a U.S. defense company. DRS ADVANCED PROGRAMS. DRS Advanced Programs provides custom-packaged integrated computer systems for deployment in land vehicles, ships, shelters and other demanding environments, including unique physical packaging requirements such as compact size, low weight, specialized air flow and rack mounting. DRS Advanced Programs markets directly to various U.S. Government agencies, primarily in the intelligence community and has teamed with leading corporations, such as GTE and Booz-Allen. DRS Advanced Programs designs and integrates special purpose systems configured specifically for a variety of target applications, including: communications processing; data acquisition, storage and forwarding; digital signal processing; and client/server systems and embedded processing. DRS Advanced Programs also provides specially packaged monitors, keyboards, printers and peripheral subsystems that are used in conjunction with its computer systems. DRS Advanced Programs now also provides support services such as configuration management, testing, sparing, maintenance and life cycle support. ELECTRO-OPTICAL SYSTEMS GROUP EOSG consists of DRS Infrared Technologies, LP (DRS Infrared), located in Dallas, Texas, DRS Sensor Systems, Inc. (DRS Sensor), located in El Segundo, California, DRS Photronics, Inc. (DRS Photronics), located in Oakland, New Jersey, DRS Optronics, Inc. (DRS Optronics) located in Palm Bay, Florida, and DRS Hadland Ltd. (DRS Hadland), based in Tring, Hertfordshire, the United Kingdom. EOSG produces systems and subsystems for infrared night vision and targeting products used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the HMMWV scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures regardless of the ambient light level. The effectiveness of the previous generation of these products was recognized in Operation Desert Storm. This Group is also a leading designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its technology base by expanding into related non-defense markets and is a leading producer of ultra high-speed digital imaging systems. DRS INFRARED. DRS Infrared produces infrared scanning Focal Plane Arrays (FPAs), staring FPAs, and linear coolers (designed to maintain optimal operating temperatures for infrared scanning) for military electro-optical systems applications. An FPA is a two-dimensional assembly of electro-optical detecting pixels used to generate night vision capability. FPAs are also used in heat-seeking missile guidance systems and missile warning systems, applications for which no pictorial image is required. DRS Infrared is a leading global supplier of cryogenic linear coolers for infrared devices. 5 DRS Infrared is the sole source supplier of the Detector Dewar Cooler (DDC) module for the U.S. Army's Javelin Commanders Launch Unit (CLU) for a Lockheed Martin-Raytheon joint venture. DRS Infrared is delivering the initial units of a three-year multi-year contract with an ordered total of 1,385 units. DRS Infrared has a 40% share of the current contract for the SADA (Standard Advanced Dewar Assembly) II Detector procured by the U.S. Army and supplied to the HTI (Horizontal Technology Integration) program for use in the Second Generation night vision equipment upgrades provided by DRS Sensor for the Abrams, Bradleys and HMMWV scout vehicles. Prior to its acquisition, DRS Infrared had provided approximately 6,000 linear drive coolers to a wide cross-section of electro-optics system vendors. The business base represented by the Javelin and SADA II programs is expected to consist of over 10,000 coolers, or $54 million in revenues over the next ten years. DRS Infrared also supplies a 256 x 256 midwave infrared module for Lockheed Martin's Joint Air-to-Surface Stand-off Missile (JASSM) program. It also supplies 240x480 DDC modules for several programs and has exclusive rights of supply for certain of these items through calendar year 2000 in support of Raytheon system sales. DRS SENSOR. DRS Sensor designs and manufactures the second generation FLIR sighting systems for the U.S. Army's Abrams, Bradleys and HMMWV scout vehicles. Second generation FLIR technology enables an operator to detect, identify and acquire targets in complete darkness. Current programs of DRS Sensor include: o HTI Second Generation FLIR thermal imaging systems (HTI SGF Thermal Imaging Systems) installed on the U.S. Army's Abrams, Bradleys and HMMWV Scouts. In January, 1999, DRS Sensor was awarded a total of $55.9 million to provide HTI SGF Thermal Imaging Systems for the sighting systems of Abrams and Bradleys, a result of the exercise of an option on a multiple-year contract with a total post-acquisition value of $92 million; o Improved Bradley Acquisition System (IBAS), which provides the thermal imaging and fire control system installed on Bradleys. In November 1998, DRS Sensor was awarded a $24.2 million contract to provide IBAS systems for the Bradleys, a result of the exercise of an option on an acquired contract; and o Long Range Advanced Scout Surveillance System (LRAS3), a development program which provides the thermal image sighting systems to be installed on the HMMWV scouts. DRS OPTRONICS. DRS Optronics designs and manufactures electro-optical targeting, sighting and fire control systems and various missile components. DRS Optronics provides certain manufacturing services to DRS Sensor in connection with the HTI SGF Thermal Imaging Systems and IBAS. DRS Optronics also provides: o Night Vision Binoculars: DRS Optronics is currently under contract to develop and manufacture these units for the Israeli military. The Nightstar(TM) night vision binocular is a hand-held viewing binocular that incorporates an image intensifier tube, laser range finder and digital compass in a compact lightweight system suited for infantry units, special forces and night operations involving forward observers and reconnaissance patrols. Nightstar(TM) displays range and azimuth data in the soldier's eyepiece, allowing identification of targets and providing essential fire support data for nighttime engagement. These units have a range of 20 to 2,000 meters. o Gunners' Auxiliary Sight: This is an electro-optical device used as a primary or secondary sighting system on Abrams M1 Main Battle Tanks and contains a very sophisticated electro-optical device and a laser protective filter. DRS Optronics has produced more than 2,000 of these instruments and continues to operate as a repair and retrofit facility for the M1A2 upgrade program. Options for additional units under this program may be exercised through fiscal 2000. o Tube-launched Optically-tracked Wire-guided (TOW) Optical Sight: DRS Optronics is currently the only U.S. qualified producer of two of the three critical assemblies in this device. This complex electro-optical system is the main component of the U.S.'s premier ground antitank weapons system. o TOW Traversing Unit: This unit provides target tracking accuracy for the TOW antitank weapon, acting as the mount for the TOW Optical Sight and the associated missile launch tube. DRS Optronics is 6 currently the only qualified manufacturer of this tightly toleranced assembly and is involved in working on modification and retrofit programs. DRS Optronics also has been contracted to modify a version for use by an overseas customer. o Eye-Safe Laser Range Finder: DRS Optronics competed against the U.S. Army's historical primary laser supplier for this contract and was awarded an initial contract for preproduction units. DRS Optronics also is currently manufacturing a laser range finder/target designator for airborne use in the Modular Integrated Laser Engagement System Air/Ground Engagement System II program. This effort includes redesigning the target designator unit to accommodate DRS Optronics' laser components. o Missile Components: DRS Optronics provides the primary, secondary, tertiary and fold mirrors, housing and nose dome for Sidewinder and Stinger missiles. It is currently under contract to produce infrared components and subassemblies on many of the next-generation infrared missile systems. DRS PHOTRONICS. DRS Photronics produces weapons calibration, or boresighting equipment, used to align and harmonize the navigation, targeting and weapons systems on rotary- and fixed-wing aircraft. Multiple Platform Boresighting Equipment (MPBE) is DRS Photronics' main product line. MPBE currently is used on the Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship radar. This technology is proprietary to the company. The company is the prime contractor on a tri-service (Army, Navy and Air Force) program to develop the Airborne Digital Imaging System (ADIS) for the test and evaluation of weapons separation events on board Navy F/A-18 aircraft. The system, which also can be used on various other fixed- and rotary-wing military aircraft, includes an electronically-shuttered, fast-frame, high-resolution, digital imaging camera and a high-density, digital data storage device. Upon completion, the ADIS will incorporate a color readiness capability and will include a miniaturized high-speed electronic camera to assure compatibility with multiple air platforms. DRS HADLAND. DRS Hadland designs, manufactures and markets products for ultra high-speed image capture and analysis. Products include a comprehensive range of equipment for the visual analysis of events lasting from hundreds of femtoseconds to milliseconds. Many of these systems are used for multiple applications by international military forces, ballistic test ranges, university and other research institutes, laboratories and large corporations. DRS Hadland also integrates airborne monitors and Computer-Controlled Device (CCD) cameras with airborne video tape recording devices from DRS Precision Echo, Inc., another DRS subsidiary. DRS Hadland products include: o Framing Cameras: Framing cameras have the ability to take a sequence of pictures at the same location at very high speeds. These cameras are designed to produce images at equivalent speeds of several million pictures per second, although in practice 4-8 frames are taken. Framing cameras are used primarily for research in the areas of electrical breakdown/discharge, ballistics, detonics and combustion. o Electronic Ballistic Range Cameras: These cameras use digital imaging to capture a single picture of a projectile in flight. Slower than framing cameras but with better resolution, these cameras are used in the development and proof testing of ballistics. o Streak Cameras: These cameras are designed to capture images of quick events analyzed over a very short, continuous period. Faster than framing or range cameras, streak cameras are used to produce continuous cross section images in one dimension, rather than full images, and are used for applications such as laser development and testing. FLIGHT SAFETY AND COMMUNICATIONS GROUP FSCG consists of DRS Flight Safety and Communications, with locations in Carleton Place and Nepean, Ontario, Canada, DRS Technologies (UK) Ltd., located in Hayes, Middlesex, the United Kingdom, and DRS Precision Echo, Inc. (DRS Precision Echo), located in Santa Clara, California. FSCG is a leading manufacturer of deployable flight emergency or "black box" recording equipment. These complete emergency avionics systems combine the functionality of a crash locator beacon with a flight incident recorder for search, recovery and crash analysis. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture and recording products, as well as high- 7 capacity data storage devices for harsh aerospace and defense environments. FSCG also manufactures shipboard communications and infrared laser warning and range finder displays for Canadian and other foreign navies. DRS FLIGHT SAFETY AND COMMUNICATIONS. DRS Flight Safety and Communications' major products and services include: o Emergency Avionics System 3000 (EAS3000): The EAS3000 is an integrated in-flight data recorder, cockpit voice recorder and emergency locator beacon system constructed in a modular, deployable and crash-survivable package, designed to withstand intensive destructive forces. Mounted on the outside of a helicopter, the EAS3000 provides the immediate location of an accident site, allowing early rescue of survivors and recovery of vital flight and cockpit voice data. DRS Flight Safety and Communications provides the EAS3000 for use on UK EH-101 helicopters and its variants, as well as on the Italian MMI, Canadian Cormorant, Tokyo Metropolitan Police and other military and search and rescue helicopters. DRS Flight Safety and Communications also developed a version of the EAS3000, known as EAS3000F, for use on fixed-wing aircraft. o Deployable Flight Incident Recorders: Designed to withstand the intense destructive forces associated with an aircraft crash, deployable flight incident recorders are mounted beneath the airframe skin. Deployment commands provided by switch activation trigger release of the unit and activation of the recorder. These systems also contain crash locator beacons. They have been installed successfully on fighter aircraft, such as the German Tornado and the U.S. Navy F/A-18 Hornet, and are used to record both flight and voice data. o Aircraft Crash Locator Beacons: Consisting of a composite airfoil which encloses a radio transmitter and power source, crash locator beacons are designed to deploy and activate either before or upon impact. Used primarily on fixed-wing military aircraft, these crash position locators enable the rapid location of downed aircraft and timely rescue of survivors. o Integrated Shipboard Communications Systems: Using the latest available technology and COTS-based designs, FSCG produces integrated digital shipboard communications systems which provide single-button access to tactical interior, exterior and secured channels for joint operations. These Shipboard Integrated Communications (SHINCOM) systems improve communication efficiency by eliminating the need for multiple single-purpose communications systems, thus providing a comprehensive system solution. FSCG's SHINCOM systems are capable of handling shipboard interior communications; communications with other aircraft, surface and undersea vessels; and UHF/VHF and broadband communications via satellite with shore stations and cooperating units. These systems are used aboard the Canadian Iroquois class ships, the U.S.S. George Washington aircraft carrier and are being manufactured for the Armada of Venezuela under a contract with Ingalls Shipbuilding. o Electronic Manufacturing and Systems Integration Services: FSCG is an experienced provider of manufacturing, test and product support services and performs contract manufacturing services for various aerospace, military and space applications. FSCG's manufacturing expertise and capabilities include: o surface mount and through-hole multi-layer computer circuit assemblies (CCAs); o harness fabrication; o power supply assembly and testing; o motherboard assembly and testing; and o systems integration services. DRS TECHNOLOGIES (UK) LTD. DRS Technologies (U.K.) Ltd. provides emergency avionics and flight recorders to international military customers. DRS PRECISION ECHO. DRS Precision Echo designs and manufactures a variety of COTS digital, analog and video recording systems used for military applications, including reconnaissance, antisubmarine warfare (ASW) and other information warfare data storage requirements. DRS Precision Echo is a leading U.S. manufacturer of 8 Hi-8 millimeter military recorders supplied to the U.S. and international armed forces. DRS Precision Echo's products include: o WRR-818: This ruggedized airborne video recorder captures various sensor and video data on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10A aircraft. The U.S. Army also has selected it for use in its Kiowa Warrior attack helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's Light Armored Reconnaissance Vehicles. o DCMR-24 and 100. These are digital cassette mission recorders that use high-capacity digital tape formats under license by Sony Corporation. DRS Precision Echo produces the DCMR-24 for U.S. Navy P-3C patrol aircraft. DRS Precision Echo also provides a line of high-capacity digital tape drives and automated library systems for the archiving and back-up of very large amounts of digital data, ranging from 378 gigabytes to 2.6 petabytes of uncompressed data. DATA SYSTEMS GROUP DSG consists of DRS Ahead Technology, Inc. (DRS Ahead), with locations in San Jose, California, Plymouth, Minnesota, St. Croix Falls, Wisconsin, and Razlog, Bulgaria. DRS Ahead manufactures burnish, glide, test and certification 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, the company specializes in the manufacture and refurbishment of broadcast video and audio heads, heads used in commercial flight data recorders and in a variety of industries for reading, writing and verifying data on magnetic cards, tapes and inks. CUSTOMERS We sell a significant portion of our products to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or their subcontractors. Approximately 78%, 74% and 71% of total consolidated revenues for fiscal 1999, 1998 and 1997, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies. See "Foreign Operations and Export Sales" below for information concerning sales to foreign governments. BACKLOG The following table sets forth our backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated. "Backlog" refers to the aggregate revenues remaining to be earned at a specified date under contracts held by us, including, for U.S. Government contracts, the extent of the funded amounts thereunder which have been appropriated by Congress and allotted to the contract by the procuring Government agency. Backlog also includes all firm orders for commercial products. Fluctuations in backlog generally relate to the timing and amount of defense contract awards. 9 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 -------------- -------------- -------------- Government Products: U.S. Government............ $293,300,000 $141,500,000 $ 85,900,000 Foreign Government......... 48,400,000 24,900,000 23,000,000 ------------ ------------- ------------- 341,700,000 166,400,000 108,900,000 Commercial Products.......... 24,100,000 11,000,000 9,500,000 ------------ ------------- ------------- $365,800,000 $177,400,000 $118,400,000 ============ ============ ============ At March 31, 1999, our backlog of orders was approximately $365.8 million compared with $177.4 million at March 31, 1998. The increase in backlog was due primarily to $140.4 million of acquired backlog from the acquisition of NAI and the Raytheon electro-optical businesses. New contract awards of approximately $322.3 million were booked during the fiscal year ended March 31, 1999. Approximately 66% of backlog as of March 31, 1999 is expected to result in revenues during fiscal 2000. RESEARCH AND DEVELOPMENT The defense electronics sector is subject to rapid technological changes, and the our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, our technological expertise is an important factor affecting our growth. A portion of our research and development activities take place in connection with customer-sponsored research and development contracts. We recorded revenues for customer-sponsored research and development of approximately $15,400,000, $11,800,000 and $13,000,000 for fiscal 1999, 1998 and 1997, respectively. All such customer-sponsored activities are primarily the result of contracts directly or indirectly with the U.S. Government. We also invest in internal research and development (IR&D). Such expenditures were approximately $5,200,000, $4,000,000, and $3,900,000 for fiscal 1999, 1998 and 1997, respectively. CONTRACTS Our contracts are normally for production, service or development. Production and service contracts are typically of the fixed-price variety with development contracts currently of the cost-type variety. Because of their inherent uncertainties and consequent cost overruns, historically, development contracts have been less profitable than production contracts. Fixed-price contracts may provide for a firm fixed price or they may be fixed-price incentive contracts. Under the firm fixed-price contracts, we agree to perform for an agreed-upon price. Accordingly, we derive benefits from cost savings, but bear the risk of cost overruns. Under the fixed-price incentive contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts, the savings are apportioned between the customer and us. If actual costs under such a contract exceed estimated costs, however, excess costs are apportioned between the customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if any. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which we are committed to deliver without regard to performance cost, cost-type contracts normally obligate us to use our best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of our reduced risk. Under cost-plus-incentive-fee contracts, the incentive may be based on cost or performance. When the incentive is based on cost, the contract specifies that we are reimbursed for allowable incurred costs plus a fee adjusted by a formula based on the ratio of total allowable costs to target cost. Target cost, target fee, minimum and maximum fee and adjustment formulae are agreed upon when the contract is negotiated. In the case of performance-based incentives, we are reimbursed for allowable incurred costs plus an incentive, contingent upon meeting or surpassing stated performance targets. The contract provides for increases in the fee to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. In some instances, incentive contracts also may include a combination of both cost and performance incentives. Under cost-plus-fixed-fee contracts, we are reimbursed for costs and receive a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. 10 The percentages of revenues during fiscal 1999, 1998 and 1997 attributable to our contracts by contract type were as follows: FISCAL YEARS ENDED MARCH 31, ---------------------------- 1999 1998 1997 ------ ------ ------ Firm fixed-price................... 84% 85% 85% Cost-plus-incentive fee............ 2% 4% 5% Cost-plus-fixed fee................ 14% 11% 10% The consistent percentage and continued predominance of firm fixed-price contracts are reflective of the fact that production contracts comprise a significant portion of our U.S. Government contract portfolio. We negotiate for and generally receive progress payments from our customers of between 75-90% of allowable costs incurred on the previously described contracts. Included in our reported revenues are certain amounts which we have not billed to customers. These amounts, approximately $14.8 million, $7.6 million, and $3.8 million as of March 31, 1999, 1998 and 1997, respectively, consist of costs and related profits, if any, in excess of progress payments for contracts on which sales are recognized on a percentage-of-completion basis. Under generally accepted accounting principles, all U.S. Government contract costs, including applicable general and administrative expenses, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations (FAR), incorporated by reference in U.S. Government contracts, provide that internal research and development costs are allowable general and administrative expenses. To the extent that general and administrative expenses are included in inventory, research and development costs also are included. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. Government contracts. Work-in-process inventory included general and administrative costs (which include internal research and development costs) of $13.6 million and $9.9 million at March 31, 1999 and 1998, respectively. Our defense contracts and subcontracts are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. Multiyear U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. COMPETITION Our products are sold in markets containing competitors which are substantially larger than we are, devote substantially greater resources to research and development and generally have greater financial resources. Certain competitors are also our customers and suppliers. The extent of competition for any single project generally varies according to the complexity of the product and the dollar volume of the anticipated award. We believe that we compete on the basis of the performance of our products, our reputation for prompt and responsive contract performance, and our accumulated technical knowledge and expertise. Our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, we compete with large and mid-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. As the size of the overall defense industry has decreased in recent years, the number of consolidations and mergers of defense suppliers has increased. We expect this consolidation trend to continue. As the industry consolidates, the large defense contractors are narrowing their supplier base and awarding increasing portions of projects to strategic mid- and lower-tier suppliers, and, in the process, are becoming oriented more toward system integration and assembly. Management believes that we have benefited from this trend, as evidenced by the formation of strategic alliances with several large suppliers. 11 PATENTS AND LICENSES We have patents on certain of our commercial and data recording products semi-conductor devices, rugged computer related items, and electro-optical and focal plane array products. DRS and its subsidiaries have certain registered trademarks, none of which are considered significant to current operations. We believe our patent position and intellectual property portfolio, in the aggregate, is valuable to our operations. We do not believe that the conduct of our business as a whole is materially dependent on any single patent, trademark or copyright. MANUFACTURING AND SUPPLIERS Our manufacturing processes for our products, excluding certain electro-optical products, includes the assembly of purchased components and testing of products at various stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors, silicon wafers and other conductive materials, insulated wire and cables. In addition, many of our products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components are fabricated to our designs and specifications. The manufacturing process for certain of our optics products includes the grinding, polishing and coating of various optical materials and the machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are our sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. We have not experienced significant production delays attributable to supply shortages, but occasionally experienced quality and other related problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to our optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. FOREIGN OPERATIONS AND EXPORT SALES We currently sell several of our products and services in the international marketplace to Canada, Israel, the Republic of China, Spain, Australia, and other countries in Europe, Scandinavia, and Southeast Asia. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. Our foreign contracts generally are payable in United States dollars. Export sales accounted for 10% or less of total revenues in the fiscal years ended March 31, 1998 and 1997. We operate outside the United States through FSCG, in Canada and the United Kingdom, and through ESG and EOSG primarily in the United Kingdom. The information required by this item with respect to revenues and long-lived assets by geographic area is incorporated by reference herein to page 49 of the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999). The addition of international businesses involves additional risks for us, such as exposure to currency fluctuations, future investment obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely different legal systems, customs and practices in foreign countries. 12 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The names of our executive officers, their positions and offices with us, and their ages are set forth below: NAME AGE POSITION - ---- --- -------- Mark S. Newman............. 49 Chairman of the Board, President and Chief Executive Officer Paul G. Casner, Jr......... 61 Executive Vice President, Operations Nina Laserson Dunn......... 52 Executive Vice President, General Counsel and Secretary Richard Ross............... 45 Vice President; President of DRS Electro-Optical Systems Group Richard A. Schneider....... 46 Executive Vice President, Chief Financial Officer and Treasurer MARK S. NEWMAN has been employed by us since 1973. He was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of DRS in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of DRS and in August 1995 became Chairman of the Board. PAUL G. CASNER, JR. joined DRS in 1993 as President of Technology Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he became President of the DRS Electronic Systems Group and a Vice President of DRS. In 1998, he became our Executive Vice President, Operations. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. NINA LASERSON DUNN joined us as Executive Vice President, General Counsel and Secretary in July 1997. Prior to joining DRS, Ms. Dunn was a director in the corporate law department of Hannoch Weisman, a Professional Corporation, where she served as our outside legal counsel. Ms. Dunn is admitted to practice law in New York and New Jersey and is a member of the American, New York State and New Jersey State Bar Associations. RICHARD ROSS joined us as Assistant Vice President and Director of Sales in 1986 and became Assistant Vice President, Corporate Development in 1987. In 1988, he became a Vice President of DRS, and in 1990, he became President of DRS Photronics, Inc. Mr. Ross also serves as President of the DRS Electro-Optical Systems Group. RICHARD A. SCHNEIDER joined us in 1999 as Executive Vice President, Chief Financial Officer and Treasurer of DRS. He held similar positions at NAI and was a member of its Board of Directors prior to its acquisition by DRS in February 1999. Mr. Schneider has over 20 years of experience in corporate financial management, including ten years with NAI. EMPLOYEES At March 31, 1999, we had approximately 2,180 employees, 1,503 of which were located in the United States. None of our employees are represented by labor unions, and we have experienced no work stoppages. There is a continuing demand for qualified technical personnel, and we believe that its future growth and success will depend upon its ability to attract, train and retain such personnel. 13 ITEM 2. PROPERTIES We lease the following properties:
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE EXPIRATION ---------------------------- -------------------------- -------------------- ---------------- ----------------- CORPORATE DRS Technologies, Inc. Parsippany, New Jersey Corporate 10,800 Fiscal 2003 Headquarters ESG DRS Electronic Systems, Inc. Gaithersburg, Maryland Administrative, 45,500 Fiscal 2006 Engineering and Manufacturing DRS Electronic Systems, Inc. Arlington, Virginia Administrative and 2,000 Fiscal 2002 Marketing DRS Laurel Technologies Johnstown, Pennsylvania Administrative and 38,000 Fiscal 2004 Manufacturing DRS Laurel Technologies Davidsville, Manufacturing 65,800 Fiscal 2000 Pennsylvania DRS Technical Services, Inc. San Diego, California Engineering 5,000 Fiscal 2000 Support Services DRS Technical Services Chesapeake, Virginia Field Service and 22,000 Fiscal 2005 Engineering Support DRS Advanced Programs, Inc. Columbia, Maryland Administrative, 25,000 Fiscal 2002 Engineering and Manufacturing DRS Rugged Systems Farnham, Surrey, Administrative, 26,000 Fiscal 2015 (Europe) Ltd. United Kingdom Engineering and Manufacturing DRS Rugged Systems Gateshead, Newcastle, Administrative 500 Fiscal 2001 (Europe) Ltd. United Kingdom DRS Rugged Systems Fyshwick, Australia Sales 1,200 Fiscal 2000 (Australia) PTY. Ltd. DRS Rugged Systems, Inc. Longmont, Colorado Administrative, 43,300 Fiscal 2005 Engineering and Manufacturing EOSG DRS Photronics, Inc. Oakland, New Jersey Administrative and 25,400 Fiscal 2003 Engineering DRS Photronics, Inc. Oakland, New Jersey Administrative and 36,000 Fiscal 2003 Manufacturing DRS Optronics, Inc. Palm Bay, Florida Administrative, 85,200 Fiscal 2006 Engineering and Manufacturing DRS Hadland, Inc. Cupertino, California Sales and Field 1,200 Fiscal 2000 Service DRS Hadland GmbH Munich, Germany Sales and Field 200 (1) Service
- ---------- (1) Lease has no set expiration date. Three months notice is required to terminate lease. 14
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE EXPIRATION ---------------------------- -------------------------- -------------------- ---------------- ----------------- DRS Hadland Ltd. Tring, Hertfordshire, Storage 2,000 Fiscal 2000 United Kingdom DRS Infrared Technologies, Dallas, Texas Administrative, 109,600 Fiscal 2003 LP Engineering and Manufacturing DRS Sensor Systems, Inc. El Segundo, California Administrative, 17,400 Fiscal 2000 Engineering and Manufacturing DSG 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, Administrative and 20,000 Fiscal 2000 Wisconsin Manufacturing FSCG DRS Flight Safety and Nepean, Ontario, Administrative and 8,000 Fiscal 2004 Communications Canada Engineering DRS Precision Echo, Inc. Santa Clara, California Administrative, 32,700 Fiscal 2006 Engineering and Manufacturing DRS Technologies (UK) Ltd. Hayes, Middlesex, Administrative and 6,800 Fiscal 2001 United Kingdom Manufacturing
On October 20, 1998, upon the closing of the acquisition of the electro-optical businesses of Raytheon, DRS Sensor Systems entered into a lease agreement for approximately 17,400 square feet of space partitioned from the Raytheon facility in El Segundo, California, and DRS Infra-Red entered into two sub-lease agreements for Raytheon facilities in Dallas, Texas for (1) a stand-alone 48,000 square foot research facility and (2) a partition measuring 61,600 square feet of a neighboring Texas Instruments building. DRS Sensor Systems is currently in the process of relocating to its newly leased facility in Torrance, California. During July 1998, in connection with the expiration of the lease for the Kanata, Ontario, Canada facility, FSCG relocated a substantial portion of the Kanata operations to its facility in Carleton Place, Ontario, Canada and the remainder to a leased facility in Nepean, Ontario, Canada. We lease the building in Oakland, New Jersey from LDR Realty Co., a partnership established by the co-founders of DRS. We believe that this lease was consummated on terms no less favorable than those that could have been obtained by us from an unrelated third party in a transaction negotiated on an arms-length basis. We own the following properties:
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE ---------------------------- -------------------------- -------------------- ------------------- DSG DRS Ahead Technology, Inc. Razlog, Bulgaria Manufacturing 64,100
15
SUBSIDIARY APPROXIMATE OR SQUARE DIVISION LOCATION ACTIVITIES FOOTAGE ---------------------------- -------------------------- -------------------- ------------------- EOSG DRS Hadland Ltd. Tring, Hertfordshire, Administrative, 7,500 United Kingdom Engineering and Manufacturing FSCG DRS Flight Safety and Carleton Place, Ontario, Administrative and 128,500 Communications Canada Manufacturing
We believe that all our facilities are in good condition, adequate for our intended use and sufficient for our immediate needs. It is not certain whether we will negotiate new leases as existing leases expire. Such determinations will be made as existing leases approach expiration and will be based on an assessment of our requirements at that time. Further, we believe that we can obtain additional space, if necessary, based on prior experience and current real estate market conditions. Substantially all of our assets, including those properties identified above, are pledged as collateral on our borrowings (see Note 7 of Notes to Consolidated Financial Statements). ENVIRONMENTAL PROTECTION We believe that our manufacturing operations and properties are, in all material respects, in compliance with existing federal, state and local provisions enacted or adopted to regulate the discharge of materials into the environment or otherwise protect the environment. Such compliance has been achieved without material effect on our earnings or competitive position. ITEM 3. LEGAL PROCEEDINGS We are a party to various legal actions and claims arising in the ordinary course of our business. In our opinion, we have adequate legal defenses for each of the actions and claims and we believe that their ultimate disposition will not have a material adverse effect on our consolidated financial position or results of operations. In the first quarter of fiscal 1999, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to certain equipment manufactured by DRS Photronics. These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee is dismissed without prejudice. To date, no claim has been made or threatened against the Company or DRS Phototronics. DRS Phototronics is currently unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. At this time, the Company is unable to quantify the effect of the delayed shipments on its future results of operations or financial position, or to predict when such shipments ultimately will be made, although the delays are expected to impact fiscal 2000 first quarter results. We are presently involved in a dispute in arbitration with Spar Aerospace Limited ("Spar") with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar (see Note 2 of Notes to Consolidated Financial Statements.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 11, 1999 at a special meeting, DRS stockholders approved the merger of NAI Technologies, Inc. with and into a wholly-owned subsidiary of DRS. There were 4,202,205 votes in favor of the merger, 32,500 votes against, and 7,107 abstentions. The merger successfully was consummated on February 19, 1999. At the same meeting, the stockholders approved an amendment to our 1996 Omnibus Plan to increase the number of shares of our Common Stock reserved for issuance under this Plan by 900,000 shares, for an aggregate of 1,400,000. There were 3,989,677 votes in favor of the Plan amendment, 232,318 votes against and 19,817 abstentions. No other matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1999. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We have not paid any cash dividends since 1976. We intend to retain future earnings for use in our business and do not expect to declare cash dividends on our Common Stock in the foreseeable future. The indenture relating to the our 9% Senior Subordinated Convertible Debentures and our bank lines of credit restrict our ability to pay dividends or make other distributions on our Common Stock. See Note 7 of Notes to Consolidated Financial Statements for information concerning restrictions on the declaration or payment of dividends. Any future declaration of dividends will be subject to the discretion of our Board of Directors. The timing, amount and form of any future dividends will depend, among other things, on our results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by our Board of Directors. The information required by this item with respect to the market prices for and number of holders of our common equity securities is incorporated herein by reference to page 50 of the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999). ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference herein to page 20 of the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999). ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference herein to pages 21 through 31 of the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risks relating to fluctuations in interest rates and foreign currency exchange risk. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. INTEREST RATE RISK As the Company seeks debt financing to maintain its ongoing operations and sustain its growth, it is exposed to interest rate risk. Borrowings under the Company's $150 million secured credit facility with Mellon Bank, N.A are sensitive to changes in interest rates as such borrowings bear interest at variable rates. In January 1998, the Company entered into an interest rate collar agreement (expiring on January 8, 2001) to limit the impact of interest rate fluctuations on cash flow and interest expense. As of March 31, 1999 approximately $6.6 million of the Company's $101.5 million of interest rate sensitive obligations outstanding have been limited to the "ceiling" rate of 5.75% and the "floor" rate 4.77%. FOREIGN CURRENCY EXCHANGE RISK DRS operates and conducts business in foreign countries and as a result is exposed to movements in foreign currency exchange rates. More specifically, our net equity is impacted by the conversion of the net assets of foreign subsidiaries for which the functional currency is not the U.S. Dollar for U.S. reporting purposes. The Company's exposure to foreign currency exchange risk related to its foreign operations is not material to the Company's results of operations, cash flows or financial position. The Company, at present, does not hedge this risk but continues to evaluate such foreign currency translation risk exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference herein to pages 32 through 50 of the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 PART III The information required by Items 10. through 13. of this Part is incorporated herein by reference to our Definitive Proxy Statement, dated June 28, 1999, for the 1999 Annual Meeting of Stockholders. Reference also is made to the information under "Executive Officers of the Registrant" in Part I of this report. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. Financial Statements The following financial statements of DRS and its subsidiaries have been incorporated by reference to the DRS 1999 Annual Report (for the fiscal year ended March 31, 1999), pursuant to Item 8 of this report:
1999 ANNUAL REPORT PAGE(S) ------------------ ------- Independent Auditors' Report 51 Consolidated Balance Sheets--March 31, 1999 and 1998 32 Consolidated Statements of Earnings--Years Ended March 31, 1999, 1998 and 1997 33 Consolidated Statements of Stockholders' Equity and Comprehensive Earnings--Years Ended March 31, 1999, 1998 and 1997 34 Consolidated Statements of Cash Flows--Years Ended March 31, 1999, 1998 and 1997 35 Notes to Consolidated Financial Statements 36-50
2. Financial Statement Schedules See Appendix A hereto. 3. Exhibits filed as part of this report are listed in the Exhibit Index at the end of this report. (b) Reports on Form 8-K 1. Filed as of January 4, 1999; Amendment No. 1 to Current Report on Form 8-K dated November 4, 1998, containing financial statements of assets to be acquired and liabilities to be assumed pursuant to the Company's acquisition of certain assets of the Second Generation Ground-Based Electro-Optical and Focal Plane Array businesses of Raytheon Company. 2. Filed as of January 6, 1999; Amendment No. 2 to Current Report on Form 8-K dated November 4, 1998, containing consent of independent auditors. 3. Filed as of March 5, 1999; Current Report on Form 8-K, describing the Company's acquisition of NAI Technologies, Inc. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DRS TECHNOLOGIES, INC. Dated: June 29, 1999 /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 29, 1999 - -------------------------------------- Chief Executive Officer and Director Mark S. Newman /s/ RICHARD A. SCHNEIDER Executive Vice President, Chief June 29, 1999 - -------------------------------------- Financial Officer and Treasurer Richard A. Schneider /s/ IRA ALBOM Director June 29, 1999 - -------------------------------------- Ira Albom /s/ DONALD C. FRASER Director June 29, 1999 - -------------------------------------- Donald C. Fraser /s/ WILLIAM F. HEITMANN Director June 29, 1999 - -------------------------------------- William F. Heitmann /s/ STEVEN S. HONIGMAN Director June 29, 1999 - -------------------------------------- Steven S. Honigman /s/ MARK N. KAPLAN Director June 29, 1999 - -------------------------------------- Mark N. Kaplan /s/ C. SHELTON JAMES Director June 29, 1999 - -------------------------------------- C. Shelton James /s/ STUART F. PLATT Director June 29, 1999 - -------------------------------------- Stuart F. Platt /s/ ERIC J. ROSEN Director June 29, 1999 - -------------------------------------- Eric J. Rosen
20 APPENDIX A DRS TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX Independent Auditors' Report Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts All other financial statement schedules have been omitted because they are either not required, not applicable or the required information is shown in the consolidated financial statements or the notes thereto. INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders, DRS Technologies, Inc.: Under date of May 11, 1999, we reported on the consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended March 31, 1999, as contained in the 1999 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 1999. 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 LLP Short Hills, New Jersey May 11, 1999 21 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1999, 1998 AND 1997
COL. A COL. B COL. C COL. D COL. E ADDITIONS (A) DEDUCTIONS (B) --------------------------- --------------------------- (1) (2) (1) (2) CHARGED TO CREDITED TO BALANCE AT CHARGED TO OTHER CREDITED TO OTHER BALANCE AT BEGINNING OF COSTS ACCOUNTS-- COSTS ACCOUNTS-- END OF DESCRIPTION PERIOD AND EXPENSES DESCRIBE AND EXPENSES DESCRIBE PERIOD ----------- ------------ ------------ ---------- ------------ ---------- ---------- INVENTORY RESERVE Year ended March 31, 1999 $1,695,000 $3,484,000 $ 440,000(c) $1,461,000 $ 797,000(d) $3,361,000 Year ended March 31, 1998 $ 741,000 $ 664,000 $ 988,000(c) $ 532,000 $ 166,000(d) $1,695,000 Year ended March 31, 1997 $1,069,000 $ 44,000 $2,166,000(c) $ 400,000 $2,138,000(d) $ 741,000 LOSSES & FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS Year ended March 31, 1999 $4,120,000 $2,717,000 $5,784,000(c) $1,197,000 $3,305,000(e) $8,119,000 Year ended March 31, 1998 $2,204,000 $4,834,000 $ 166,000(c) $2,346,000 $ 738,000(e) $4,120,000 Year ended March 31, 1997 $3,850,000 $1,564,000 $ 16,000(c) $1,060,000 $2,166,000(e) $2,204,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended March 31, 1999 $ 486,000 $ 564,000 $ 258,000(c) $ 48,000 $ 6,000(d) $1,254,000 Year ended March 31, 1998 $ 136,000 $ 313,000 $ 71,000(c) $ 34,000 $ -- $ 486,000 Year ended March 31, 1997 $ 136,000 $ -- $ -- $ -- $ -- $ 136,000
- ---------------------- (a) Represents, on a full-year basis, net credits to reserve accounts. (b) Represents, on a full-year basis, net charges to reserve accounts. (c) Represents amounts reclassified from related reserve accounts. (d) Represents amounts utilized and credited to related asset accounts. (e) Represents amounts reclassified to related reserve accounts. 22 EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*) are filed herewith. Certain of the following exhibits, designated with a "P", are being filed on paper, pursuant to a hardship exemption under Rule 202 of Regulation S-T. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits. EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 -- Restated Certificate of Incorporation of the Company [Registration Statement No. 2-70062-NY, Amendment No. 1, Exhibit 2(a)] 3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation of the Company, as filed July 7, 1983 [Registration Statement on Form 8-A of the Company, dated July 13, 1983, Exhibit 2.2] 3.3 -- Composite copy of the Restated Certificate of Incorporation of the Company, as amended [Registration Statement No. 2-85238, Exhibit 3.3] 3.4 -- Amended and Restated Certificate of Incorporation of the Company, as filed April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.4] 3.5 -- By-laws of the Company, as amended to November 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 -- Certificate of Amendment of the Certificate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 -- Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] 3.8 -- Amended and Restated By-Laws of the Company, as of April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.8] 4.1 -- Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee, in respect of the Company's 9% Senior Subordinated Convertible Debentures Due 2003 [Registration Statement No. 33-64641, Amendment No. 1, Exhibit 4.1] 4.2 -- Form of 9% Senior Subordinated Convertible Debenture Due 2003 (included as part of Exhibit 4.1) [Registration Statement No. 33-64641, Amendment No. 1, Exhibit 4.2] 4.3 -- Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P. [Registration Statement No. 33-64641, Amendment No. 1, Exhibit 4.3] 10.1 -- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.2 -- 1996 Omnibus Plan of the Company [Registration Statement No. 333-14487, Exhbit 99.1] 10.3 -- Joint Venture Agreement, dated as of November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] 10.4 -- Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 -- Partnership Agreement, dated December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 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)] 23 EXHIBIT NO. DESCRIPTION - ----------- ----------- 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] 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 -- 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] 10.22 -- 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] 10.23 -- 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] 10.24 -- 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] 24 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.25 -- 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] 10.26 -- 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] 10.27 -- 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] 10.28 -- 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] 10.29 -- 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] 10.30 -- 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] 10.31 -- 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] 10.32 -- 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] 10.33 -- 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] 10.34 -- 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] 10.35 -- Asset Purchase Agreement, dated June 17, 1996, by and among Vikron, Inc., Northland Aluminum, Inc., Ahead Wisconsin Acquisition Corporation, a third-tier subsidiary of the Company, and Ahead Technology, Inc., a second-tier subsidiary of the Company [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.99] 10.36 -- Agreement and Plan of Merger, dated September 30, 1996, by and among PTI Acquisition Corp., a subsidiary of the Company, Pacific Technologies, Inc., David A. Leedom, Karen A. Mason, Robert T. Miller, Carl S. Ito and Barry S. Kindig [Form 10-K, fiscal year ended March 31, 1997, File No. 1-8533, Exhibit 10.101] 10.37 -- Asset Purchase Agreement, dated October 22, 1996, by and among Ahead Technology, Inc., a second-tier subsidiary of the Company, Nortronics Acquisition Corporation, a third-tier subsidiary of the Company, Nortronics Company, Inc., Alan Kronfeld, Thomas Philipich and Robert Liston [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.102] 10.38 -- Purchase Agreement, dated as of September 19, 1997, between DRS Technologies, Inc. and Spar Aerospace Limited. [Form 8-K, October 27, 1997, File No. 1-8533, Exhibit 1] 10.39 -- Asset Purchase Agreement, dated July 28, 1998, by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 1] 25 EXHIBIT NO. DESCRIPTION 10.40 -- Letter Amendment by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., dated October 20, 1998, amending the Asset Purchase Agreement. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 2] 10.41 -- Amended and Restated Revolving Credit Loan and Term Loan Agreement, dated October 20, 1998, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS EO, Inc., DRS FPA, L.P. and Mellon Bank, N.A. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 3] 10.42 -- Agreement and Plan of Merger dated August 26, 1998, as amended, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1, Exhibit 2.1]). 10.43 -- Amendment to Agreement and Plan of Merger, dated February 17, 1999, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Form 8-K, March 5, 1999, File No. 1-8533, Exhibit 2] 10.44 -- 1991 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.4] 10.45 -- 1993 Stock Option Plan for Directors of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.5] 10.46 -- 1996 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.6] 10.47* -- Employment Agreement, dated as of November 20, 1996, by and between the Company and Mark S. Newman 10.48* -- Employment Agreement, dated as of April 30, 1997, by and between the Company and Nina Laserson Dunn 10.49* -- Employment Agreement, dated as of February 19, 1999, by and between the Company and Richard A. Schneider 10.50[P]-- Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10-K, fiscal year ended March 31, 1995, 1995, File No. 1-8533, Exhibit 10.37] 10.51[P]-- Purchase Order No. 10606321 1, dated October 28, 1998, between the Company and Raytheon TI Systems, Inc. 10.52[P]-- Contract DAAH01-97-C-0390, dated September 24, 1997, between Hughes Georgia, Inc. and the U.S. Army 10.53[P]-- Modification P00001, dated January 16, 1998, to Contract DAAH01-97-C-0390 10.54[P]-- Modification P00008, dated October 30, 1998, to Contract DAAH01-97-C-0390 10.55[P]-- Contract DAAB07-97-C-J430, dated April 1, 1997, between Hughes Aircraft Co. and the U.S. Army 10.56[P]-- Modification P00037, dated March 31, 1999, to Contract DAAB07-97-C-J430 *13 -- Portions of the 1999 Annual Report to Stockholders of the Company *21 -- List of subsidiaries of the Company as of March 31, 1999 *23.1 -- Consent of KPMG LLP *27 -- Financial Data Schedule 26 EX-10.47 2 AGREEMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 20th day of November, 1996, by and between DIAGNOSTIC RETRIEVAL SYSTEMS. INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan Way, Parsippany, New Jersey and Mark S. Newman (the "Executive"), currently residing at 191 Campbell Road, Far Hills, New Jersey 07931. WHEREAS, the Executive desires to enter into an agreement of employment with the Company in accordance with the terms and conditions set forth herein: and WHEREAS, the Company desires to continue to employ the Executive as Its Chairman of the Board, President and Chief Executive Officer in accordance with the terms and conditions set forth herein; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Term of Employment. This Agreement shall be effective from the date first above written (the "Effective Date") and its initial term shall continue in effect until the third anniversary of the Effective Date (such period being the "Initial Term"). On November 2Oth of each year, beginning on November 20, 1998, this Agreement shall automatically be renewed for successive two year periods, unless at least ninety (90) days prior to the end of each renewal date either party hereto gives written notice to the other party of its intention not to renew this Agreement and, as provided below, shall remain in effect following a Change in Control. This Agreement may be terminated at any time during its initial term or during any renewal term solely in accordance with the terms and conditions of Section 5 hereof. 2. Duties. 2.1 Position. The Company hereby employs the Executive in a professional capacity with the title of Chairman of the Board, President and Chief Executive Officer of the Company, and the Executive hereby accepts such employment and undertakes and agrees to serve in such capacities. In such capacities, the Executive shall have such powers, perform such duties and fulfill such responsibilities typically associated with such positions in other publicly-held companies, including, without limitation, planning, supervision and control of the operations and financial affairs of the Company, management and direction of the Company's operating divisions, and such other general powers and duties of an operational or supervisory nature usually vested in the offices held by him. In addition. subject to his election by the stockholders of the Company, the Executive shall serve on the Company's Board of Directors as Chairman of the Board. Performance of his duties hereunder shall in no event require that the Executive, work on a regular basis at any location other than within twenty (2O) miles of his present office location; provided, however, that if Executive initiates a relocation of his present office, such shall be deemed 1 a consent to performance of his duties in such location. The Executive shall devote substantially all of his working time and efforts to the performance of his duties hereunder. The Executive shall report directly to the Board of Directors of the Company, and shall have the authority to hire and discharge any employee or independent contractor of the Company or its affiliates. 2.2 Limitation on Other Employment. During the term of his employment hereunder, the Executive will not engage in any other occupation for gain, profit or pecuniary advantage without the consent of the Board of Directors of the Company; provided, however, that this limitation shall not be construed as preventing him from (a) serving on the board of directors of any corporation not directly competitive with the Company (provided that Executive has informed the Board of Directors of the Company of his intention to so serve and that the Board of Directors of the Company has not objected thereto within twenty days of its receipt of Executives notice), and (b) investing or trading in securities or other forms of investment, in each case so long as such activities do not materially interfere with the performance of his duties hereunder and such investments do not represent the ownership of 5% or more of the capital stock of publicly traded entities. 3. Compensation. 3.1 Base Salary. In consideration of the services rendered hereunder, the Company shall pay the Executive during the Initial Term of this Agreement a base salary at the rate of THREE HUNDRED TWENTY THOUSAND DOLLARS ($320,000) per annum or at such higher rate as the Company's Board of Directors may reasonably determine ("Base Salary"), which amount will be payable to him in bi-weeklv installments (or at such intervals as other salaried employees of the Company are paid). The amount of the Executive's Base Salary shall be reviewed annually by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee"), but shall not be reduced without written consent of the Executive and shall in all events be increased annually by the percentage change in the Consumer Price index for Urban Wage Earners - New York, N.Y. - Northeastern N.J. ("CPI"). The Executive and the Company may agree on a higher Base Salary for any renewal term of this Agreement but if they do not agree by the beginning of a renewal term, the Executive's Base Salary shall be the base salary he received in the year immediately prior to the renewal term increased by the percentage change in the CPI. 3.2 Incentive Compensation. (a) To further the attainment of the Company's long-term profit and growth objectives, the Executive shall be eligible to receive an incentive bonus in all events equal to no less a percentage of the Executive's Base Salary as shall be equal to that percentage attainable by the Executive under the currently effective Incentive Compensation Plan ("ICP"). Specific annual entitlements to bonus awards shall be predicated on the Executive's performance and subject to the Company achieving its operating targets, consistent with the rules as set forth in the ICP. -2- (b) The Executive shall participate in all other Bonus, Long-Term Capital Accumulation and/or Stock-Based Programs that the Company may adopt from time to time. (c) To further provide Executive with appropriate incentive and reward to continue as Chief Executive Officer of the Company and to acquire a proprietary interest in the long-term success of the Company, the Company hereby grants, pursuant to the Company's 1996 Omnibus Plan (the "Plan"), fifty thousand (50,000) options to acquire Company Stock. These options shall be Incentive Stock Options to the extent permitted by the Plan and Non-Qualified Stock Options for the balance. The option exercise price payable shall be the Fair Market Value of a share of Company Stock. The term of the option shall be ten (10) years and shall vest, be exercisable and the Executive shall have Reload Options all as provided in Section 7 of the Plan. All capitalized terms shall have the meaning specified in the Plan. As further incentive for the Executive to pursue acquisition targets for the Company, upon the consummation of any Board approved acquisition, it is the parties intention that the Board consider appropriate compensation to Executive on a case-by-case basis. 4. Benefits. 4.1 Benefit Programs. The Executive will be included in all group insurance plans ("Insurance Plans"), retirement plans, and other benefit plans and arrangements (such retirement and other benefit plans and arrangements, together with the Insurance Plans, the "Benefit Program") available to executives of the Company, as such plans may be or have been adopted from time to time. The Company will provide to the Executive the specific benefits listed on Schedule A hereto. 4.2 Vacation. The Executive shall be entitled to five (5) weeks of vacation with pay during each twelve (12) month period of employment under this Agreement. 4.3 Automobile and Other Expenses. The Company will provide the Executive with an automobile of the type currently provided to him and the Company will pay, or reimburse him for, all business related operating expenses of such automobile without limitation, insurance, service, repairs, gasoline and oil). The Company will also reimburse the Executive for: (1) his ordinary and customary business expenses incurred in the performance of his duties hereunder, (ii) a comprehensive annual physical examination by a physician of his choice and (iii) tax planning and financial counselling by professionals of his choice up to an annual limitation of $10,000. 5. Termination. 5.1 Termination by the Company for Cause. (a) Definition. The Company may terminate the Executive's employment hereunder for "Cause" which shall be limited to: -3- (i) Gross neglect or dereliction of Executive's duties or other grave misconduct by him and the failure to cure such situation within twenty days after receipt of a notice thereof from the Board of Directors. (ii) Executive's engaging in conduct which has caused demonstrable and serious injury to the Company, monetary or otherwise, as evidenced by a written determination authorized by the Board of Directors of the Company, or (iii) Executive's conviction for or plea to a felony or for any lesser crime which involves the property of the Company. (b) Compensation upon Termination for Cause. Upon the termination of the Executive's employment for Cause, the Company shall pay the Executive his Base Salary, prorated Incentive Compensation and continued participation in the Benefit Program, through the effective date of such termination. 5.2 Termination For Disability or Death. (a) Disability. The Company may terminate the Executive's employment hereunder in the event of the Executive's permanent disability. For the purposes of this Agreement, permanent disability shall mean the Executive's inability, whether mental or physical to perform the regular duties of his employment on a full-time continuous basis for six (6) consecutive months (the "Disability Period"). If a policy of disability insurance is in effect insuring the Executive, then in no event shall Executive be deemed to be disabled until he is determined to be entitled to receive disability income payments pursuant to such disability policy. During the Disability Period, the Company shall (i) pay the Executive his full Base Salary then in effect, as well as any ICP benefit to which he would otherwise be entitled, reduced by any amounts to which he actually receives under any disability plan maintained by the Company during the Disability Period, and (ii) shall continue his participation in the Benefit Program. The Company shall notify the Executive in writing of any such finding on its part at the end of the Disability Period. If the Company and the Executive are unable to agree whether he is so disabled the question shall be decided by a panel of three physicians, one to be designated by the Company, one by the Executive and one by the first two so designated. The determination of the panel shall be final and binding upon the parties with costs of the panel to be paid by the Company. (b) Death. The Executive's employment hereunder will terminate upon the Executive's death. (c) Compensation Upon Termination For Disability or Death. (i) If the Company terminates the Executive's employment due to permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall pay the Executive his monthly Base Salary then in effect for one (1) year after his termination, reduced by any -4- amounts to which he actually receives under any disability plan maintained by the Company and shall pay the Executive when due, a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his employment during the termination year. (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2(b) herein, the Company shall pay the Executive's estate or designated beneficiary (A) the Executive's Base Salary and any other amounts due or earned through the date of death, and (B) until the end of the fiscal year in which occurred the date of death or, if greater, for three months following the date of death, the Executive's Base Salary as then in effect, and (C) a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his employment during the termination year. (iii) For purposes of determining the bonus payable in the year of termination, the Company shall pay a bonus equal to the amount of the most recent full year's bonus paid to Executive preceding the year of termination, pro-rated for the period of his employment during the termination year. (d) Benefits upon Termination for Death or Disability. (i) If the Company terminates the Executive's employment due to his permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall continue to provide him and his dependents coverage under the Insurance Plans, at his option, for the longer of Executive reaching the age of sixty-five (65) or the period required by applicable law. The Company shall provide such coverage at its expense (except with respect to those costs for which the Executive was responsible prior to the termination of employment). (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2(b) herein, the Company shall continue to provide the Executive's dependents medical insurance coverage, at their option, for the longer of one (1) year after his death, the period for which Executive's children would be considered dependents for health insurance purposes, or the period required by applicable law. The Company shall provide such coverage at its expense (except for those costs for which the Executive was responsible prior to this death). 5.3 Termination By The Executive. (a) Good Reason. The Executive may terminate his employment during the Employment Period hereunder for "Good Reason" (i) upon the failure by the Company (or its stockholders as the case may be) to elect or reelect or to appoint or reappoint the Executive as a member of the Board of Directors of the Company or to the offices of President and Chief Executive Officer of the Company or (ii) after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within twenty (20) days after written notice thereof has been given by the Executive to the Company, or (iii) upon the occurrence of any action taken by the Company -5- which would constitute a constructive termination; provided, that, in addition to and without limiting the generality of the foregoing, on and after a Change in Control (as defined in Section 5.3(c)) herein), any one of the following events shall be deemed a material breach of this Agreement; (i) the assignment to the Executive of any duties inconsistent with the Executive's then status as an executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; (iii) a reduction in the aggregate percentage upon which the Execu- tive's Incentive Compensation is determined following the Change of Control unless equivalent reductions are made generally for other executives of the Company; (iv) the relocation of Executive's principal place of employment, without his consent, to a location more than twenty (20) miles from the place of such employment immediately prior to the Change in Control; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by Executive under the Benefit Program, as in effect immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to Change in Control; (vi) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 5.6 hereof. (b) Compensation and Benefits upon Termination by The Executive. (i) In the event of a termination of this Agreement by the Executive, without Good Reason, the Company shall provide to him his Base Salary, the pro-rata portion of the bonus determined pursuant to Section corresponding to the period of his employment during the termination year and continued participation in the Benefit Program through the effective date of such termination. (ii) If the Executive terminates his employment hereunder for Good Reason. (A) if there has not occurred a Change in Control, the Company shall also pay him, as -6- liquidated damages under this Agreement, his monthly Base Salary then in effect for the balance of this Agreement then in effect, but for not less than one year plus the pro-rata portion of the bonus determined pursuant to Section 5.2(c)(iii); (B) if there has occurred a Change in Control, the Company shall pay him, as liquidated damages under this Agreement, a lump sum equal to 2.99 times the sum of his the sum of his Base Salary then in effect plus the bonus earned by him during the immediately preceding fiscal year of the Company, and (C) in either case, the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During the period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with outplacement assistance utilizing a consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. (c) Definition of Change in Control. A "Change in Control" shall mean the occurrence of the event set forth in any one of the following paragraphs: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company, outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any -7- parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by the stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 5.3(c), the following definitions shall apply: "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Act,"), as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act. 5.4 Termination by the Company other than for Cause. (a) Compensation Upon Termination by the Company other than for Cause. If the Company terminates the Executive's employment hereunder without "Cause," the Company shall pay the Executive the amounts described in 5.3(b)(ii). (b) Benefits Upon Termination by the Company other than for Cause. If the Company terminates the Executive's employment hereunder without "Cause," the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program existing prior to the termination or under any equivalent plan providing the same coverage which may be substituted for any such plan; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During this period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out-placement assistance utilizing a consultation -8- service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. 5.5. Insurance. As soon as practicable and if available on commercially reasonable terms, the Company shall purchase key man insurance sufficient to cover its severance obligations to the Executive under Sections 5.1(b), 5.3(b), and 5.4(b). 5.6 Successor. The Company, or any entity which controls the Company, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company by written agreement expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had occurred. Failure of the Company or a controlling entity to obtain such agreement prior to the effective date of any such succession followed by failure of the successor to honor this Agreement shall be a breach of this Agreement and shall entitle the Executive to the rights and benefits hereunder as though he had terminated his employment with the Company for Good Reason pursuant to paragraph 5.3 hereof (including those provisions which concern compensation following a Change in Control), whether or not he terminates his employment with the Company. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to all or substantially all of its business or assets which becomes bound by all of the terms and conditions of this Agreement. 6. Restrictions. 6.1 Confidential Information. The Executive agrees that during and after the period of his employment he will not, without authorization from the Company, divulge, disclose or otherwise communicate to any person or company any information of a confidential nature pertaining to specific details of the Company's business, functions or operations, except in connection with the discharge of his duties hereunder, or pursuant to the order of a court of competent jurisdiction. The Executive further agrees that, upon termination of his employment with the Company for any reason, he will prompty return to the Company all books and records of or pertaining to the Company's business, and ail other property belonging to the Company which is in his custody or possession. 6.2 Non-Compete. During his employment by the Company and in the event he is terminated by the Company for Cause or terminates his employment without Good Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the Executive shall not compete with the Company in any activity relating to the business of the Company as conducted by the Company during the term of this Agreement. For purposes of the preceding sentence, competition shall include, without limitation, direct or indirect competition by the Executive, whether as an owner, officer, director, employer, partner, consultant, advisor, contractor, principal agent, licensor, employee or affiliate of a person firm, venture or corporation that so competes with the Company. Without the prior written approval of the Board of Directors, the Executive further -9- agrees that during the twelve (12) month period following the termination of this Agreement for any reason he will not solicit for employment any employee of the Company. 6.3 Cause of Action. The parties hereby declare that the rights of the Company are of a unique nature, the loss of which may cause irreparable harm, and that it may be impossible to measure in money the damages which will accrue to the Company by reason of the loss of such rights or a failure by the Executive to perform or adhere to any of the obligations under Sections 6.1 and 6.2 hereof. The Executive expressly acknowledges that remedies at law alone will be inadequate to compensate the Company for any breach or violation of any of the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition to all other remedies hereunder or thereunder, shall be entitled, as a matter of right, to seek injunctive relief, including specific performance, with respect to any such breach of violation, in any court of competent jurisdiction. 7. Legal Matter. 7.1 Resolution of Conflict. Any and all disputes, claims and controversies between the parties hereto concerning the validity, interpretation, performance, termination or breach of this Agreement, which cannot be resolved by the parties within ninety (90) days after such dispute, claim or controversy arises shall, at the option of either party, be referred to and finally settled by arbitration. Such arbitration shall be initiated by the initiating party giving notice (the "Arbitration Notice") to the other party (the "Respondent") that it intends to submit such dispute, claim or controversy to arbitration. Each party shall, within thirty (30) days of the date the Arbitration Notice is received by the Respondent, designate a person to act as an arbitrator, if either party fails to designate a person to Act as an arbitrator within the time specified herein the arbitration shall be conducted by the sole designated arbitrator. The two arbitrators appointed by the parties shall, within thirty (30) days after their designation appoint a third arbitrator who shall act as presiding arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by the parties are unable to appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed according to the rules of the American Arbitration Association as in effect on the date the notice of submission to arbitration is given (the "Rules"). Such arbitration shall be held in New Jersey in accordance with the Rules except as otherwise expressly provided herein. The arbitrators shall, by majority vote, render a written decision stating reasons therefor in reasonable detail within three (3) months after the appointment of all the arbitrators. Each party shall bear its own costs and attorneys fees. All other costs and expenses of arbitration shall be apportioned between the parties by the arbitrators. The award of the arbitrators shall be made in United States currency and shall be final and binding, and judgment thereon may be rendered by any court having jurisdiction thereof, or application may be made to such court for the judicial acceptance of the award and an order of enforcement as the case may be. 7.2 Agreement Confidential. Both the Executive and the Company will keep the terms of this Agreement confidential provided that this provision shall not restrict any disclosure by the Company pursuant to any applicable law, regulation or Judicial order. -10- 7.3 Notices. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, by registered or certified mail, addressed to either party at the address first written above (or to such other address as either party shall designate by notice in writing to the other party in accordance herewith). 8. Miscellaneous. 8.1 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed within New Jersey, without regard to the principles of conflict of laws. 8.2 Headings. The sections headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 8.3 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and from and after the date hereof supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof provided, however, that the benefits conferred under this Agreement are in addition to, and not in lieu of, any and all benefits conferred under plans and arrangements currently in effect for the Executive. 8.4 Assignment. This Agreement is binding upon and shall insure to the benefits of the Executive and his estate, but the Executive's rights and obligations hereunder may not be assigned or pledged by him. 8.5 Modification. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by written instrument executed by both of the parties hereto or in the case of a waiver, by the party waiving compliance. 8.6 Section 162(m). In the event compensation payable to Executive hereunder in any single tax year would result in the non-deductibility of a portion of such compensation by the Company solely by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended, then, and in such event, the Company shall be permitted to defer payment of such non-deductible amount to the Executive to be paid to him on the first day of the succeeding tax year of the Company. -11- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with legal and binding effect as of the day and year first above written. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. BY: /s/ MARK N. KAPLAN ------------------------------------- Mark N. Kaplan Chairman, Compensation Committee of the Board of Directors THE EXECUTIVE /s/ MARK S. NEWMAN -------------------------------------- Mark S. Newman SCHEDULE A Mark S. Newman Group/Executive Benefits GROUP PLANS BENEFIT - ----------- ------- DRS Group Medical/Dental Plan Vanes DRS Group Life Insurance Plan $50,000 DRS Group AD&D $500,000 DRS Long Term Disability Plan S5,000 monthly benefit DRS Retirement/Savings Plan (401K) Varies - Fully vested DRS Reimbursement Account Plan (IRC 125) Varies (See below) EXECUTIVE PLANS/BENEFITS BENEFIT - ------------------------ ------- Executive Incentive Compensation Plan Varies 1991 DRS Stock Option Plan See Proxy for current options 1996 Omnibus Plan No grants issued at present Group Life Carve-Out $450,000 Life Insurance $100,000 (family beneficiary) S100,000 (family beneficiary) $250,000 (split DRS/family) $1,000,000 (split DRS/family) $2,000,000 (family beneficiary) S1,600,000 (SERP pre-retirement death benefit) Long Term Disability $6,340 monthly benefit $3,000 monthly benefit $2,000 monthly benefit DRS Reimbursement Account: one time annual deposit to the reimbursement account (amount may vary from year to year) $10,000 for 1996 Supplemental Executive Retirement Plan (SERP) Determined at time of Retirement EX-10.48 3 AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 30th day of April, 1997, by and between DIAGNOSTIC RETRIEVAL SYSTEMS, INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan Way, Parsippany, New Jersey and Nina Laserson Dunn (the "Executive"), currently residing at 431 Kelly Court, Wyckoff, New Jersey 07481. WHEREAS, the Executive desires to enter into an agreement of employment with the Company in accordance with the terms and conditions set forth herein; and WHEREAS, the Company desires to employ the Executive as its Executive Vice President, General Counsel and Secretary in accordance with the terms and conditions set forth herein; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Term of Employment. The initial term of employment shall begin on July 1, 1997 (the "Effective Date") and shall continue in effect until the third anniversary of the Effective Date (such period being the "Initial Term"). On July 1 of each year, beginning on July 1, 1998, this Agreement shall automatically be renewed for successive two year periods, unless at least ninety (90) days prior to the end of each renewal date either party hereto gives written notice to the other party of its intention not to renew this Agreement and, as provided below, shall remain in effect following a Change in Control. This Agreement may be terminated at any time during its initial term or during any renewal term solely in accordance with the terms and conditions of Section 5 hereof. 2. Duties 2.1 Position. The Company hereby employs the Executive in an executive capacitY with the title of Executive Vice President, General Counsel and Secretary of the Company, and the Executive hereby accepts such employment and undertakes and agrees to serve in such capacities. In such capacities, the Executive shall have such powers, perform such duties and fulfill such responsibilities typically associated with such positions in other publicly-held companies, including, without limitation, planning, supervision and control of the Company's administrative and legal divisions, and such other general powers and duties of an operational or supervisory nature usually vested in the offices held by her. As Secretary, the Executive shall attend meetings of the Board of Directors and the Shareholders of the Company and record the proceedings thereof. Performance of her duties hereunder shall in no event require that the Executive work on a regular basis at any location other than within twenty (20) miles of the Company's present office location. The Executive shall devote substantially all of her working time and efforts to the performance of her duties hereunder. The Executive shall report directly to the Chief Executive Officer ("CEO") of the Company, and shall have the authority to hire and discharge any employee within her areas of responsibility. 2.2 Limitation on Other Employment. During the term of her employment hereunder, the Executive will not engage in any other occupation for gain, profit or pecuniary advantage, without the consent of the CEO of the Company; provided, however, that this limitation shall not be construed as preventing her from (a) serving on the board of directors of any corporation not directly competitive with the Company (provided that Executive has obtained the approval of the CEO), and (b) investing or trading in securities or other forms of investment, in each case so long as such activities do not materially interfere with the performance of her duties hereunder and such investments do not represent the ownership of 5% or more of the capital stock of publicly traded entities. 3. Compensation. 3.1 Base Salary. In consideration of the services rendered hereunder, the Company shall pay the Executive during the Initial Term of this Agreement a base salary at the rate of TWO HUNDRED FORTY THOUSAND DOLLARS ($240,000) per annum or at such higher rate as the CEO may reasonably determine ("Base Salary"), which amount will be payable to her in bi-weekly installments (or at such intervals as other salaried employees of the Company are paid). The amount of the Executive's Base Salary shall be reviewed annually by the CEO but shall not be reduced without written consent of the Executive. 3.2 Incentive Compensation. (a) To further the attainment of the Company's long-term profit and growth objectives, the Executive shall be eligible to receive an incentive bonus equal, in the initial year of employment, to no less a percentage of the Executive's Base Salary as that percentage attainable by the Executive under Level 29 of the currently effective Incentive Compensation Plan ("ICP"). Specific annual entitlements to bonus awards shall be predicated on the Executive's performance and subject to the Company achieving its operating targets, consistent with the rules as set forth in the ICP. Until such a time as the Executive and the CEO agree on the individual performance criteria of the Executive, bonus awards shall be predicated 70% on the Company's performance, as calculated for the CEO, and 30% on the CEO's evaluation of the Executive. (b) The Executive shall participate in all other Bonus, Long-Term Capital Accumulation and/or Stock-Based Programs that the Company may adopt from time to time. (c) To further provide Executive with appropriate incentive and to acquire a proprietary interest in the long-term success of the Company, the Company hereby grants, pursuant to the Company's 1996 Omnibus Plan (the "Plan"), fifty thousand (50,000) options to acquire Company Stock. Twenty thousand (20.000) of these options shall be Non-Qualified Stock Options ("NQO") and thirty thousand (30.000) of these options shall be Incentive Stock Options ("ISO"). The option exercise price payable shall be $0.01 per share of Company Stock for the -2- NQO's and fair market value at the date of this Agreement for ISO's. The term of the option shall be ten (10) years and 20% of the options shall vest on the date of this Agreement, with an additional 20% vesting on each of the first, second, third and fourth anniversaries hereof. All capitalized terms shall have the meaning specified in the Plan. 4. Benefits. 4.1 Benefit Programs. The Executive will be included in all group insurance plans ("Insurance Plans"), retirement plans, and other benefit plans and arrangements (such retirement and other benefit plans and arrangements, together with the Insurance Plans, the "Benefit Program") available to executives of the Company, as such plans may be or have been adopted from time to time. The Company will provide to the Executive the specific benefits listed on Schedule A hereto. The Executive shall be a Class B Participant in the Company's SERP and, pursuant to Section II L (1)(f) of such SERP, "Service" (and employment for purposes of Sections III (B) and IV (A)) has been deemed by the Board of Directors of the Company to commence as of July 1, 1992. 4.2 Vacation. Executive shall be entitled to four (4) weeks of vacation with pay during each twelve (12) month period of employment under this Agreement. 4.3 Automobile and Other Expenses. The Company will provide the Executive with an automobile of a type mutually agreed upon and the Company will pay, or reimburse her for, all business related operating expenses of such automobile (including, without limitation, insurance, service, repairs, gasoline and oil). The Company will also reimburse the Executive for her ordinary and customary business expenses incurred in the performance of her duties hereunder. 5. Termination 5.1 Termination by the Company for Cause. (a) Definition. The Company may terminate the Executive's employment hereunder for "Cause" which shall be limited to: (i) Gross neglect or dereliction in the performance of Executive's duties or other grave misconduct by her and the failure to cure such situation within twenty days after receipt of a notice thereof from the Board of Directors, (ii) Executive's engaging in conduct which has caused demonstrable and serious injury to the Company, monetary or otherwise, as evidenced by a written determination authorized by the Board of Directors of the Company, or (iii) Executive's conviction for or plea to a felony or for any lesser crime which involves the property of the Company. -3- (b) Compensation upon Termination for Cause. Upon the termination of the Executive's employment for Cause, the Company shall pay the Executive her Base Salary, prorated Incentive Compensation and continued participation in the Benefit Program, through the effective date of such termination. 5.2 Termination For Disability or Death. (a) Disability. The Company may terminate the Executive's employment hereunder in the event of the Executive's permanent disability. For the purposes of this Agreement, permanent disability shall mean the Executive's inability, whether mental or physical, to perform the regular duties of her employment on a full-time continuous basis for six (6) consecutive months (the "Disability Period"). If a policy of disability insurance is in effect insuring the Executive, then in no event shall Executive be deemed to be disabled until she is determined to be entitled to receive disability income payments pursuant to such disability policy. During the Disability Period, the Company shall (i) pay the Executive her full Base Salary then in effect, as well as any ICP benefit to which she would otherwise be entitled, reduced by any amounts which she actually receives under any disability plan maintained by the Company during the Disability Period, and (ii) shall continue her participation in the Benefit Program. The Company shall notify the Executive in writing of any such finding on its part at the end of the Disability Period. If the Company and the Executive are unable to agree whether she is so disabled the question shall be decided by a panel of three physicians, one to be designated by the Company, one by the Executive and one by the first two so designated. The determination of the panel shall be final and binding upon the parties with costs of the panel to be paid by the Company. (b) Death. The Executive's employment hereunder will terminate upon the Executive's death. (c) Compensation Upon Termination For Disability or Death. (i) If the Company terminates the Executive's employment due to permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall pay the Executive her monthly Base Salary then in effect for one (1) year after her termination, reduced by any amounts to which she actually receives under any disability plan maintained by the Company and shall pay the Executive when due, a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of her employment during the termination year. (ii) If the Executive's employment is terminated due to her death, pursuant to Subsection 5.2(b) herein, the Company shall pay the Executive's estate or designated beneficiary (A) the Executive's Base Salary and any other amounts due or earned through the date of death, and (B) until the end of the fiscal year in which occurred the date of death or, if greater, for three months following the date of death, the Executive's Base Salary as then in effect, and (C) a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of her employment during the termination year. -4- (iii) For purposes of determining the bonus payable in the year of termination, the Company shall pay a bonus equal to the amount of the current year's bonus which could have been paid to Executive for the year of termination, pro-rated for the period of her employment during the termination year. (d) Benefits upon Termination for Death or Disability. (i) If the Company terminates the Executive's employment due to her permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall continue to provide her and her dependents coverage under the Insurance Plans, at her option, for the longer of one year or the period required by applicable law. The Company shall provide such coverage at its expense (except with respect to those costs for which the Executive was responsible prior to the termination of employment). (ii) If the Executive's employment is terminated due to her death, pursuant to Subsection 5.2(b) herein, the Company shall continue to provide the Executive's dependents medical insurance coverage, at their option, for the longer of one (1) year after her death or the period required by applicable law. The Company shall provide such coverage at its expense (except for those costs for which the Executive was responsible prior to her death). 5.3 Good Reason. Termination By The Executive. (a) Good Reason. The Executive may terminate her employment during the Employment Period hereunder for "Good Reason" (i) upon the failure by the Company (or its stockholders as the case may be) to elect or reelect or to appoint or reappoint the Executive to the offices of Executive Vice President, General Counsel and Secretary of the Company, or (ii) after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within twenty (20) days after written notice thereof has been given by the Executive to the Company, or (iii) upon the occurrence of any action taken by the Company which would constitute a constructive termination; provided, that, in addition to and without limiting the generality of the foregoing, on and after a Change in Control (as defined in Section 5.3(c)) herein), any one of the following events shall be deemed a material breach of this Agreement: (i) the assignment to the Executive of any duties inconsistent with the Executive's then status as an executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in ControL; -5- (iii) a reduction in the aggregate percentage upon which the Executive's Incentive Compensation is determined following the Change of Control unless equivalent reductions are made generally for other executives of the Company. (iv) the relocation of Executive's principal place of employment, without her consent, to a location more than twenty (20) miles from the place of such employment immediately prior to the Change in Control; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by Executive under the Benefit Program, as in effect immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to Change in Control; (vi) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 5.5 hereof. (b) Compensation and Benefits upon Termination by The Executive. (i) In the event of a termination of this Agreement by the Executive, without Good Reason, the Company shall provide to her her Base Salary, the pro-rata portion of the bonus determined pursuant to Section 5.2(c)(iii) corresponding to the period of his employment during the termination year and continued participation in the Benefit Program, through the effective date of such termination. (ii) If the Executive terminates her employment hereunder for Good Reason, (A) if there has not occurred a Change in Control, the Company shall also pay her, as liquidated damages under this Agreement, her monthly Base Salary then in effect for the balance of this Agreement then in effect, but for not less than two years plus the pro-rata portion of the bonus determined pursuant to Section 5.2(c)(iii); (B) if there has occurred a Change in Control, the Company shall pay her, as liquidated damages under this Agreement, a lump sum equal to 2.99 times the sum of her Base Salary then in effect plus the bonus earned by her during the immediately preceding fiscal year of the Company, and (C) in either case, the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining her participation in the Benefit Program; provided, however, that if such participation by her after termination of employment is not permitted under any such plan, the Company will provide her with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During the period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out placement assistance utilizing a consultation service designated and paid for by the Company. -6- Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. (c) Definition of Change in Control. A "Change in Control" shall mean the occurrence of an event set forth in any one of the following paragraphs: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below and excluding a transaction whereby a Person becomes the Beneficial Owner of 20% or more of the combined voting power of the Company's then outstanding securities, but such transaction does not transfer the power to control the management or the policies of the Company; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially' Owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an -7- entity, at least 60% of the combined voting power of the voting securities of which are owned by the stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 5.3(c), the following definitions shall apply: "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Act"), as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act. 5.4 Termination by the Company other than for Cause. (a) Compensation Upon Termination by the Company other than for Cause. If the Company terminates the Executive's employment hereunder without "Cause," the Company shall pay the Executive the amounts described in 5.3(b)(ii). (b) Benefits Upon Termination by the Company other than for Cause. If the Company terminates the Executive's employment hereunder without "Cause," the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining her participation in the Benefit Program existing prior to the termination or under any equivalent plan providing the same coverage which may be substituted for any such plan; provided, however, that if such participation by her after termination of employment is not permitted under any such plan, the Company will provide her with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During this period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out-placement assistance utilizing a consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. 5.5 Successor. The Company, or any entity which controls the Company, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company by written agreement expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had occurred. Failure of the Company or a controlling entity to obtain such agreement prior to the effective date of any such succession followed by failure of the successor to honor this Agreement shall be a breach of this Agreement and shall entitle the Executive to the rights and benefits hereunder as though she had terminated her employment with the Company for Good Reason pursuant to paragraph 5.3 hereof -8- (including those provisions which concern compensation following a Change in Control), whether or not she terminates her employment with the Company. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to all or substantially all of its business or assets which becomes bound by all of the terms and conditions of this Agreement. 6. Restrictions. 6.1 Confidential Information. The Executive agrees that during and after the period of her employment she will not, without authorization from the Company, divulge, disclose or otherwise communicate to any person or company any information of a confidential nature pertaining to specific details of the Company's business, functions or operations, except in connection with the discharge of her duties hereunder, or pursuant to the order of a court of competent jurisdiction. The Executive further agrees that, upon termination of her employment with the Company for any reason, she will promptly return to the Company all books and records of or pertaining to the Company's business, and all other property belonging to the Company which is in her custody or possession. 6.2 Non-Compete. During her employment by the Company and in the event she is terminated by the Company for Cause or terminates her employment without Good Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the Executive shall not compete with the Company in any activity relating to the business of the Company as conducted by the Company during the term of this Agreement. For purposes of the preceding sentence, competition shall include, without limitation, direct or indirect competition by the Executive, whether as an owner, officer, director, employer, partner, consultant, advisor, contractor, principal agent, licensor, employee or affiliate of a person firm, venture or corporation that so competes with the Company. Without the prior written approval of the CEO, the Executive further agrees that during the twelve (12) month period following the termination of this Agreement for any reason she will not solicit for employment any employee of the Company. Notwithstanding the above, competition shall not be deemed to include the practice of law after termination of employment. 6.3 Cause of Action. The parties hereby declare that the rights of the Company are of a unique nature, the loss of which may cause irreparable harm, and that it may be impossible to measure in money the damages which will accrue to the Company by reason of the loss of such rights or a failure by the Executive to perform or adhere to any of the obligations under Sections 6.1 and 6.2 hereof. The Executive expressly acknowledges that remedies at law alone will be inadequate to compensate the Company for any breach or violation of any of the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition to all other remedies hereunder or thereunder, shall be entitled, as a matter of right, to seek injunctive relief, including specific performance, with respect to any such breach of violation. in any court of competent jurisdiction. -9- 7. Legal Matters. 7.1 Resolution of Conflict. Any and all disputes, claims and controversies between the parties hereto concerning the validity, interpretation, performance, termination or breach of this Agreement, which cannot be resolved by the parties within ninety (90) days after such dispute, claim or controversy arises shall, at the option of either party, be referred to and finally settled by arbitration. Such arbitration shall be initiated by the initiating party giving notice (the "Arbitration Notice") to the other party (the "Respondent") that it intends to submit such dispute, claim or controversy to arbitration. Each party shall, within thirty (30) days of the date the Arbitration Notice is received by the Respondent, designate a person to act as an arbitrator, if either party fails to designate a person to Act as an arbitrator within the time specified herein the arbitration shall be conducted by the sole designated arbitrator. The two arbitrators appointed by the parties shall, within thirty (30) days after their designation appoint a third arbitrator who shall act as presiding arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by the parties are unable to appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed according to the rules of the American Arbitration Association as in effect on the date the notice of submission to arbitration is given (the "Rules"). Such arbitration shall be held in New Jersey in accordance with the Rules except as otherwise expressly provided herein. The arbitrators shall, by majority vote, render a written decision stating reasons therefor in reasonable detail within three (3) months after the appointment of all the arbitrators. Each party shall bear its own costs and attorneys fees. All other costs and expenses of arbitration shall be apportioned between the parties by the arbitrators. The award of the arbitrators shall be made in United States currency and shall be final and binding, and judgment thereon may be rendered by any court having jurisdiction thereof, or application may be made to such court for the judicial acceptance of the award and an order of enforcement as the case may be. 7.2 Agreement Confidential. Both the Executive and the Company will keep the terms of this Agreement confidential provided that this provision shall not restrict any disclosure by the Company pursuant to any applicable law, regulation or judicial order. 7.3 Notices. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, by registered or certified mail, addressed to either party at the address first written above (or to such other address as either party shall designate by notice in writing to the other party in accordance herewith). 8. Indemnification. The Company desires to have the Executive serve as an executive officer and general counsel of the Company, free from undue concern for unpredictable, inappropriate or unreasonable legal risks and personal liabilities by reason of her acting in good faith in the performance of her duty to the Company and will, therefore indemnify the Executive to the fullest extent permitted under Delaware law; and the Executive desires to serve as an executive officer -10- and general counsel of the Company; provided that she is furnished with the indemnity set forth hereinafter. 8.1 Definitions. As used in this Agreement: (a) The Term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including, but not limited to, actions, suits or proceedings brought under and/or predicated upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or their respective state counterparts and/or any rule or regulation promulgated thereunder, in which Executive may be or may have been involved as a party or otherwise by reason of the fact that Executive is or was a director and/or officer of the Company, by reason of any action taken by her or of any inaction on her part while acting as such director and/or officer or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise, whether or not she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" includes, without limitation thereto, expenses of investigations, judicial or administrative proceedings or appeals, amounts paid in settlement by or on behalf of Executive, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement, but shall not include the amount of judgments, fines or penalties actually levied against Executive. 8.2 Indemnity in Third Party Proceedings. The Company shall indemnify Executive in accordance with the provisions of this section if Executive is a party to or threatened to be made party to or otherwise involved in any Proceeding (other than a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that Executive is or was a director and/or officer of the Company or is or was acting at the request of the Company as a director, officer, employee, or agent of another Company, partnership, joint venture, trust or other enterprise, against all Expenses, liabilities, judgments, fines and penalties, actually and reasonably incurred by Executive in connection with the defense or settlement of such Proceeding, provided that Executive acted in good faith and in a manner which she reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, in addition, had no reasonable cause to believe that her conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that Executive did not act in good faith in a manner which she reasonably believed to be in the best interests of the Company, and with respect to any criminal proceeding, that such person had reasonable cause to believe that her conduct was unlawful. 8.3 Indemnity in Proceedings By or In the Name of the Company. The Company shall indemnify Executive in accordance with the provisions of this section if Executive is a -11- party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that Executive was or is a director and/or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise against all Expenses actually incurred by Executive in connection with the defense or settlement of such Proceeding, but only if she acted in good faith and in a manner which she reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification for Expenses shall be made under this Paragraph 8.3 in respect of any claim, issue or matter as to which Executive will have been adjudged to be liable to the Company, unless and only to the extent that any court in which such Proceeding is brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Executive is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 8.4 Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that Executive has been successful on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter therein, including the dismissal of an action without prejudice, Executive shall be indemnified against all Expenses incurred in connection therewith. 8.5 Advances of Expenses. Any Expenses incurred by Executive in any Proceeding described in this Agreement shall be paid by the Company in advance and on or prior to the date when payment of such Expenses is due. 8.6 Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Executive may be entitled under the Certificate of Incorporation, the Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. 9. Miscellaneous. 9.1 Governing Law. Except for the indemnification provision contained in Section 8 which shall be governed by the laws of the State of Delaware, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed within New Jersey, without regard to the principles of conflict of laws. 9.2 Headings. The sections headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 9.3 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and from and after the date hereof supersedes all prior agreements, arrangements and understandings, written or oral, relating to the -12- subject matter hereof provided, however, that the benefits conferred under this Agreement are in addition to, and not in lieu of, any and all benefits conferred under plans and arrangements currently in effect for the Executive. 9.4 Assignment. This Agreement is binding upon and shall insure to the benefits of the Executive and her estate, but the Executive's rights and obligations hereunder may not be assigned or pledged by her. 9.5 Modification. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by written instrument executed by both of the parties hereto or in the case of a waiver, by the party waiving compliance. 9.6 Section 162(m). In the event compensation payable to Executive hereunder in any single tax year would result in the non-deductibility of a portion of such compensation by the Company solely by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended, then, and in such event, the Company shall be permitted to defer payment of such non-deductible amount to the Executive to be paid to her on the first day of the succeeding tax year of the Company. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with legal and binding effect as of the day and year first above written. DIAGNOSTIC/RETRIEVAL SYSTEMS. INC. By: /s/ MARK S. NEWMAN ----------------------------------- Mark S. Newman, Chairman, President and Chief Executive Officer THE EXECUTIVE /s/ NINA LASERSON DUNN -------------------------------------- Nina Laserson Dunn -13- SCHEDULE A Group/Executive Benefits GROUP PLANS BENEFIT - ----------- ------- DRS Group Medical/Dental Plan Varies DRS Group Life Insurance Plan $50,000 DRS Group AD&D $500,000 DRS Long Term Disability Plan $5,000 monthly benefit DRS Retirement/Savings Plan (401K) Varies DRS Reimbursement Account Plan (IRC 125) Varies (See below) EXECUTIVE PLANS/BENEFITS BENEFIT - ------------------------ ------- Executive Incentive Compensation Plan Varies 1996 Omnibus Plan Option for 50,000 shares granted at present Life Insurance $1,200,000 Long Term Disability $9,000 monthly benefit. DRS Reinbursement Account: one time annual deposit to the reimbursement account (amount may vary from $7,500 for 1997 year to year) Supplemental Executive Retirement Plan (SERP) Determined at time of Retirement EX-10.49 4 EMPLOYMENT AGREEMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 19th day of February, 1999, by and between DRS TECHNOLOGIES, INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan Way, Parsippany, New Jersey and Richard A. Schneider (the "Executive"), currently residing at 23 Old Town Avenue, Huntington, NY 11743. WHEREAS, the Executive desires to enter into an agreement of employment with the Company in accordance with the terms and conditions set forth herein; and WHEREAS, the Company desires to employ the Executive as its Executive Vice President, Finance and Chief Financial Officer in accordance with the terms and conditions set forth herein; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto, intending legally to be bound, hereby agree as follows: 1. TERM OF EMPLOYMENT. The initial term of employment shall begin on February l9, 1999 (the "Effective Date") and shall continue in effect until the first anniversary of the Effective Date (such period being the "Initial Term"). On February 19 of each year, beginning on February 19, 2000, this Agreement shall automatically be renewed for successive one year periods, unless at least ninety (90) days prior to the end of each renewal date either party hereto gives written notice to the other party of its intention not to renew this Agreement and, as provided below, shall remain in effect following a Change in Control. This Agreement may be terminated at any time during its initial term or during any renewal term solely in accordance with the terms and conditions of Section 5 hereof. 2. DUTIES. 2.1 POSITION. The Company hereby employs the Executive in an executive capacity with the title of Executive Vice President, Finance and Chief Financial Officer of the Company, and the Executive hereby accepts such employment and undertakes and agrees to serve in such capacities. In such capacities, the Executive shall have such powers, perform such duties and fulfill such responsibilities typically associated with such positions in other publicly held companies. Performance of his duties hereunder shall in no event require that the Executive work on a regular basis at any location other than within twenty (20) miles of the Company's present office location. The Executive shall devote substantially all of his 1 working time and efforts to the performance of his duties hereunder. The Executive shall report directly to the Chief Executive Officer ("CEO") of the Company. 2.2 LIMITATION ON OTHER EMPLOYMENT. During the term of his employment hereunder, the Executive will not engage in any other occupation for gain, profit or pecuniary advantage, without the consent of the CEO of the Company; provided, however, that this limitation shall not be construed as preventing him from (a) serving on the board of directors of any corporation not directly competitive with the Company (provided that the Executive has obtained the approval of the CEO), and (b) investing or trading in securities or other forms of investment, in each case so long as such activities do not materially interfere with the performance of his duties hereunder and such investments do not represent the ownership of 5% or more of the capital stock of publicly traded entities. 3. COMPENSATION. 3.1 BASE SALARY. In consideration of the services rendered hereunder, the Company shall pay the Executive during the Initial Term of this Agreement a base salary at the rate of TWO HUNDRED TWENTY THOUSAND DOLLARS ($220,000) per annum ("Base Salary"), which amount will be payable to him in bi-weekly installments (or at such intervals as other salaried employees of the Company are paid). The amount of the Executive's Base Salary shall be reviewed annually by the CEO but shall not be reduced without written consent of the Executive. 3.2 INCENTIVE COMPENSATION. (a) Effective April 1, 1999 the Executive will be eligible to participate in the DRS Incentive Compensation Plan ("ICP") at a grade level commensurate with his position. The current grade level for the Executive is M76. Specific annual entitlements to bonus awards shall be predicated on the Executive's performance and subject to the Company achieving its operating targets, consistent with the rules set forth in the ICP. Because the Executive is not in the ICP plan for 1999, the Executive will receive a bonus of $50,000 for FY99 payable on or about July 1, 1999. (b) The Executive shall participate in all other Bonus, Long-Term Capital Accumulation and/or Stock-Based Programs that the Company may adopt from time to time. (c) To further provide the Executive with appropriate incentive and to acquire a proprietary interest in the long-term success of the Company, the Company shall recommend to the Stock Option 2 Committee of the Board of Directors that he be granted, pursuant to the Company's 1996 Omnibus Plan (the "Plan"), [18,750] options to acquire Company Stock. These options shall be Non-Qualified Stock Options ("NQO"). The option exercise price payable shall be the fair market value at the date of the grant. The term of the option shall be (10) years and 20% of the options shall vest on the date of grant, with an additional 20% vesting on each of the first, second, third and fourth anniversaries thereof. All capitalized terms shall have the meaning specified in the Plan. 4. BENEFITS. 4.1 BENEFIT PROGRAMS. The Executive will be included in all group insurance plans ("Insurance Plans"), retirement plans, and other benefits plans and arrangements (such retirement and other benefit plans and arrangements, together with the Insurance Plans, the "Benefit Program") available to executives of the Company, as such plans may be or have been adopted from time to time. The Company will provide to the Executive the specific benefits listed on Schedule A hereto. The Executive shall be a Class B Participant in the Company's SERP. 4.2 VACATION. The Executive shall be entitled to three (3) weeks of vacation with pay during each twelve (12) month period of employment under this Agreement. 4.3 AUTOMOBILE AND OTHER EXPENSES. In accordance with Company policy as established from time to time, the Company will provide the Executive with an automobile of a type mutually agreed upon and the Company will pay, or reimburse him for, all business related operating expenses of such automobile (including, without limitation, insurance, service, repairs, gasoline and oil). The Company will also reimburse the Executive for his ordinary and customary business expenses incurred in the performance of his duties hereunder. 5. TERMINATION. 5.1 TERMINATION BY THE COMPANY FOR CAUSE. (a) DEFINITION. The Company may terminate the Executive's employment hereunder for "Cause" which shall be limited to: (i) Gross neglect or dereliction in the performance of the Executive's duties or other misconduct by him and the failure to cure such situation within twenty days after receipt of a notice thereof from the Board of Directors, 3 (ii) The Executive's engaging in conduct which has caused demonstrable and serious injury to the Company, monetary or otherwise, as evidenced by a written determination authorized by the Board of Directors of the Company, or (iii) The Executive's conviction for or plea to a felony or for any lesser crime which involves the property of the Company. (b) COMPENSATION UPON TERMINATION FOR CAUSE. Upon the termination of the Executive's employment for Cause, the Company shall pay the Executive his Base Salary and continued participation in the Benefit Program through the effective date of such termination. 5.2 TERMINATION FOR DISABILITY OR DEATH. (a) DISABILITY. The Company may terminate the Executive's employment hereunder in the event of the Executive's permanent disability. For the purposes of this Agreement, permanent disability shall mean the Executive's inability, whether mental or physical, to perform the regular duties of his employment on a full-time continuous basis for six (6) consecutive months (the "Disability Period"). If a policy of disability insurance is in effect insuring the Executive, then in no event shall Executive be deemed to be disabled until he is determined to be entitled to receive disability income payments pursuant to such disability policy. During the Disability Period the Company shall (i) pay the Executive his full Base Salary then in effect, as well as any ICP benefit to which he would otherwise be entitled, reduced by any amounts which he actually received under any disability plan maintained by the Company during the Disability Period, and (ii) shall continue his participation in the Benefit Program. The Company shall notify the Executive in writing of any such finding on its part at the end of the Disability Period. If the Company and Executive are unable to agree whether he is so disabled the question shall be decided by a panel of three physicians, one to be designated by the Company, one by the Executive and one by the first two so designated. The determination of the panel shall be final and binding upon the parties with costs of the panel to be paid by the Company. (b) DEATH. The Executive's employment hereunder will terminate upon-the Executive's death. (c) COMPENSATION UPON TERMINATION FOR DISABILITY OR DEATH. 4 (i) If the Company terminates the Executive's employment due to permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall pay the Executive his monthly Base Salary then in effect for one (1) year after his termination, reduced by any amounts to which he actually receives under any disability plan maintained by the Company and shall pay the Executive when due, a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his active employment during the termination year. (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2 (b) herein, the Company shall pay the Executive's estate or designated beneficiary (A) the Executive's Base Salary and any other amounts due or earned through the date of death, and (B) a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his employment during the termination year. (iii) For purposes of determining the bonus payable in the year of termination, the Company shall pay a bonus equal to the amount of the current year's bonus which could have been paid to Executive for the year of termination, pro-rated for the period of his employment during the termination year. (d) BENEFITS UPON TERMINATION FOR DEATH OR DISABILITY. (i) If the Company terminates the Executive's employment due to his permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall continue to provide him and his dependents coverage under insurance Plans, at his option, for the longer of one year or the period required by applicable law. The Company shall provide such coverage at its expense (except with respect to those costs for which the Executive was responsible prior to the termination of employment). (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2(b) herein, the Company shall continue to provide the Executive's dependents medical insurance coverage, at their option, for the longer of one (1) year after his death or the period required by applicable law. The Company shall provide such coverage at its expense (except for those costs for which the Executive was responsible prior to his death). 5 5.3 TERMINATION BY THE EXECUTIVE. (a) GOOD REASON. The Executive may terminate his employment during the Employment Period hereunder for "Good Reason" (i) upon the failure by the Company (or its stockholders as the case may be) to elect or reelect or to appoint or reappoint the Executive to the offices of Executive Vice President, Finance and Chief Financial Officer, or (ii) after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within twenty (20) days after written notice thereof has been given by the Executive to the Company, or (iii) upon the occurrence of any action taken by the Company which would constitute a constructive termination; provided, that, in addition to and without limiting the generality of the foregoing, on and after a Change in Control (as defined in Section 5.3(c) herein), any one of the following events shall be deemed a material breach of this Agreement: (i) the assignment to the Executive of any duties inconsistent with the Executive's then status as an executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; (iii) a reduction in the aggregate percentage upon which the Executive's Incentive Compensation is determined following the Change of Control unless equivalent reductions are made generally for other executives of the Company; (iv) the relocation of Executive's principal place of employment, without his consent, to a location more than twenty (20) miles from the place of such employment immediately prior to the Change in Control; (v) The failure by the company to continue to provide the Executive with benefits substantially similar to those enjoyed by Executive under the Benefit Program, as in effect immediately prior to the Change in Control, the taking of any action by the company which would directly 6 or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to Change in Control; and (vi) The failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 5.5 herein. (b) COMPENSATION AND BENEFITS UPON TERMINATION BY THE EXECUTIVE. (i) In the event of a termination of this Agreement by the Executive, without Good Reason, the company shall provide to him his Base Salary, corresponding to the period of his employment and continued participation in the Benefit Program, through the effective date of such termination. (ii) If the Executive terminates his employment hereunder for Good Reason, (A) if there has not occurred A Change in Control, the Company shall also pay him, as liquidated damages under this Agreement, his monthly Base Salary then in effect for twelve months following the notice of termination, plus the pro-rata portion of the bonus determined pursuant to Section 5.2(c)(iii); (B) if there has occurred a Change in Control, the Company shall pay him, as liquidated damages under this Agreement, a lump sum equal to the sum of the bonus earned by him during the immediately preceding fiscal year of the Company plus 200% of his annual Base Salary then in effect, and (C) in either case, the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During the period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out-placement assistance utilizing a 7 consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. (c) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall mean the occurrence of an event set forth in any one of the following paragraphs: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below and excluding a transaction whereby a person becomes the Beneficial Owner of 20% or more of the combined voting power of the Company's then outstanding securities, but such transaction does not transfer the power to control the management or the policies of the Company; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting 8 securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by the stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 5.3(c), the following definitions shall apply: "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Act"), as modified and used in Section 13(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act. 9 5.4 TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. (a) COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. If the Company terminates the Executive's employment hereunder without "Cause", the Company shall pay the Executive the amounts described in 5.3(b)(ii)(A). (b) BENEFITS UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. if the company terminates the Executive's employment hereunder without "Cause", the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program existing prior to the termination or under any equivalent plan providing the same coverage which may be substituted for any such plan; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During this period the Executive will have full use of the Company-supplied automobile. The Executive also, will be provided with out-placement assistance utilizing a consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. 5.5 SUCCESSOR. The Company, or any entity which controls the Company, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company by written agreement expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had occurred. Failure of the Company or a controlling entity to obtain such agreement prior to the effective date of any such succession followed by failure of the successor to honor this Agreement shall be a breach of this Agreement and shall entitle the Executive to the rights and benefits hereunder as though he had terminated his employment with the Company for Good Reason pursuant to paragraph 5.3 hereof (including those provisions which concern compensation following a Change in Control), whether or not he terminates his employment with the Company. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to all or substantially all of its business or assets which becomes bound by all of the terms and conditions of this Agreement. 10 6. RESTRICTIONS. 6.1 CONFIDENTIAL INFORMATION. The Executive agrees that during and after the period of his employment he will not, without authorization from the Company, divulge, disclose or otherwise communicate to any person or company any information of a confidential nature pertaining to specific details of the Company's business, functions or operations, except in connection with the discharge of his duties hereunder, or pursuant to the order of a court of competent jurisdiction. The Executive further agrees that, upon termination of his employment with the Company for any reason, he will promptly return to the Company all books and records of or pertaining to the Company's business, and all other property belonging to the Company which is in his custody or possession. 6.2 NON-COMPETE. During his employment by the Company and in the event he is terminated by the Company for Cause or terminates his employment without Good Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the Executive shall not compete with the Company in any activity relating to the Business of the Company as conducted by the Company during the term of this Agreement. For purposes of the preceding sentence, competition shall include, without limitation, direct or indirect competition by the Executive, whether as an owner, officer, director, employer, partner, consultant, advisor, contractor, principal agent, licensor, employee or affiliate of a person firm, venture or corporation that so competes with the Company. Without the prior written approval of the CEO, the Executive further agrees that during the twelve (12) month period following the termination of this Agreement for any reason he will not solicit for employment any employee of the Company. It is further agreed and understood that the Executive shall not engage in any conduct or communication which shall disparage the Company or interfere with its current or prospective business relationships. 6.3 CAUSE OF ACTION. The parties hereby declare that the rights of the Company are of a unique nature, the loss of which may cause irreparable harm, and that it may be impossible to measure in money the damages which will accrue to the company by reason of the loss of such rights or a failure by the Executive to perform or adhere to any of the obligations under Sections 6.1 and 6.2 hereof. The Executive expressly acknowledges that remedies at law alone will be inadequate to compensate the Company for any breach or violation of any of the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition to all other remedies hereunder or thereunder, shall be entitled, as a matter of right, to seek injunctive relief, including specific performance, with respect to any such breach of violation, in any court of competent jurisdiction. 11 7. LEGAL MATTERS. 7.1 RESOLUTION OF CONFLICT. Other than as provided in Section 6.3 herein with respect to obligations contained in Sections 6.1 and 6.2 herein, any and all disputes, claims and controversies between the parties hereto concerning the validity, interpretation, performance, termination or breach of this Agreement, which cannot be resolved by the parties within ninety (90) days after such dispute, claim or controversy arises shall, at the option of either party, be referred to and finally settled by arbitration. Such arbitration shall be initiated by the initiating party giving notice (the "Arbitration Notice") to the other party (the "Respondent") that it intends to submit such dispute, claim or controversy to arbitration. Each party shall, within thirty (30) days of the date the Arbitration Notices is received by the Respondent, designate a person to act as an arbitrator, if either party fails to designate a person to Act as an arbitrator within the time specified herein the arbitration shall be conducted by the sole designated arbitrator. The two arbitrators appointed by the parties shall, within thirty (30) days after their designation appoint a third arbitrator who shall act as presiding arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by the parties are unable to appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed according to the rules of the American Arbitration Association as in effect on the date the notice of submission to arbitration is given (the "Rules"). Such arbitration shall be held in New Jersey in accordance with the Rules except as otherwise expressly provided herein. The arbitrators shall, by majority vote, render a written decision stating reasons therefor in reasonable detail within three (3) months after the appointment of all the arbitrators. Each party shall bear its own costs and attorneys fees. All other costs and expenses of arbitration shall be apportioned between the parties by the arbitrators. The award of the arbitrators shall be made in United States currency and shall be final and binding, and judgment thereon may be rendered by any court having jurisdiction thereof, or application may be made to such court for the judicial acceptance of the award and an order of enforcement as the case may be. 7.2 AGREEMENT CONFIDENTIAL. Both the Executive and the Company will keep the terms of this Agreement confidential provided that this provision shall not restrict any disclosure by the Company pursuant to any applicable law, regulation or judicial order. 12 7.3 NOTICES. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, by registered or certified mail, addressed to either party at the address first written above (or to such other address as either party shall designate by notice in writing to the other party in accordance herewith). 8. MISCELLANEOUS. 8. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed within New Jersey, without regard to the principles of conflict of laws. 8.2 HEADINGS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 8.3 ENTIRE AGREEMENt. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and from and after the date hereof supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof provided, however, that the benefits conferred under this Agreement are in addition to, and not in lieu of, any and all benefits conferred under plans and arrangements currently in effect for the Executive. 8.4 ASSIGNMENT. This Agreement is binding upon and shall inure to the benefits of the Executive and his estate, but the Executive's rights and obligations hereunder may not be assigned or pledged by him. 8.5 MODIFICATION. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only be written instrument executed by both of the parties hereto or in the case of a waiver, by the party waiving compliance. 8.6 SECTION 162(m). In the event compensation payable to Executive hereunder in any single tax year would result in the non-deductibility of a portion of such compensation by the Company solely by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended, then, and in such event, the Company shall be permitted to defer payment of such nondeductible amount to the Executive to be paid to him on the first day of the succeeding tax year of the Company. 13 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with legal and binding effect as of the day and year first above written. DRS TECHNOLOGIES, INC. /s/ MARK S. NEWMAN ------------------------------------- BY: Mark S. Newman, Chairman, President and Chief Executive Officer THE EXECUTIVE /s/ RICHARD A. SCHNEIDER ------------------------------------- Richard A. Schneider 14 SCHEDULE A GROUP PLANS BENEFIT - ----------------------------------------------- -------------------------- DRS Group Medical/Dental Plan Varies DRS Group Life Insurance Plan $50,000 DRS Group AD&D $440,000 (2 X salary) DRS Long Term Disability Plan--Class I $10,000 monthly benefit DRS Retirement/Savings Plan (401K) Varies DRS Reimbursement Account Plan (IRC 125) Varies (See below) EXECUTIVE PLANS/BENEFITS BENEFIT - ----------------------------------------------- -------------------------- Executive Incentive Compensation Plan Varies 1996 Omnibus Plan (1) Life Insurance $1,110,000 DRS Reimbursement Account: one time annual $5,000 currently Deposit to the reimbursement account (amount may vary from year to year) Supplemental Executive Retirement Plan (SERP)-- Determined at time of Class B Participant Retirement (1) Amount determined by combining resulting DRS shares from NAI option conversion with additional grant to equal in the aggregate 50,000 shares. 15 EX-13 5 ANNUAL REPORT DRS TECHNOLOGIES INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA Years Ended March 31, 1999 1998 1997 1996 1995 ========================================================================================================================= SUMMARY OF EARNINGS REVENUES $273,428,000 $190,854,000 $143,578,000 $101,454,000 $69,930,000 OPERATING INCOME $ 14,245,000 $ 14,259,000 $ 12,582,000 $ 8,547,000 $ 5,094,000 EARNINGS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES $ 4,742,000 $ 9,664,000 $ 9,284,000 $ 6,727,000 $ 4,256,000 NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986,000 $ 6,372,000 $ 5,663,000 $ 4,103,000 $ 2,604,000 NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000 $ 4,103,000 $ 2,604,000 - ------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA (1)(2) BASIC EARNINGS PER SHARE $ 0.45 $ 1.13 $ 1.03 $ 0.75 $ 0.51 DILUTED EARNINGS PER SHARE $ 0.44 $ 0.93 $ 0.84 $ 0.69 $ 0.50 BOOK VALUE PER SHARE $ 7.96 $ 7.16 $ 5.90 $ 4.86 $ 4.16 - ------------------------------------------------------------------------------------------------------------------------- SUMMARY OF FINANCIAL POSITION WORKING CAPITAL $ 13,491,000 $ 42,126,000 $ 32,838,000 $ 33,990,000 $20,317,000 NET PROPERTY, PLANT AND EQUIPMENT $ 34,163,000 $ 22,972,000 $ 19,987,000 $ 16,191,000 $ 9,849,000 TOTAL ASSETS $330,344,000 $163,473,000 $ 97,673,000 $ 97,251,000 $64,590,000 LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS $102,091,000 $ 56,532,000 $ 30,801,000 $ 32,608,000 $11,732,000 NET STOCKHOLDERS' EQUITY $ 73,442,000 $ 44,335,000 $ 32,987,000 $ 26,566,000 $22,509,000 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS PRETAX RETURN ON REVENUES (1) 1.7% 5.1% 6.5% 6.6% 6.1% AFTER TAX RETURN ON REVENUES (1) 1.1% 3.3% 3.9% 4.0% 3.7% RETURN ON AVERAGE STOCKHOLDERS' EQUITY (1) 5.6% 16.5% 19.0% 16.7% 12.3% CURRENT RATIO 1.1 1.8 2.2 2.0 1.9 LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS, TO TOTAL CAPITALIZATION 58.2% 56.0% 48.3% 55.1% 34.3% INTEREST COVERAGE RATIO (6) 2.83x 4.28x 4.98x 4.69x 5.91x - ------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL INFORMATION EBIT (3) $ 14,100,000 $ 14,762,000 $ 12,876,000 $ 9,408,000 $ 5,628,000 EBITDA (4) $ 26,511,000 $ 25,821,000 $ 17,903,000 $ 12,578,000 $ 8,108,000 FREE CASH FLOW (5) $ 19,645,000 $ 15,251,000 $ 12,675,000 $ 6,247,000 $ 5,565,000 CAPITAL EXPENDITURES $ 6,866,000 $ 6,570,000 $ 5,228,000 $ 6,331,000 $ 2,543,000 DEPRECIATION AND AMORTIZATION $ 12,411,000 $ 7,059,000 $ 5,027,000 $ 3,170,000 $ 2,480,000 INTERNAL RESEARCH AND DEVELOPMENT $ 5,228,000 $ 4,049,000 $ 3,852,000 $ 649,000 $ 795,000 EMPLOYEES (7) $ 2,180 $ 1,470 $ 1,107 $ 809 $ 565 REVENUES PER EMPLOYEE (8) $ 133,000 $ 124,000 $ 129,000 $ 137,000 $ 130,000
- ---------- (1) Earnings per share and financial ratios presented and calculated before extraordinary item in fiscal 1999. (2) No cash dividends have been distributed in any of the years in the five-year period ended March 31, 1999. (3) Earnings before extraordinary items, interest and related expenses, and income taxes. (4) Earnings before extraordinary items, interest and related expenses, income taxes, depreciation and amortization. (5) EBITDA less capital expenditures. (6) Ratio of EBITDA to interest and related expenses (primarily amortization of debt issuance costs). (7) Indicates the number of employees at March 31 for each of the fiscal years presented. Included in fiscal 1999, 1998, 1997 and 1996 are approximately 407, 428, 188 and 155 employees, respectively, from new operations. (See Note 2 of Notes to Consolidated Financial Statements.) (8) Based on average number of employees. -20- DRS TECHNOLOGIES INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis (MD&A) of the consolidated financial condition and results of operations of DRS Technologies, Inc. and Subsidiaries (hereinafter, the Company or DRS) as of March 31, 1999 and 1998, and for each of the fiscal years in the three-year period ended March 31, 1999. This discussion should be read in conjunction with the audited consolidated financial statements and related notes. The following discussion and analysis contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that risks and uncertainties are inherent to forward-looking statements. Accordingly, the Company's actual results could differ materially from those suggested by such forward-looking statements. Risks include, without limitation: the effect of the Company's acquisition strategy on future operating results; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to the Company's products and services; the effects of government regulation or shifts in government policy, as they may relate to the Company's products and services; competition; and other matters referred to in this report. BUSINESS OVERVIEW DRS Technologies is a leading supplier of defense electronics systems and has served the defense industry for over thirty years. The Company provides advanced technology products and services to government and commercial markets worldwide and holds leading positions in most of its niche markets. DRS develops and manufactures a broad range of mission critical products -- from rugged computers and peripherals to systems and components in the areas of communications, data storage, digital imaging, electro-optics, flight safety and space. The Company's defense electronics systems and subsystems are sold to all branches of the U.S. military, selected U.S. government intelligence agencies, major aerospace/defense prime contractors, international military forces and a wide range of commercial customers. DRS also offers a full complement of technical support and advanced manufacturing services. The Company has grown substantially in recent years, as a result of internal business development and strategic acquisitions. In fiscal 1999, the Company completed two milestone transactions: the acquisition of certain assets of the Second Generation Ground-Based Electro-Optical (Ground EO) and Focal Plane Array (FPA) buinesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon); and the merger with NAI Technologies, Inc. These acquisitions have significantly expanded the Company's business base and have increased and further diversified DRS's backlog. Over the past five fiscal years, revenues and earnings before extraordinary items, interest and related expenses, income taxes, depreciation and amortization (EBITDA) have grown at compounded average annual rates of approximately 36% and 31%, respectively. In fiscal 1999, the Company's total revenues increased by approximately 43%, with revenues generated by the Company's core businesses (existing businesses as of March 31, 1998) increasing by approximately 18%. Funded backlog also has increased substantially. At March 31, 1999, DRS's funded backlog was approximately $365.8 million, an increase of 106% from the prior year-end level, and included approximately $108.7 million and $31.7 million added at the dates of acquisition of the EOS Business of Raytheon and the merger with NAI Technologies, Inc., respectively. These acquisitions have further diversified the Company's backlog with respect to its defense customer base. As of March 31, 1999, approximately 47% and 27% of the Company's backlog related to products and services for the U.S. Army and U.S. Navy, as compared with 11% and 62% at March 31, 1998, respectively. To achieve this level of growth and business development, DRS has executed a consistent long-term business strategy. The Company's goal is to secure its emerging position as a mid-tier defense technology supplier by maintaining its reputation for technical excellence, focusing on the development of profitable long-term contracts and acquiring businesses that complement or extend existing product lines. COMPANY ORGANIZATION AND PRODUCTS DRS is organized into four principal operating segments, three of which compete in the defense industry: the Electronic Systems Group (ESG); the Electro-Optical Systems Group (EOSG); the Flight Safety and Communications Group (FSCG); and the Data Systems Group (DSG). Each group is comprised of separate and distinct businesses. -21- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) During the current fiscal year, DRS's military recording systems subsidiary, DRS Precision Echo, Inc., was combined with DRS Flight Safety and Communications for management purposes, based on business and product synergies. DRS Precision Echo, Inc. previously had been managed, together with DRS Ahead Technology, Inc., as part of DSG. DSG now consists solely of the operations of DRS Ahead Technology, Inc., which principally serves commercial markets. Prior-year balances and results of operations disclosed in this MD&A for both FSCG and DSG have been restated to give effect to this management change. In addition, as a result of acquisitions completed in fiscal 1999, ESG and EOSG now include the operations of NAI Technologies, Inc. and the EOS Business of Raytheon, respectively. ESG is a leading provider of naval computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustical signal processing and display equipment, and combat control systems. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in the U.S. Army's ongoing battlefield digitization programs. EOSG produces systems and subsystems for infrared night vision and targeting products used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV) scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures regardless of the ambient light level. The effectiveness of the previous generation of these products was recognized in the Desert Storm conflict. This Group is also a leading designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its technology base by expanding into related non-defense markets and is a leading producer of ultra high-speed digital imaging systems. FSCG is a leading manufacturer of deployable flight emergency or "black box" recording equipment used by military and search and rescue aircraft. FSCG also manufactures shipboard communications and infrared surveillance systems for the U.S., Canadian and other navies. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. FSCG, recognized for its technical expertise and capabilities, also provides advanced manufacturing services for international military and space customers. FSCG products are used on such platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target verification and battle damage assessment. DSG produces consumable magnetic heads used in the production of hard disk drives by some of the world's largest computer manufacturers. Other commercial products provide data retrieval capability for devices such as airplane phones, credit card readers and other electronic scanning equipment. ACQUISITIONS AND RELATED ACTIVITIES On June 18, 1996, DRS Ahead Technology, Inc. (Ahead Technology) acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. In September 1998, DSG closed Nortronics' sole production facility in Dassel, Minnesota, and transferred related assets and products to the Group's Plymouth, Minnesota and Razlog, Bulgaria plants. On October 30, 1996, Pacific Technologies, Inc., a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $0.5 million. Based in San Diego, California, and renamed DRS Technical Services, Inc., it provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. On May 13, 1997, a subsidiary of the Company acquired approximately 80% of the outstanding equity of Magnetic Heads Company Ltd. (MHC) for approximately $0.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead Technology, Inc. (Bulgaria) AD (Ahead Technology -- Bulgaria), is a manufacturer and supplier of magnetic recording heads used primarily for commercial applications. In connection with this acquisition, the Company has agreed to make additional investments in DRS Ahead Technology -- Bulgaria totaling approximately $2.3 million over a five-year period. For purposes of this agreement, investments include the transfer of technology and related intangible assets, transfer of inventory and other productive assets, employee training and other similar transfers and expenditures. -22- On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems (a partnership formed in February 1996 in which the Company held a 90% interest) to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $0.1 million and the reversal of accrued obligations of $0.3 million. The results of operations of this partnership were not material to the consolidated operating results of the Company during the periods presented. On October 29, 1997, DRS acquired, through certain of its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace Limited (Spar), a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited, incorporated under the laws of England and Wales (the Spar Acquisition), pursuant to a purchase agreement (the Agreement) dated as of September 19, 1997 between DRS and Spar. The Company paid approximately $35.4 million in cash for the Acquisition (which included $6.9 million for cash acquired in connection with the transaction), subject to a certain working capital adjustment as provided for in the Agreement. The amount of such working capital adjustment, if any, remains the subject of dispute between DRS and Spar. Although the Company cannot, at this time, predict the outcome of such dispute, management does not expect that its resolution will have a material impact on the Company's consolidated results of operations or financial position. The excess of cost over the estimated fair value of net assets acquired was approximately $20.0 million and is being amortized on a straight-line basis over 30 years. DRS incurred professional fees and other costs related to the Spar Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Headquartered in Carleton Place, Ontario, Canada, and operating under the name DRS Flight Safety and Communications (FS&C), the company has been an international provider of aviation and defense systems for over 30 years. It designs, manufactures and markets sophisticated flight safety systems, naval communications systems and other advanced electronics for government and commercial customers around the world. It also provides custom manufacturing services for complex electronic assemblies and systems. On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics Ltd. and subsidiaries for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating under the name DRS Hadland, the company has been a leader in ultra high-speed image capture and analysis for over 40 years. It designs, manufactures and markets ultra high-speed digital imaging cameras and provides avionics systems, including airborne video recording and ground replay systems, for government and commercial customers worldwide. The excess of cost over the estimated fair value of net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over 30 years. On October 20, 1998, the Company acquired, through certain of its subsidiaries, certain assets of the Second Generation Ground-Based Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the Company and Raytheon, as amended (the EOS Acquisition). The Company paid approximately $45 million in cash at closing for the EOS Business. The purchase price is subject to a post-closing working capital adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment currently is being determined. Management does not expect that the final adjustment will have a material impact on the Company's consolidated financial position or results of operations. The excess of cost over the estimated fair value of net assets acquired and the appraised value of certain identified intangible assets were approximately $34.5 million and $30.8 million, respectively, and are being amortized on a straight-line basis over 20 years. DRS incurred professional fees and other costs related to the EOS Acquisition of approximately $2.0 million, which also were capitalized as part of the total purchase price. The Company has valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on the Company's effort to complete such contracts (see Note 6 of Notes to Consolidated Financial Statements). Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. The EOS Business provides products used in the detection, identification and acquisition of targets based on infrared data. Primary programs include the U.S. Army's Horizontal Technology Integration Second Generation FLIR (Forward-Looking Infra-Red) (HTI SGF), the Long-Range Advanced Scout Surveillance System (LRAS)(3), the Improved Bradley Acquisition System (IBAS) and the Javelin missile programs. Ground EO, renamed DRS Sensor Systems, Inc., has 47 employees based in El Segundo, California; and FPA, renamed DRS Infrared Technologies, LP, has 186 employees located in Dallas, Texas. On February 19, 1999, a wholly-owned subsidiary of the Company merged with and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary EMPLOYEES 99 ===================================================================== 2,180 98 ===================================================== 1,470 97 ========================================= 1,107 96 =============================== 809 95 ========================565 -23- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) of DRS, for stock and other consideration valued at approximately $24.8 million (the NAI Merger). The excess of cost over the estimated fair value of net assets acquired was approximately $25.4 million and is being amortized on a straight-line basis over 20 years. DRS incurred professional fees and other costs related to the NAI Merger of approximately $2.8 million, which were capitalized as part of the total purchase price. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. NAI is a diversified, international electronics company and a leading provider of rugged computers, peripherals and integrated systems primarily for military and special government applications. The company has office locations in Columbia, Maryland; Longmont, Colorado; Farnham, Surrey, England; and Fyshwick, Australian Capital Territory, Australia and employs approximately 200 people. NAI reported revenues from continuing operations of approximately $48 million for the fiscal year ended December 31, 1997 and $35 million for the nine-month period ended September 30, 1998. The aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in the Company's reported operating results from their respective effective dates of acquisition. Except for the Spar Acquisition, the EOS Acquisition and the NAI Merger, the financial position and results of operations of these businesses were not significant to those of the Company as of their respective effective dates of acquisition (see Note 2 of Notes to Consolidated Financial Statements). DRS selectively targets acquisition candidates that complement or expand the Company's products, services or technical capabilities. As part of the selection process, the Company assesses the potential for near-term accretion to earnings and typically selects only those businesses which can be accretive within twelve to eighteen months. The Spar Acquisition, the EOS Acquisition and NAI Merger, the Company's most recent and significant acquisitions, were immediately accretive to earnings. The Company continues to seek acquisition opportunities consistent with its overall business strategy and is engaged in preliminary discussions regarding several other potential acquisitions. There can be no assurance, however, that definitive agreements will be reached or that any further acquisitions will be consummated. RESULTS OF OPERATIONS The following table sets forth items in the Consolidated Statements of Earnings as a percentage of revenues and the percentage increase or decrease of those items as compared with the prior period:
PERCENT OF REVENUES PERCENT CHANGES - ----------------------------------------------------------------------------------------- ------------------------------ 1999 vs 1998 vs Years Ended March 31, 1999 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------- ------------------------------ REVENUES 100.0% 100.0% 100.0% 43.3% 32.9% COSTS AND EXPENSES 94.8% 92.5% 91.2% 46.8% 34.8% - ----------------------------------------------------------------------------------------- ------------------------------ OPERATING INCOME 5.2% 7.5% 8.8% (0.1%) 13.3% INTEREST AND OTHER INCOME, NET (0.3%) (0.7%) (0.5%) (36.4%) 97.3% INTEREST AND RELATED EXPENSES 3.4% 2.7% 2.5% 83.6% 41.9% - ----------------------------------------------------------------------------------------- ------------------------------ EARNINGS BEFORE EXTRAORDINARY ITEM, MINORITY INTERESTS AND INCOME TAXES 2.1% 5.5% 6.8% (45.3%) 8.8% MINORITY INTERESTS 0.4% 0.5% 0.4% 16.8% 116.3% - ----------------------------------------------------------------------------------------- ------------------------------ EARNINGS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES 1.7% 5.0% 6.4% (50.9%) 4.1% INCOME TAXES 0.6% 1.7% 2.5% (46.7%) (9.1%) - ----------------------------------------------------------------------------------------- ------------------------------ NET EARNINGS BEFORE EXTRAORDINARY ITEM 1.1% 3.3% 3.9% (53.1%) 12.5% - ----------------------------------------------------------------------------------------- ------------------------------
The following tables set forth, by operating segment, revenues, operating income, operating margin and the percentage increase or decrease of those items as compared with the prior period:
ESG PERCENT CHANGES - ------------------------------------------------------------------------------------------ --------------------------- 1999 vs 1998 vs Years Ended March 31, 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ --------------------------- REVENUES $123,558 $95,054 $81,157 30.0% 17.1% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 9,497 $ 9,481 $ 6,405 0.2% 48.0% OPERATING INCOME $ 9,292 $ 9,454 $ 6,348 (1.7%) 48.9% OPERATING MARGIN 7.5% 9.9% 7.8% (24.4%) 27.2% - ------------------------------------------------------------------------------------------ ---------------------------
-24-
DSG PERCENT CHANGES - ------------------------------------------------------------------------------------------ --------------------------- 1999 vs 1998 vs Years Ended March 31, 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ --------------------------- REVENUES $ 19,460 $25,307 $22,255 (23.1%) 13.7% OPERATING (LOSS) INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ (1,964) $ 2,252 $ 4,843 (187.2%) (53.5%) OPERATING (LOSS) INCOME $ (2,526) $ 1,681 $ 4,541 (250.3%) (63.0%) OPERATING MARGIN (13.0%) 6.6% 20.4% (295.4%) (67.4%) - ------------------------------------------------------------------------------------------ ---------------------------
EOSG PERCENT CHANGES - ------------------------------------------------------------------------------------------ --------------------------- 1999 vs 1998 vs Years Ended March 31, 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ --------------------------- REVENUES $ 78,186 $31,396 $25,134 149.0% 24.9% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 5,296 $ 1,270 $ 1,431 317.0% (11.3%) OPERATING INCOME $ 3,661 $ 1,134 $ 1,295 222.8% (12.4%) OPERATING MARGIN 4.7% 3.6% 5.2% 29.6% (29.9%) - ------------------------------------------------------------------------------------------ ---------------------------
FSCG PERCENT CHANGES - ------------------------------------------------------------------------------------------ --------------------------- 1999 vs 1998 vs Years Ended March 31, 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ --------------------------- REVENUES $ 52,224 $37,387 $11,597 39.7% 222.4% OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 5,457 $ 2,344 $ 916 132.8% 155.9% OPERATING INCOME $ 4,608 $ 1,847 $ 690 149.5% 167.7% OPERATING MARGIN 8.8% 4.9% 5.9% 78.6% (17.0%) - ------------------------------------------------------------------------------------------ ---------------------------
COMPARISON OF FISCAL 1999 WITH FISCAL 1998 ESG's revenue growth was attributable primarily to increased shipments of the Group's military display workstations and coastal surveillance systems. Fiscal 1999 revenues included approximately $7.0 million from NAI following the merger in February 1999. The decrease in ESG's operating income and operating margin resulted primarily from a shift in revenue mix in the current year to a higher percentage of revenues from the AN/UYQ-70 Advanced Display System tactical workstation (Q-70) program with the U.S. Navy. Margins are generally lower on the Q-70 program compared with certain other product lines, due to its significant commercial off-the-shelf (COTS) component content. The decrease in revenues at DSG resulted from the continuing effects of the sluggish global computer disk drive marketplace and competitive pricing pressure on certain other magnetic tape head products. DSG has experienced delays in orders expected from major customers and, more recently, postponements of existing orders, resulting from these market conditions. The decrease in DSG's operating income and operating margin was the result of lower revenues and margins attributable to pricing pressure and less favorable absorption of fixed operating expenses. These results also included charges incurred in September 1998 of approximately $0.5 million for costs relating to the closing of its Dassel, Minnesota facility and reserves for certain receivables and inventory, necessitated by the bankruptcy filing of a significant customer. In November 1998, DSG implemented a 25% reduction in its work force in its San Jose, California operation in response to the decrease in sales volume. DSG intends to continue its cost reduction efforts in general and in response to market conditions. The increase in revenues at EOSG was attributable to the acquisition of the EOS Business in October 1998, and the acquisition of DRS Hadland in March 1998. These increases were partially offset by the continued delay in shipping boresight systems, resulting from the complaint filed against an employee of DRS Photronics, Inc. (Photronics). To date, no claim has been made or threatened against the Company or Photronics. The Company cannot predict when such shipments will resume; however, these delays are expected to impact fiscal 2000's first quarter results. Operating results for the fiscal year ended March 31, 1998 reflect the effect of a second quarter restructuring charge of $471,000, associated with the relocation of the Group's boresight operations from Hauppauge, New York to Oakland, New Jersey. The increases in operating income and margins in fiscal 1999 were primarily due to the acquisitions mentioned above. FSCG's revenue growth was attributable to shipments of the Group's flight safety and communications products and to revenues from contract manufacturing services, generated by the business acquired from Spar in the third quarter of fiscal 1998. In addition, revenues for the fiscal year ended March 31, 1999 included approximately $1.7 million relating to an equitable adjustment claim settlement between the Company and the U.S. Navy. This settlement represented a recovery of a portion of excess costs incurred on a contract, completed in fiscal 1994, to develop and produce a mission data recorder playback -25- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) support system for use with the Company's AN/AQH-9 and AN/AQH-11 data recorders. The excess costs incurred on this contract were charged to earnings in prior periods. The increase in operating income and operating margin resulted from the increase in revenues, as explained above, partially offset by decreases in the Group's military data recording systems product line margins resulting from lower revenues and a change in product mix. Operating results were impacted adversely by a charge in the third quarter of fiscal 1999 of approximately $1.0 million for reserves against inventory in excess of current contract requirements at the Group's DRS Precision Echo, Inc. unit. Interest and other income, net was $0.9 million for the fiscal year ended March 31, 1999 as compared with $1.4 million in the prior fiscal year. Interest and other income, net in fiscal 1998 included approximately $0.3 million from the sale of the net assets of DRS Medical Systems in September 1997. Minority interest was approximately $1.0 million and $0.9 million in fiscal 1999 and 1998, respectively. The increase was due to higher operating income generated by ESG's DRS Laurel Technologies unit, in which the Company has an 80% interest. Interest and related expenses were approximately $9.4 million and $5.1 million for the fiscal years ended March 31, 1999 and 1998. The increase was primarily attributable to debt associated with the EOS Acquisition and the Spar Acquisition in October 1998 and 1997, respectively. The increase in interest expense was also due, in part, to higher average working capital borrowings in fiscal 1999. The Company's effective tax rate was 37% and 34% in the fiscal years ended March 31, 1999 and 1998, respectively. The lower effective tax rate for fiscal 1998 included the effect of a one-time benefit associated with the utilization of a U.S. Federal capital loss carryforward (see Results of Operations -- Comparison of Fiscal 1998 with Fiscal 1997). The fiscal 1999 effective tax rate reflected the effect of U.S. tax return benefits that were not recognized previously for financial statement purposes. The fiscal 1999 effective rate also reflected the effect of lower average foreign statutory tax rates, as domestic earnings were proportionately less than fiscal 1998. The Company's effective tax rate is expected to increase as domestic earnings improve. DRS recorded an extraordinary charge of approximately $2.3 million, net of tax, in the fiscal quarter ended December 31, 1998 in connection with a modification of the Company's credit facility (see Financial Condition and Liquidity -- Working Capital). COMPARISON OF FISCAL 1998 WITH FISCAL 1997 Revenues from ESG for the fiscal year ended March 31, 1998 increased 17.1% to $95.1 million from $81.2 million in fiscal 1997. The revenue growth was attributable primarily to increased shipments of the Group's military display workstations and coastal surveillance systems. ESG's operating income for fiscal 1998 increased 48.9% to $9.5 million, compared with $6.3 million reported in the prior year. Operating margins were 9.9% and 7.8% for the fiscal years ended March 31, 1998 and 1997, respectively. The increase in ESG's operating income and operating margin in fiscal 1998 resulted from the overall increase in revenues, coupled with operating efficiencies and the net cost savings derived from the consolidation and transfer of certain of the Group's military display product lines to its Gaithersburg, Maryland operation. Revenues from DSG for the fiscal year ended March 31, 1998 increased 13.7% to $25.3 million from $22.3 million in fiscal 1997. The increase in revenues was attributable primarily to increased shipments of the Group's computer disk drive head products (disk head products), as well as revenues from shipments of magnetic heads products generated by businesses acquired in fiscal 1997. DSG's operating income for fiscal 1998 decreased 63.0% to $1.7 million, compared with $4.5 million reported in fiscal 1997. Operating margins were 6.6% and 20.4% for the fiscal years ended March 31, 1998 and 1997, respectively. The decrease in DSG's operating income and operating margin was primarily the result of increased general and administrative costs and pricing pressure on its disk head products. Lower margins reflected the effects of declining orders in the second half of fiscal 1998 related to the general downturn and consolidation in the computer disk drive industry. Higher general and administrative expenses were attributable to the Group's marketing and product development efforts, as well as to the delayed start up of the Group's Bulgarian operation. Revenues from EOSG for the fiscal year ended March 31, 1998 increased 24.9% to $31.4 million from $25.1 million in fiscal 1997. The increase in revenues was attributable primarily to increased shipments of the Group's electro-optical systems product lines and to revenues from the acquisition of DRS Hadland in March 1998. EOSG's operating income for fiscal 1998 decreased 12.4% to $1.1 million, compared with $1.3 million in the prior year. Operating margins were 3.6% and 5.2% for the fiscal years ended March 31, 1998 and 1997, respectively. The decrease in EOSG's operating income and operating margin in fiscal 1998 reflected the effect of restructuring and other costs related to the closure of the Group's Hauppauge, New York facility and relocation of its operations to Oakland, New Jersey. FSCG's revenues and operating income increased 222.4% and 167.7%, respectively, in fiscal 1998. Operating margins were 4.9% and 5.6% in the fiscal years ended March 31, 1998 and 1997, respectively. Results for fiscal 1998 include -26 those of FS&C from the date of its acquisition in October 1997. Revenues from FS&C were $13.4 million in the fiscal year ended March 31, 1998 and were attributable primarily to shipments of flight safety and communications products and from contract manufacturing services. The increase in revenues was also attributable to increased shipments of the Group's military data storage and recording products. Operating margins decreased due mainly to higher company-sponsored research and development expenditures during the year for new 8mm recording products. Consolidated revenues in fiscal 1998 and 1997 included approximately $1.7 million and $3.4 million, respectively, from DRS Medical Systems. Substantially all of the net assets of DRS Medical Systems were sold on September 12, 1997. Operating income of the Partnership was not significant to the consolidated results of operations of the Company in fiscal 1998 and 1997. Interest and related expenses increased 41.9% to $5.1 million for the fiscal year ended March 31, 1998, as compared with $3.6 million in the prior fiscal year. The increase was attributable primarily to the increase in debt associated with the acquisition of FS&C and higher average working capital borrowings. Interest and other income, net increased by approximately $0.7 million, or 97.3%, in fiscal 1998 to $1.4 million. This increase principally was due to the interest earned on higher average cash balances primarily resulting from cash acquired with FS&C. Minority interest increased from $0.4 million in fiscal 1997 to $0.9 million in fiscal 1998. The increase was due to the continued growth of the DRS Laurel Technologies partnership (DRS Laurel), in which the Company has an 80% interest. DRS Laurel manufactures many of the Company's military display workstations. The Company's effective tax rates for the fiscal years ended March 31, 1998 and 1997 were 34% and 39%, respectively. The lower effective income tax rate in fiscal 1998 reflected the benefit of the utilization of U.S. Federal capital loss carryforwards against the capital gain resulting from the sale of the Company's Hauppauge, New York facility, combined with the effect of lower overall effective tax rates of newly acquired foreign operations. The provision for income taxes included all estimated income taxes payable to federal, state and foreign governments, as applicable. FINANCIAL CONDITION AND LIQUIDITY Cash and Cash Flow: Cash and cash equivalents at March 31, 1999 and 1998 represented approximately 3% and 6%, respectively, of total assets. During the fiscal year, cash increased by approximately $0.5 million. Cash flow from operations totaled $15.2 million, which included $14.9 million in net advance payments relating to the Q-70 program. Beginning in March 1999, these advance payments are being liquidated against associated progress billings through August 1999. Net cash flow from operations were net of approximately $8.0 million and $3.6 million for interest and income tax payments, respectively. Net cash provided by financing activities for the fiscal year was $46.5 million, including net proceeds from acquisition-related borrowings of $47.1 million. Approximately $6.2 million was used for repayments of long-term debt, which included approximately $5.0 million for the retirement of the Company's 8 1/2% convertible subordinated debentures at maturity. Working capital borrowings under the Company's credit facility were $8.0 million and $5.1 million as of March 31, 1999 and 1998, respectively. Cash used in investing activities totaled $60.9 million, which included $54.2 million for acquisitions and $6.9 million for capital expenditures. Working Capital: Working capital as of March 31, 1999 was $13.5 million, a decrease of $28.6 million, or 68.0%, from the prior year-end level. This decrease was directly related to liabilities recorded in connection with the EOS Acquisition. Approximately $28.5 million was provided for estimated costs in excess of contract value on acquired contracts. In addition, approximately $10.9 million was recorded, representing management's estimate of normal profits (operating income) to be earned in connection with the completion of acquired contracts and related work-in-process as of the acquisition date. In connection with the acquisition of the EOS Business on October 20, 1998, the Company and certain of its subsidiaries entered into a $150 million secured credit facility (Facility) with Mellon Bank, N.A., consisting of two term loans: the first in the principal amount of $30 million (First Term Loan), and the second in the principal amount of $50 million (Second Term Loan); and a revolving line of credit (Line of Credit) for $70 million, subject to a borrowing base calculation. As of March 31, 1999 and 1998, the Company had approximately $38.4 million and $10.8 million, respectively, of additional available credit after satisfaction of its borrowing base requirement. The maturity dates of the First Term Loan and the Second Term Loan are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments beginning on June 30, 1999. The Line of Credit matures on October 20, 2003. The Facility amended, restated and replaced the Company's existing $60 million secured credit facility consisting of a $20 million term loan and a $40 million revolving line of credit. The Second Term Loan was used to finance a portion of the acquisition of the EOS Business. The First Term Loan was used to refinance the debt associated with the acquisition of DRS Flight Safety and Communications, completed in the third quarter of fiscal 1998. The Line of Credit is available for working capital, general corporate purposes and acquisitions. The Facility is secured by substantially all of the assets of the Company. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or -27- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The Facility contains certain covenants and restrictions, including maintenance of a minimum level of consolidated net worth, a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. As of March 31, 1999, the Company was in compliance with all covenants. For accounting purposes, the modification of the Facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extraordinary charge in the amount of $2,306,000, net of tax, in the third quarter of fiscal 1999. With the new Facility described above, the Company believes that its present working capital position and available bank financing are sufficient to support its current operational needs, as well as its near-term business objectives. Total Assets: During the year, total assets increased by $166.9 million, or 102.1%, as compared with March 31, 1998, primarily due to the EOS Acquisition and the NAI Merger. With respect to the EOS Acquisition, the Company acquired approximately $88.1 million in total assets, including $4.4 million in net accounts receivable, $6.5 million in net inventory and $11.9 million in fixed assets. In accounting for this acquisition, the Company provided $39.4 million for unearned income and future estimated costs on existing Focal Plane Array and certain other contracts. Based on the purchase price of $45.0 million, the excess of purchase price over net assets acquired and the appraised value of certain identified intangible assets totaled approximately $65.3 million (including approximately $2.0 million for closing costs). Total assets also increased by $44.2 as a result of the NAI Merger. As of the effective date of the merger, NAI had approximately $8.4 million in net inventory and $4.9 million of net accounts receivable. The excess of the value of consideration exchanged over the estimated fair value of net assets acquired was approximately $28.2 million (including approximately $2.8 million for professional fees and related closing costs). Accounts Receivable: Accounts receivable, net, excluding amounts from acquired businesses, increased by approximately $20.9 million in fiscal 1999, primarily due to increased revenues in the fourth quarter of fiscal 1999. At March 31, 1999 and 1998, accounts receivable included $0.8 million arising from retainage provisions in certain contracts, primarily with the Canadian and British governments, which may not be collected within one year. Inventories: Inventories, excluding amounts from acquired businesses, increased by approximately $23.1 million from March 31, 1998, due primarily to increases in production activities, particularly with respect to the EOS Business. Debt: Total debt outstanding increased by approximately $48.0 million during the fiscal year ended March 31, 1998 to $117.1 million, primarily due to the borrowings associated with the EOS Acquisition. The Company has become increasingly leveraged in recent years, as many of its acquisitions have been financed with convertible debt securities and bank debt. Despite the increase in long-term debt this fiscal year, the ratio of long-term debt (excluding current installments) to total capitalization increased only slightly from 56.0% at March 31, 1998 to 58.2% at March 31, 1999, primarily due to the offsetting effect of equity issued in connection with the NAI Merger. Stockholders' Equity: Net stockholders' equity increased by approximately $29.1 million during the fiscal year ended March 31, 1999 to approximately $73.4 million, primarily as a result of the exchange of shares in the NAI Merger. Backlog: Backlog at March 31, 1999 was approximately $365.8 million, as compared with $177.4 million at March 31, 1998. The Company booked $322.3 million in new orders in fiscal 1999. The increase in backlog was due to the net effect of bookings, partially offset by revenues together with the addition of approximately $140.4 million of backlog added as a result the EOS Acquisition and the NAI Merger. Due to the general nature of defense procurement and contracting, the operating cycle for the Company's military business typically has been long term. Military backlog currently consists of various production and development contracts with varying delivery schedules and project timetables. However, there has been a recent trend in the Company's backlog to include a higher percentage of commercial product orders and COTS-based systems for the military, both of which favor shorter delivery times. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues and related backlog positions, may not be indicative of future results. FREE CASH FLOW (Dollars in millions) 99 ====================================================================== 19.6 98 ========================================================= 15.3 97 ================================================= 12.7 96 ==================================== 6.2 95 =============================== 5.6 -28- Of the $322.3 million in new contract awards booked in fiscal 1999, ESG secured $124.3 million in new contracts, including significant awards of approximately $70.0 million in additional production and engineering contracts for AN/UYQ-70 Advanced Display Systems; $6.6 million for cables and wire harnesses for the Army's Bradley M2A3 Infantry Fighting Vehicles; $6.2 million for AN/SPS-67 Radar Systems; $5.9 million for littoral surveillance systems; $5.9 million for Replacement Data Storage Systems; $4.5 million for combat display emulators; and $4.2 million on the Joint-STARS program. DSG booked $21.3 million in new business in fiscal 1999, consisting of $11.9 million for its specialty magnetic head products and $9.4 million for tape head products. EOSG booked awards of $121.0 million in fiscal 1999, including awards totaling $55.9 million from the U.S. Army to provide Horizontal Technology Integration Second Generation Forward Looking Infrared (HTI SGF) Thermal Imaging Systems for the sighting systems of the Abrams M1A2 System Enhancement Package (SEP) and Bradley M2A3 fighting vehicles, $24.2 million for Improved Bradley Acquisition Systems (IBAS) for the new Bradley M2A3 fighting vehicles, and $6.6 million to provide Standard Advanced Dewar Assemblies Type II (SADA II) for the tracking and imaging systems on a variety of platforms, including the M2A3 Bradley and the M1A2 Abrams vehicles. These awards were booked by the Group's new DRS Sensor Systems and DRS Infrared Technologies units. Other significant EOSG awards for the year included $12.0 million for high-speed digital imaging systems; $2.7 million to produce upper optics modules for optical laser surgery equipment; and $3.6 million for Multi-Platform Boresight Equipment (MPBE), including a $2.1 million award for the Hawk 100 Series Light Attack aircraft, the first application of MPBE systems for a European fixed-wing aircraft platform. FSCG received a total of $55.8 million in fiscal 1999, including approximately $19.4 million for advanced manufacturing services, $11.5 million for flight incident recorders and locator beacons, $8.6 million for shipboard communications systems and $6.3 million for 8mm military data recorders for use on F/A-18, A-10 and other fixed-wing aircraft. Internal Research and Development: In addition to customer-sponsored research and development, the Company also engages in internal research and development (IR&D). IR&D expenditures reflect the Company's continued investment in new technology and diversification of its products. Expenditures for IR&D in fiscal 1999, 1998 and 1997 were $5.2 million, $4.0 million and $3.9 million, respectively. Business Considerations: The Company primarily is engaged in the design and manufacture of high-technology systems and products used for the processing, display and storage of electronic data. Although DRS has diversified into commercial products and markets, a significant portion of the Company's revenues continues to be derived directly or indirectly from defense industry contracts with the U.S. Government. In recent years, the Federal defense budget has been reduced dramatically in inflation-adjusted terms. However, the overall level of spending for defense electronics has increased, given the nature of modern warfare and its increasing reliance on sophisticated weaponry and support systems. In addition, the U.S. Government has determined that it is often more cost effective to retrofit and upgrade existing weapons platforms than to replace them. These factors have affected the nature and extent of defense procurement and have precipitated a consolidation of the defense industry and a focus principally on cost competitiveness and efficiency of operations. DRS has participated successfully in this industry consolidation through strategic business acquisitions and by streamlining its existing operations. The Company also has focused on supporting and improving existing products and programs, as well as identifying opportunities to develop and manufacture new products. The defense electronics sector is characterized by rapid technological change. The nature of modern warfare also has changed, with increasing reliance on timely and accurate battlefield information, both to ensure that increasingly costly assets are deployed efficiently and to minimize the destruction of non-military targets. In response to these factors, as well as to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on COTS product designs, whereby commercial electronic components are integrated, adapted, upgraded and "ruggedized" for applications in harsh military environments. Using COTS designs, the Company is able to develop and deliver its products with significantly less development time and expense compared with traditional military product cycles. The COTS approach generally results in shorter lead times, lower product costs and the employment of the latest available information and computing technologies. The design and manufacture of COTS-based products is a complex process requiring specific engineering capabilities, extensive knowledge of military platforms in which the equipment will be installed and an in-depth understanding of military operating environments and requirements. The Company believes that it has the personnel and technical expertise required to address the technological challenges confronting the defense electronics sector. INTERNAL RESEARCH AND DEVELOPMENT (Dollars in millions) 99 ======================================================================= 5.2 98 ===================================================== 4.0 97 =============================================== 3.9 96 ============== 0.6 95 ================= 0.8 -29- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company is subject to other inherent risks associated with defense contracting, including changes in government policies and dependence on Congressional support, primarily for appropriations and allocation of funds to products and programs supported by the Company. In recent years, the Company's products and programs have been well supported. However, uncertainty exists with respect to the size and scope of future defense budgets and their possible impact on existing or future products and programs. Further, the Company's existing defense contracts are subject to termination, either at the convenience of the customer or as a result of cancellation of funding. The Company's contracts and operations also are subject to governmental oversight, particularly with respect to business practices, contract performance and cost accounting practices. Governmental investigations may lead to claims against the Company, the outcome of which cannot be predicted. As described in Note 10 of Notes to the Consolidated Financial Statements, in fiscal 1999, the Government commenced a case against an employee of DRS Photronics, Inc., a subsidiary of the Company, relating to the accuracy of test data. To date, no claim has been made or threatened against the Company or the subsidiary. The subsidiary is currently unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. At this time, the Company is unable to quantify the effect of the delayed shipments on its future results of operations or financial position, or to predict when such shipments ultimately will be made, although the delays are expected to impact fiscal 2000 first quarter results. The additions of international businesses involve additional risks for the Company, such as exposure to currency fluctuations, future investment obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely differing legal systems, customs and practices in foreign countries. The Company expects that international sales as a percentage of the overall sales of the Company will continue to increase in future years as a result of, among other factors, the Company's growth strategy and continuing changes in the United States defense industry. DRS has continued to grow despite these circumstances and conditions. However, future growth will be dependent on the Company's ability to adapt to these and other changing market and industry conditions. Inflation: The Company has experienced the effects of inflation through increased costs of labor, services and raw materials. Although a majority of the Company's revenues are derived from long-term contracts, the selling prices of such contracts generally reflect estimated costs to be incurred in the applicable future periods. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities." This accounting standard, which is effective for fiscal years beginning after December 15, 1998, provides authoritative guidance on accounting and financial reporting related to costs of start-up activities. This SOP requires that, at the effective date of adoption, costs of start-up activities previously capitalized be expensed and reported as a cumulative effect of a change in accounting principle, and further requires that such costs subsequent to adoption be expensed as incurred. The Company does not anticipate the effect of adopting this standard to be material to the Company's consolidated results of operations. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 provides authoritative guidance on accounting and financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Statement requires the recognition of all derivatives as either assets or liabilities in the consolidated balance sheet, and the periodic measurement of those instruments at fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Upon adoption of this standard, existing hedging relationships, if any, must be designated anew and documented pursuant to the provisions of the Statement. Based on the Company's fiscal calendar and the current requirements of SFAS 133, this standard must be adopted no later than April 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial position or results of operations. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union established permanent, fixed conversion rates between their existing currencies and the European Union's common currency called the "Euro". The transition period for the introduction of the Euro is scheduled to phase in over a period ending January 1, 2002, with existing currencies being removed completely from circulation on July 1, 2002. The Company currently does not have significant transactions denominated in Euro-related currencies. This is not expected to change in the foreseeable future. Therefore, the Company believes the introduction of the Euro and the phasing out of the other currencies will not have a material impact on the Company's consolidated financial statements. -30- YEAR 2000 DRS has initiated a Year 2000 readiness plan focused on identification and remediation of information processes which may not function correctly at the beginning of the Year 2000. The plan, developed as a company-wide effort and directed by a corporate Year 2000 committee, monitors the DRS operating groups' performance as the groups proceed through the phases of awareness, assessment and remediation. Each DRS operating group has appointed its own Year 2000 project staff, responsible for implementation of the plan and for reporting progress and costs to the corporate Year 2000 committee. This committee, in turn, reports the Company's overall Year 2000 status to the Board of Directors. The Company's overall status is, therefore, a composite of the compliance efforts of the DRS operating groups. On an aggregate basis, DRS estimates that the costs of its Year 2000 readiness will total approximately $1.5 million, of which approximately $500,000 has been spent to date. Although the various operating groups are currently at varying phases of the readiness process, the Company expects that information systems will be protected from material failure by mid-1999 and that Company products will have achieved such readiness by October 1999. Within each DRS operating group, the Year 2000 effort is directed towards: (1) IT Systems (which examines operating systems and business application software); (2) External Agents (which examines third-party suppliers and customers); and (3) Product Issues (which examines Year 2000 issues inherent in products sold by DRS). The IT Systems section evaluates hardware and systems software. DRS has substantially completed its evaluation of its main internal operating systems and business application software. As a result of this evaluation, DRS has begun the process of implementing the necessary changes in its internal systems to achieve Year 2000 compliance in this area. Based on the current schedule, the Company's IT Systems are expected to be Year 2000 compliant by October 1999. The External Agents section includes the process of identifying and prioritizing critical suppliers and customers at the direct interface level and communicating with them about their plans and progress in addressing the Year 2000 problem. Year 2000 compliance issues at critical suppliers create risk for DRS since their inability to operate effectively could impact our business. Possible problems for DRS could include isolated performance problems with manufacturing or administrative systems, isolated interruption of deliveries from critical suppliers and product liability issues. The consequences of these issues may include increases in manufacturing and administrative costs until the problems are resolved, lost revenues, lower cash receipts and product liability. DRS does not have control over these third parties and, as a result, cannot currently estimate to what extent the future operating results of DRS's may be adversely affected by the failure of these third parties to address successfully their Year 2000 issues. Failure by critical suppliers and customers (in particular, the U.S. Government, on which DRS is materially dependent), however, to achieve Year 2000 compliance in a timely manner could have a material adverse effect on the Company's operations. Evaluations of critical third parties have been initiated and should be completed by mid-1999. These evaluations will be followed by corrective actions and the development of contingency plans, if considered necessary. The Product Issues section includes the process of identifying any products sold by DRS which may not be Year 2000 compliant, determining a corrective course of action and disseminating information with respect thereto to customers. Although many of DRS's products that have integrated software are Year 2000 compliant, there can be no assurances that all of DRS's products are currently Year 2000 compliant. DRS's costs to achieve Year 2000 compliance will include the costs and expenses of fulfilling warranty obligations on non-compliant products. Detailed evaluations of certain products have been initiated, and completion of this phase of the Company's Year 2000 project should be completed by mid-1999. These evaluations will be followed by corrective actions and the development of contingency plans, if considered necessary. At a projected $1.5 million, total costs associated with required IT Systems modifications to become Year 2000 compliant are not expected to have a material effect on the consolidated results of operations, cash flows or financial position of DRS. To the extent recoverable under the terms of contracts with its customers, DRS's compliance costs will be included in establishing prices for the Company's products and services, and, therefore, will be reflected in the Company's revenues and costs and expenses. Uncertainties exist, however, as to DRS's ability to detect in a timely manner all Year 2000 problems, as well as its ability to achieve successful and timely resolution of all Year 2000 issues. Consequently, there can be no assurances as to the amount of total cost associated with implementing DRS's Year 2000 project and, as a result, the effect of such cost on the consolidated result of operations, cash flows or financial position of DRS. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect DRS's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, DRS is unable to determine at this time whether the consequences of Year 2000 failure will have a material impact on DRS's results of operations, liquidity or financial condition. DRS implemented its Year 2000 project with the intention of significantly reducing DRS's level of risk regarding the Year 2000 problem. DRS expects that if its Year 2000 project is completed as scheduled, the risk of significant interruptions of normal operations should be reduced. -31- DRS TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS $ 10,154,000 $ 9,673,000 ACCOUNTS RECEIVABLE, NET (NOTE 3) 76,135,000 47,273,000 INVENTORIES, NET OF PROGRESS PAYMENTS (NOTE 4) 72,907,000 38,637,000 PREPAID EXPENSES, DEFERRED INCOME TAXES AND OTHER CURRENT ASSETS (NOTE 8) 4,316,000 1,849,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 163,512,000 97,432,000 - -------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 5) 72,893,000 55,429,000 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 38,730,000 32,457,000 - -------------------------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 34,163,000 22,972,000 - -------------------------------------------------------------------------------------------------------------------------- GOODWILL AND RELATED INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION OF $9,163,000 AND $6,061,000 AT MARCH 31, 1999 AND 1998, RESPECTIVELY 122,335,000 33,070,000 DEFERRED INCOME TAXES AND OTHER NONCURRENT ASSETS (NOTE 8) 10,334,000 9,999,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $330,344,000 $163,473,000 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES CURRENT INSTALLMENTS OF LONG-TERM DEBT (NOTES 2 AND 7) $ 5,844,000 $ 7,514,000 SHORT-TERM BANK DEBT (NOTE 7) 9,169,000 5,100,000 ACCOUNTS PAYABLE 42,470,000 23,179,000 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (NOTE 6) 92,538,000 19,513,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 150,021,000 55,306,000 LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS (NOTES 2 AND 7) 102,091,000 56,532,000 DEFERRED INCOME TAXES (NOTE 8) -- 3,897,000 OTHER NONCURRENT LIABILITIES (NOTES 9 AND 10) 4,790,000 3,403,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 256,902,000 119,138,000 - -------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (NOTES 7 AND 9) PREFERRED STOCK, NO PAR VALUE. AUTHORIZED 2,000,000 SHARES; NONE ISSUED AT MARCH 31, 1999 AND 1998 -- -- COMMON STOCK, $.01 PAR VALUE PER SHARE. AUTHORIZED 20,000,000 SHARES; ISSUED 9,615,933 AND 6,596,237 SHARES AT MARCH 31, 1999 AND 1998, RESPECTIVELY 96,000 66,000 ADDITIONAL PAID-IN CAPITAL 48,038,000 19,399,000 RETAINED EARNINGS 27,737,000 27,057,000 ACCUMULATED OTHER COMPREHENSIVE LOSSES (139,000) (135,000) TREASURY STOCK, AT COST: 385,164 AND 402,461 SHARES OF COMMON STOCK AT MARCH 31, 1999 AND 1998, RESPECTIVELY (1,493,000) (1,561,000) UNAMORTIZED RESTRICTED STOCK COMPENSATION (797,000) (491,000) - -------------------------------------------------------------------------------------------------------------------------- NET STOCKHOLDERS' EQUITY 73,442,000 44,335,000 - -------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $330,344,000 $163,473,000 - --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. -32- DRS TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- REVENUES $273,428,000 $190,854,000 $143,578,000 COSTS AND EXPENSES (NOTE 4) 259,183,000 176,595,000 130,996,000 - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 14,245,000 14,259,000 12,582,000 INTEREST AND OTHER INCOME, NET (876,000) (1,377,000) (698,000) INTEREST AND RELATED EXPENSES 9,358,000 5,098,000 3,592,000 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE EXTRAORDINARY ITEM, MINORITY INTERESTS AND INCOME TAXES 5,763,000 10,538,000 9,688,000 MINORITY INTERESTS 1,021,000 874,000 404,000 - -------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES 4,742,000 9,664,000 9,284,000 INCOME TAXES (NOTE 8) 1,756,000 3,292,000 3,621,000 - -------------------------------------------------------------------------------------------------------------------------- NET EARNINGS BEFORE EXTRAORDINARY ITEM 2,986,000 6,372,000 5,663,000 EXTRAORDINARY ITEM, NET OF TAX (NOTE 7) (2,306,000) -- -- - -------------------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000 - -------------------------------------------------------------------------------------------------------------------------- NET EARNINGS PER SHARE OF COMMON STOCK (NOTE 1) BASIC EARNINGS PER SHARE: NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.45 $ 1.13 $ 1.03 EXTRAORDINARY ITEM, NET OF TAX $ (0.35) $ -- $ -- NET EARNINGS $ 0.10 $ 1.13 $ 1.03 DILUTED EARNINGS PER SHARE: NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.93 $ 0.84 EXTRAORDINARY ITEM, NET OF TAX $ (0.34) $ -- $ -- NET EARNINGS $ 0.10 $ 0.93 $ 0.84 - --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. -33- DRS TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
ACCUMULATED UNAMORTIZED OTHER RESTRICTED COMMON STOCK ADDITIONAL COMPRE- TREASURY STOCK STOCK Years Ended March 31, --------------- PAID-IN RETAINED HENSIVE ---------------- COMPEN- 1999, 1998 AND 1997 SHARES AMOUNT CAPITAL EARNINGS LOSSES SHARES AMOUNT SATION TOTAL ==================================================================================================================================== BALANCES AT MARCH 31, 1996 5,963,566 $59,000 $13,639,000 $15,022,000 -- 498,434 $(1,918,000) $(236,000) $26,566,000 - ------------------------------------------------------------------------------------------------------------------------------------ COMPREHENSIVE EARNINGS NET EARNINGS -- -- -- 5,663,000 -- -- -- -- 5,663,000 FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPREHENSIVE EARNINGS 5,663,000 - ------------------------------------------------------------------------------------------------------------------------------------ STOCK OPTIONS EXERCISED 44,220 1,000 101,000 -- -- 300 (3,000) -- 99,000 COMPENSATION RELATING TO STOCK OPTIONS, NET -- -- (29,000) -- -- -- -- 109,000 80,000 RESTRICTED STOCK BONUS AWARDS -- -- 167,000 -- -- (34,575) 133,000 (217,000) 83,000 SHARES REISSUED FROM TREASURY FOR ACQUISITIONS -- -- 330,000 -- -- (43,266) 166,000 -- 496,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1997 6,007,786 60,000 14,208,000 20,685,000 -- 420,893 (1,622,000) (344,000) 32,987,000 - ------------------------------------------------------------------------------------------------------------------------------------ COMPREHENSIVE EARNINGS NET EARNINGS -- -- -- 6,372,000 -- -- -- -- 6,372,000 FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (135,000) -- -- -- (135,000) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPREHENSIVE EARNINGS 6,237,000 - ------------------------------------------------------------------------------------------------------------------------------------ STOCK OPTIONS EXERCISED 23,480 -- 145,000 -- -- 224 (2,000) -- 143,000 COMPENSATION RELATING TO STOCK OPTIONS, NET -- -- 199,000 -- -- -- -- (101,000) 98,000 RESTRICTED STOCK BONUS AWARDS -- -- 139,000 -- -- (18,656) 63,000 (46,000) 156,000 CONVERSION OF 9% DEBENTURES (NOTE 7) 564,971 6,000 4,708,000 -- -- -- -- -- 4,714,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1998 6,596,237 66,000 19,399,000 27,057,000 (135,000) 402,461 (1,561,000) (491,000) 44,335,000 - ------------------------------------------------------------------------------------------------------------------------------------ COMPREHENSIVE EARNINGS NET EARNINGS -- -- -- 680,000 -- -- -- -- 680,000 FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (4,000) -- -- -- (4,000) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPREHENSIVE EARNINGS 676,000 - ------------------------------------------------------------------------------------------------------------------------------------ STOCK OPTIONS EXERCISED 63,600 1,000 143,000 -- -- -- -- -- 144,000 COMPENSATION RELATING TO STOCK OPTIONS, NET -- -- 427,000 -- -- -- -- (314,000) 113,000 RESTRICTED STOCK BONUS AWARDS -- -- 173,000 -- -- (17,297) 68,000 8,000 249,000 CONVERSION OF 9% DEBENTURES (NOTE 7) 97,830 1,000 855,000 -- -- -- -- -- 856,000 EQUITY ISSUED IN CONNECTION WITH THE NAI MERGER (NOTES 2 AND 9) 2,858,266 28,000 27,041,000 -- -- -- -- -- 27,069,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31, 1999 9,615,933 $96,000 $48,038,000 $27,737,000 $(139,000) 385,164 $(1,493,000) $(797,000) $73,442,000 ====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. -34- DRS TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1999 1998 1997 ==================================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000 ADJUSTMENTS TO RECONCILE NET EARNINGS TO CASH FLOWS FROM OPERATING ACTIVITIES: EXTRAORDINARY ITEM, NET OF TAX 2,306,000 -- -- DEPRECIATION AND AMORTIZATION 12,411,000 7,059,000 5,027,000 INVENTORY RESERVES AND PROVISION FOR DOUBTFUL ACCOUNTS 3,980,000 1,018,000 (335,000) DEFERRED INCOME TAXES (3,451,000) (121,000) 701,000 OTHER, NET 373,000 (446,000) 120,000 CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM BUSINESS COMBINATIONS: INCREASE IN ACCOUNTS RECEIVABLE (20,939,000) (17,051,000) (200,000) INCREASE IN INVENTORIES (23,084,000) (10,985,000) (5,485,000) (INCREASE) DECREASE IN PREPAID EXPENSES AND OTHER CURRENT ASSETS (474,000) (393,000) 779,000 INCREASE (DECREASE) IN ACCOUNTS PAYABLE 12,454,000 11,011,000 (5,837,000) INCREASE (DECREASE) IN ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 15,933,000 2,324,000 (1,057,000) INCREASE IN CUSTOMER ADVANCES 14,613,000 683,000 -- OTHER, NET 423,000 (703,000) (1,090,000) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,225,000 (1,232,000) (1,714,000) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES CAPITAL EXPENDITURES (6,866,000) (6,570,000) (3,634,000) SALES OF CAPITAL ASSETS 130,000 2,277,000 151,000 PAYMENTS PURSUANT TO BUSINESS COMBINATIONS, NET OF CASH ACQUIRED (54,176,000) (34,183,000) (6,285,000) PROCEEDS FROM SALE OF PARTNERSHIP NET ASSETS -- 1,890,000 -- OTHER, NET -- 227,000 -- - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (60,912,000) (36,359,000) (9,768,000) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES PAYMENTS ON LONG-TERM DEBT (1,193,000) (2,294,000) (840,000) RETIREMENT OF CONVERTIBLE SUBORDINATED DEBENTURES (4,992,000) -- -- NET PROCEEDS FROM ACQUISITION-RELATED DEBT 47,075,000 35,578,000 -- OTHER BORROWINGS (REPAYMENTS), NET 5,367,000 4,706,000 (1,107,000) OTHER, NET 191,000 (168,000) 99,000 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 46,448,000 37,822,000 (1,848,000) - --------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (280,000) (13,000) -- - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 481,000 218,000 (13,330,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,673,000 9,455,000 22,785,000 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $10,154,000 $ 9,673,000 $ 9,455,000 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. -35- DRS TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ===================== A. ORGANIZATION DRS Technologies, Inc. (hereinafter NOTE 1 DRS or the Company) is a leading supplier of defense electronics systems and has served the defense Summary of Signficant industry for over thirty years. The Company provides Accounting Policies advanced technology products and services to government and commercial markets worldwide and holds leading positions in most of its markets. DRS develops and manufactures a broad range of mission critical products -- from rugged computers and peripherals to systems and components in the areas of communications, data storage, digital imaging, electro-optics, flight safety and space. The Company's defense electronics systems and subsystems are sold to all branches of the U.S. military, selected U.S. government intelligence agencies, major aerospace/defense prime contractors, international military forces and a wide range of commercial customers. DRS also offers a full complement of technical support and advanced manufacturing services. B. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of DRS Technologies, Inc., its subsidiaries (all of which are wholly or majority owned) and a joint venture consisting of an 80% controlling partnership interest. All significant intercompany transactions and balances have been eliminated in consolidation. Certain items in the prior years' consolidated financial statements have been reclassified to conform to the fiscal 1999 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY TRANSACTIONS Transactions in foreign currencies are translated into U.S. dollars at the approximate prevailing rate at the time of the transaction. The operations of the Company's foreign subsidiaries, other than Bulgaria, are translated from the local (functional) currencies into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." The functional currency of the Company's Bulgarian subsidiary is the U.S. dollar. The rates of exchange at each balance sheet date are used for translating balance sheet accounts, and an average rate of exchange is used for translating the statement of earnings. Gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a separate component of stockholders' equity. D. CLASSIFICATIONS Receivables, inventories, losses and future costs accrued on uncompleted contracts, unearned income and accruals for future costs on uncompleted acquired contracts are primarily attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, these items are included in current assets and liabilities, respectively. E. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. F. RECEIVABLES Receivables consist of amounts billed and currently due from customers, and unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized for accounting purposes, but not yet billed to customers. G. INVENTORIES Commercial and other non-contract inventories are stated at the lower of cost (which includes material, labor and manufacturing overhead) or net realizable value. Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expenses which include research and development costs, where such costs are recoverable under customer contracts. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of progress payments and advances. Accordingly, such progress payments and advances are reflected as an offset against the related inventory balances. To the extent that customer advances exceed related inventory levels, such advances are classified as current liabilities. -36- H. PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been provided on the straight-line method. The ranges of estimated useful lives are: office furnishings 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. Costs of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in results of operations. I. GOODWILL AND RELATED INTANGIBLE ASSETS Goodwill and related intangible assets consist primarily of intangible assets resulting from acquisitions and represent the excess of cost of the investments over the fair values of the underlying net assets at the dates of investment and certain identified acquired intangible assets (see Note 2). Goodwill and related intangible assets are being amortized on a straight-line basis over three to thirty years. J. CONVERTIBLE DEBENTURES The Company's outstanding 9% Senior Subordinated Convertible Debentures due 2003 (9% Debentures) and 12% Convertible Promissory Notes due 2001 (12% Notes) are convertible at any time into shares of the Company's Common Stock at the election of the holders. Upon conversion, the Company's policy is to credit stockholders' equity for the aggregate principal amount of debt converted, net of a pro-rata portion of unamortized issuance costs at the conversion date. In the event the conversion occurs before an interest payment record date, the related liability for accrued and unpaid interest is also credited to stockholders' equity. K. REVENUE RECOGNITION Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as shipments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues from commercial product sales also are recognized upon shipment. Revenues on contracts with significant engineering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total contract costs at completion (cost-to-cost) with consideration given for risk of performance and estimated profit. Revenues related to incentive-type contracts also are determined on a percentage-of-completion basis measured by the cost-to-cost method. Revenues from cost-reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Revenues recognized under the cost-to-cost percentage-of-completion basis during fiscal 1999, 1998 and 1997 approximated 10%, 9% and 7% of total revenues, respectively, with remaining revenues recognized as deliveries of finished units are made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1999, 1998 and 1997 were $15,380,000, $11,774,000 and $12,995,000, respectively, of customer-sponsored research and development. Revisions in profit estimates are reflected in the period in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 78%, 74% and 71% of the Company's revenues in fiscal 1999, 1998 and 1997, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government. In addition, approximately 8% in fiscal 1999 and 9% in fiscal 1998 and 1997 of the Company's revenues were derived directly or indirectly from sales to foreign governments, respectively. L. STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123), the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost is recognized for its stock options in the financial statements only as it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company's Common Stock as of the date of grant. The Company follows the provisions of SFAS 123 and provides pro forma disclosures of net earnings and earnings per share as if the fair value-based method of accounting for stock options, as defined in the Statement, had been applied (see Note 9). M. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences became deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. -37- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) N. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement simplified standards for computing earnings per share (EPS), as specified in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under SFAS 128, the presentation of primary EPS was replaced by the presentation of basic EPS. For companies with complex capital structures, the presentation of fully diluted EPS was replaced by diluted EPS. Diluted EPS is computed similarly to fully diluted EPS, pursuant to APB 15. The Company adopted this standard in fiscal 1998 beginning with the fiscal quarter ended December 31, 1997, and its adoption did not have a material impact on reported earnings per share for current or restated prior periods. Basic earnings per share is computed by dividing net earnings by the weighted average of Common Stock outstanding during each period. The computation of diluted earnings per share includes the effect, when dilutive, of shares from the assumed exercise of dilutive stock options and the effect of the assumed conversion of the Company's outstanding 9% Debentures and 8-1/2% Debentures. The Company's 12% Notes were antidilutive in fiscal 1999. The following table provides the components of the per-share computations:
(In thousands, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------------------- BASIC EPS COMPUTATION NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986 $ 6,372 $ 5,663 EXTRAORDINARY ITEM, NET OF TAX (2,306) -- -- - ------------------------------------------------------------------------------------------- NET EARNINGS $ 680 $ 6,372 $ 5,663 - ------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,618 5,626 5,525 BASIC EARNINGS (LOSSES) PER SHARE: NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.45 $ 1.13 $ 1.03 EXTRAORDINARY ITEM, NET OF TAX (0.35) -- -- - ------------------------------------------------------------------------------------------- NET EARNINGS $ 0.10 $ 1.13 $ 1.03 - ------------------------------------------------------------------------------------------- DILUTED EPS COMPUTATION NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986 $ 6,372 $ 5,663 INTEREST AND EXPENSES RELATED TO CONVERTIBLE DEBENTURES -- 2,071 1,795 - ------------------------------------------------------------------------------------------- ADJUSTED NET EARNINGS BEFORE EXTRAORDINARY ITEM 2,986 8,443 7,458 EXTRAORDINARY ITEM, NET OF TAX (2,306) -- -- - ------------------------------------------------------------------------------------------- ADJUSTED NET EARNINGS $ 680 $ 8,443 $ 7,458 - ------------------------------------------------------------------------------------------- DILUTED COMMON SHARES OUTSTANDING: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,618 5,626 5,525 STOCK OPTIONS 214 283 228 CONVERTIBLE DEBENTURES: 8 1/2% DEBENTURES -- 333 333 9% DEBENTURES -- 2,803 2,824 - ------------------------------------------------------------------------------------------- DILUTED COMMON SHARES OUTSTANDING 6,832 9,045 8,910 - ------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSSES) PER SHARE: NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.93 $ 0.84 EXTRAORDINARY ITEM, NET OF TAX (0.34) -- -- - ------------------------------------------------------------------------------------------- NET EARNINGS $ 0.10 $ 0.93 $ 0.84 - -------------------------------------------------------------------------------------------
O. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS Whenever events or changes in circumstances indicate that the carrying amount of a long-lived or intangible asset may not be recoverable, the Company's policy is to evaluate the realizability of such assets based upon the expectations of non-discounted cash flows or of 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. P. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable, accounts payable and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values as of March 31, 1999 and 1998 of the Company's convertible debt are disclosed herein (see Note 7). Q. OTHER COMPREHENSIVE EARNINGS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes new standards for reporting and display of comprehensive income in a full set of general- -38- purpose financial statements. The Company adopted SFAS 130 this fiscal year, and the components of Comprehensive Income are disclosed within the Consolidated Statements of Stockholders' Equity and Comprehensive Earnings. - ---------------- On June 18, 1996, DRS Ahead Technology, Inc. (DRS Ahead NOTE 2 Technology) acquired, through a wholly-owned subsidiary, substantially all the assets of Vikron, Inc. (Vikron) Business Combinations for approximately $3.7 million in cash. The excess of cost over the estimated fair value of net assets acquired was approximately $1.6 million and is being amortized on a straight-line basis over fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and recording heads. On October 24, 1996, DRS Ahead Technology acquired, through a wholly-owned subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for approximately $2.4 million in cash. In September 1998, DSG closed Nortronics' sole production facility in Dassel, Minnesota, and transferred related assets and products to its Plymouth, Minnesota and Razlog, Bulgaria plants. On October 30, 1996, Pacific Technologies, Inc., a California corporation, merged with and into a wholly-owned subsidiary of the Company for stock and cash valued at approximately $0.5 million. Based in San Diego, California and renamed DRS Technical Services, Inc., it provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. On May 13, 1997, a subsidiary of the Company acquired approximately 80% of the outstanding equity of Magnetic Heads Company Ltd. (MHC) for approximately $0.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead Technology, Inc. (Bulgaria) AD (Ahead Technology -- Bulgaria), is a manufacturer and supplier of magnetic recording heads used primarily for commercial applications. In connection with this acquisition, the Company has agreed to make additional investments in DRS Ahead Technology -- Bulgaria totaling approximately $2.3 million over a five-year period. For purposes of this agreement, investments include transfer of technology and related intangible assets, transfer of inventory and other productive assets, employee training and other similar transfers and expenditures. On September 12, 1997, the Company sold substantially all of the net assets of DRS Medical Systems (a partnership formed in February 1996 in which the Company held a 90% interest) to United States Surgical Corporation for approximately $1.9 million in cash. The sale resulted in a gain of approximately $0.1 million and the reversal of accrued obligations of $0.3 million. The results of operations of this partnership were not material to the consolidated operating results of the Company during the periods presented. On October 29, 1997 (the Closing Date), DRS acquired, through certain of its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace Limited (Spar), a Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited, incorporated under the laws of England and Wales (the Spar Acquisition), pursuant to a purchase agreement (the Agreement) dated as of September 19, 1997 between DRS and Spar. The Company paid approximately $35.4 million in cash for the Acquisition (which included $6.9 million for cash acquired in connection with the transaction), subject to a certain working capital adjustment as provided for in the Agreement. The amount of such working capital adjustment, if any, remains the subject of dispute between DRS and Spar. Although the Company cannot, at this time, predict the outcome of such dispute, management does not expect that its resolution will have a material impact on the Company's consolidated results of operations or financial position. The excess of cost over the estimated fair value of net assets acquired was approximately $20.0 million and is being amortized on a straight-line basis over 30 years. DRS incurred professional fees and other costs related to the Spar Acquisition of approximately $1.5 million, which were capitalized as part of the total purchase price. Headquartered in Carleton Place, Ontario, Canada, and operating under the name DRS Flight Safety and Communications, the company has been an international provider of aviation and defense systems for over 30 years. It designs, manufactures and markets sophisticated flight safety systems, naval communications systems and other advanced electronics for government and commercial customers around the world. It also provides custom manufacturing services for complex electronic assemblies and systems. On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics Ltd. and subsidiaries for approximately $6.5 million in cash. Headquartered in Tring, Hertfordshire, the United Kingdom, and operating under the name DRS Hadland, the company has been a leader in ultra high-speed image capture and analysis for over 40 years. It designs, manufactures and markets ultra high-speed digital imaging cameras and provides avionics systems, including airborne video recording and ground replay systems, for government and commercial customers worldwide. The excess of cost over the estimated fair value of net assets acquired was approximately $4.0 million and is being amortized on a straight-line basis over 30 years. On October 20, 1998 the Company acquired, through certain of its subsidiaries, certain assets of the Second Generation Ground-Based Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the Company and Raytheon, as amended (the EOS Acquisition). The Company paid approximately $45 million in cash for the acquisition at closing; the purchase price is subject to a post-closing working capital adjustment, as provided for in -39- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment is currently being determined. Management does not expect that the final adjustment will have a material impact on the Company's consolidated financial position or results of operations. The excess of cost over the estimated fair value of net assets acquired and the appraised value of certain identified intangible assets were approximately $34.5 million and $30.8 million, respectively, and are being amortized on a straight-line basis over 20 years. DRS incurred professional fees and other costs related to the EOS Acquisition of approximately $2.0 million, which also were capitalized as part of the total purchase price. The Company has valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on the Company's effort to complete such contracts (see Note 6). Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. The EOS Business provides products used in the detection, identification and acquisition of targets based on infrared data. Primary programs include the U.S. Army's Horizontal Technology Integration Second Generation FLIR (Forward-Looking Infra-Red) (HTI SGF), the Long-Range Advanced Scout Surveillance System (LRAS3), the Improved Bradley Acquisition System (IBAS) and the Javelin missile programs. Ground EO, renamed DRS Sensor Systems, Inc., has 47 employees based in El Segundo, California; and FPA, renamed DRS Infrared Technologies, LP, has 186 employees located in Dallas, Texas. On February 19, 1999, a wholly-owned subsidiary of the Company merged with and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary of DRS, for stock and other consideration valued at approximately $24.8 million (the NAI Merger). The excess of cost over the estimated fair value of net assets acquired was approximately $25.4 million and is being amortized on a straight-line basis over 20 years. DRS incurred professional fees and other costs related to the NAI Merger of approximately $2.8 million, which were capitalized as part of the total purchase price. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Consolidated Financial Statements. NAI is a diversified, international electronics company and a leading provider of rugged computers, peripherals and integrated systems primarily for military and special government applications. The company has office locations in Columbia, Maryland; Longmont, Colorado; Farnham, Surrey, England; and Fyshwick, Australian Capital Territory, Australia and employs approximately 200 people. NAI reported revenues from continuing operations of approximately $48 million for the fiscal year ended December 31, 1997 and $35 million for the nine-month period ended September 30, 1998. The aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in the Company's reported operating results from their respective effective dates of acquisition. Except for the Spar Acquisition, the EOS Acquisition and the NAI Merger, the financial position and results of operations of these businesses were not significant to those of the Company as of their respective effective dates of acquisition. The following unaudited pro forma financial information shows the results of operations for the years ended March 31, 1999 and 1998, as though the Spar Acquisition, the EOS Acquisition and the NAI Merger had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the companies, the pro forma calculations include: amortization of the excess of cost over the estimated fair value of net assets acquired and other identified intangible assets; additional interest expense on the debt associated with the Spar and EOS Acquisitions; estimated costs associated with certain master service agreements between DRS and Raytheon, negotiated in connection with the EOS Acquisition; elimination of interest and related expenses associated with NAI's 12% Notes and other short-term borrowings, converted and liquidated, respectively, in connection with the NAI Merger; the disposal of NAI's Telecommunications segment (Wilcom, Inc.) immediately prior to the NAI Merger; an increase in the average shares outstanding used in earnings per share computations, based on equity issued in connection with the NAI Merger; adjustments to conform accounting practices, particularly with respect to revenue recognition (except with respect to the Spar Acquisition, as it was not practicable to conform the revenue recognition method); and the related tax effect of these adjustments for each pro forma period presented. For purposes of this pro forma financial information, an adjustment to conform the treatment of general and administrative expenses between DRS and the businesses acquired in the Spar Acquisition was not made, as management believes that the effect of any such adjustment would be immaterial. Years Ended March 31, 1999 1998 - -------------------------------------------------------------------------------- REVENUES $327,632,000 $284,228,000 NET LOSSES BEFORE EXTRAORDINARY ITEM $ (6,806,000) $ (2,927,000) LOSSES PER SHARE: BASIC $ (0.74) $ (0.34) DILUTED $ (0.74) $ (0.34) - -------------------------------------------------------------------------------- -40- The pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisitions and the merger been made at the beginning of the period, or of the future results of operations of the combined companies. - -------------------- The component elements of accounts receivable, net of NOTE 3 allowances for doubtful accounts of $1,254,000 and $486,000 at March 31, 1999 and 1998, respectively, Accounts Receivable are as follows: March 31, 1999 1998 - -------------------------------------------------------------------------------- U.S. GOVERNMENT: AMOUNTS BILLED $14,831,000 $10,042,000 RECOVERABLE COSTS AND ACCRUED PROFIT ON PROGRESS COMPLETED, NOT BILLED 7,229,000 1,592,000 - -------------------------------------------------------------------------------- 22,060,000 11,634,000 - -------------------------------------------------------------------------------- OTHER DEFENSE CONTRACTS: AMOUNTS BILLED 42,963,000 24,058,000 RECOVERABLE COSTS AND ACCRUED PROFIT ON PROGRESS COMPLETED, NOT BILLED 5,558,000 4,925,000 - -------------------------------------------------------------------------------- 48,521,000 28,983,000 - -------------------------------------------------------------------------------- OTHER TRADE RECEIVABLES 5,554,000 6,656,000 - -------------------------------------------------------------------------------- TOTAL $76,135,000 $47,273,000 - -------------------------------------------------------------------------------- Included in accounts receivable are $848,000 and $784,000 at March 31, 1999 and 1998, respectively, arising from retainage provisions in certain contracts with the Canadian and British governments which may not be collected within one year. The Company receives progress payments on certain contracts between 75-90% of allowable costs incurred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final acceptance of the product. In addition, the Company may bill based upon units delivered. - -------------------- Inventories are summarized as follows: NOTE 4 Inventories March 31, 1999 1998 - -------------------------------------------------------------------------------- WORK-IN-PROCESS $ 95,392,000 $63,000,000 RAW MATERIAL AND FINISHED GOODS 14,309,000 5,813,000 - -------------------------------------------------------------------------------- 109,701,000 68,813,000 LESS PROGRESS PAYMENTS (36,794,000) (30,176,000) - -------------------------------------------------------------------------------- TOTAL $ 72,907,000 $38,637,000 - -------------------------------------------------------------------------------- General and administrative costs included in work in process were $13,604,000 and $9,855,000 at March 31, 1999 and 1998, respectively. General and administrative costs included in costs and expenses amounted to $51,105,000, $38,783,000 and $34,569,000 in fiscal 1999, 1998 and 1997, respectively. Included in these amounts are expenditures for internal research and development, amounting to approximately $5,228,000, $4,049,000 and $3,852,000 in fiscal 1999, 1998 and 1997, respectively. - -------------------- Property, plant and equipment at March 31, 1999 and NOTE 5 1998 are summarized as follows: Property, Plant and Equipment March 31, 1999 1998 - -------------------------------------------------------------------------------- LABORATORY AND PRODUCTION EQUIPMENT $ 42,717,000 $29,279,000 COMPUTER EQUIPMENT 12,562,000 10,329,000 LAND, BUILDINGS AND IMPROVEMENTS AND LEASEHOLD IMPROVEMENTS 11,480,000 10,787,000 OFFICE FURNISHINGS, EQUIPMENT AND OTHER 6,134,000 5,034,000 - -------------------------------------------------------------------------------- TOTAL $ 72,893,000 $55,429,000 - -------------------------------------------------------------------------------- -41- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Depreciation and amortization of plant and equipment amounted to $7,559,000, $4,983,000 and $3,542,000 in fiscal 1999, 1998 and 1997, respectively. - -------------------- The component elements of accrued expenses and other NOTE 6 current liabilities are as follows: Accrued Expenses and Other Current Liabilities March 31, 1999 1998 - -------------------------------------------------------------------------------- PAYROLLS, OTHER COMPENSATION AND RELATED EXPENSES $ 9,323,000 $ 5,693,000 INCOME TAXES PAYABLE (NOTE 8) 3,666,000 1,342,000 DEFERRED INCOME TAXES (NOTE 8) -- 697,000 CUSTOMER ADVANCES 15,973,000 118,000 LOSSES AND FUTURE COSTS ACCRUED ON UNCOMPLETED CONTRACTS 8,119,000 4,120,000 UNEARNED INCOME AND ACCRUAL FOR FUTURE COSTS RELATED TO ACQUIRED CONTRACTS (NOTE 2) 38,167,000 -- OTHER 17,290,000 7,543,000 - -------------------------------------------------------------------------------- TOTAL $92,538,000 $19,513,000 - -------------------------------------------------------------------------------- - -------------------- A summary of debt is as follows: NOTE 7 Debt March 31, 1999 1998 - -------------------------------------------------------------------------------- 9% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES DUE OCTOBER 1, 2003 $ 19,134,000 $20,000,000 8 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE AUGUST 1, 1998 -- 4,992,000 TERM NOTES 80,000,000 19,794,000 REVOLVING LINE OF CREDIT 15,683,000 23,556,000 OTHER OBLIGATIONS 2,287,000 804,000 - -------------------------------------------------------------------------------- 117,104,000 69,146,000 LESS: CURRENT INSTALLMENTS OF LONG-TERM DEBT 5,844,000 7,514,000 SHORT-TERM BANK DEBT 9,169,000 5,100,000 - -------------------------------------------------------------------------------- TOTAL $102,091,000 $56,532,000 - -------------------------------------------------------------------------------- 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, unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. In fiscal 1999 and 1998, $866,000 and $5,000,000 aggregate principal amount of these Debentures were converted into 97,830 and 564,971 shares of Common Stock, respectively, at the election of the bondholders. The 9% Debentures are currently redeemable at the option of the Company, in whole or in part, together with accrued interest to the redemption date, at a redemption price of 105% of face value, diminishing by one percent each year to 100% on the fifth anniversary of the initial redemption date (October 1, 1998). There is no sinking fund requirement associated with the 9% Debentures. The 9% Debentures are subordinated to the prior payment of principal and interest on all senior indebtedness of the Company. The indenture for the 9% Debentures contains certain restrictions, including a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. Under the indenture, the Company also is required to maintain a minimum level of consolidated net worth. As of March 31, 1999, the Company was in compliance with all covenants. The 9% Debentures are listed for trading on the American Stock Exchange. The aggregate market values, based on closing prices, of the outstanding principal amount was approximately $19,517,000 and $25,400,000 as of March 31, 1999 and 1998, respectively. At March 31, 1998, $4,992,000 aggregate principal amount of the Company's 8 1/2% Debentures remained outstanding. These Debentures were redeemed at maturity on August 1, 1998. In connection with the acquisition of the EOS Business (see Note 2) on October 20, 1998, the Company and certain of its subsidiaries entered into a $150 million secured credit facility (Facility) with Mellon Bank, N.A., consisting of two term -42- loans: the first in the principal amount of $30 million (First Term Loan), and the second in the principal amount of $50 million (Second Term Loan); and a revolving line of credit (Line of Credit) for $70 million, subject to a borrowing base calculation. As of March 31, 1999 and 1998, the Company had approximately $38.4 million and $10.8 million, respectively, of additional available credit after satisfaction of its borrowing base requirement. The maturity dates of the First Term Loan and the Second Term Loan are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments beginning on June 30, 1999. The Line of Credit matures on October 20, 2003. The Facility amended, restated and replaced the Company's existing $60 million secured credit facility consisting of a $20 million term loan and a $40 million revolving line of credit, obtained in fiscal 1998 in connection with the Spar Acquisition. The Second Term Loan was used to finance a portion of the acquisition of the EOS Business. The First Term Loan was used to refinance the debt associated with the acquisition of DRS Flight Safety and Communications in the third quarter of fiscal 1998, and the Line of Credit is available for working capital, general corporate purposes and acquisitions. The Facility is secured by substantially all of the assets of the Company. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The Facility contains certain covenants and restrictions, including maintenance of a minimum level of consolidated net worth, a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. The Company was in compliance with all covenants under its credit agreements at March 31, 1999 and 1998. For accounting purposes, the modification of the Facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extraordinary charge in the amount of $2,306,000, net of tax of $1,347,000 (see Note 8), during the period. As of March 31, 1999, approximately $95,683,000 was outstanding against the Facility, in addition to which $5,922,000 was contingently payable under letters of credit, as compared with amounts outstanding and contingently payable under the previous revolving line of credit at March 31, 1998 of $43,350,000 and $4,944,000, respectively. Weighted average borrowings under revolving lines of credit for the fiscal years ended March 31, 1999 and 1998 were approximately $22,977,000 and $11,325,000, respectively. The weighted average interest rates on outstanding revolving line of credit borrowings as of March 31, 1999 and 1998 were 8.1% and 7.8%, respectively. As of March 31, 1999, the effective interest rates on the First and Second Term Loans were 8.25% and 9.25%, respectively. Cash payments for interest during fiscal 1999, 1998 and 1997 were $7,978,000, $3,874,000 and $3,032,000, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2004 are as follows: 2000, $5,844,000; 2001, $5,250,000; 2002, $7,250,000; 2003, $9,250,000 and 2004, $31,400,000. - ------------------- Earnings before extraordinary item and NOTE 8 income taxes and income tax expense consist of the following: Income Taxes Years Ended March 31, 1999 1998 1997 - -------------------------------------------------------------------------------- EARNINGS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES: DOMESTIC EARNINGS $ 2,903,000 $9,118,000 $9,284,000 FOREIGN EARNINGS 1,839,000 546,000 -- - -------------------------------------------------------------------------------- TOTAL $ 4,742,000 $9,664,000 $9,284,000 - -------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT): CURRENT: FEDERAL $ 2,363,000 $2,186,000 $2,673,000 STATE 431,000 698,000 247,000 FOREIGN 2,413,000 529,000 -- - -------------------------------------------------------------------------------- 5,207,000 3,413,000 2,920,000 - -------------------------------------------------------------------------------- DEFERRED: FEDERAL (2,014,000) 117,000 596,000 STATE 39,000 34,000 105,000 FOREIGN (1,476,000) (272,000) -- - -------------------------------------------------------------------------------- (3,451,000) (121,000) 701,000 - -------------------------------------------------------------------------------- TOTAL $ 1,756,000 $3,292,000 $3,621,000 - -------------------------------------------------------------------------------- -43- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 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, 1999 and 1998 are as follows: March 31, 1999 1998 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS: ACQUIRED FEDERAL NET OPERATING LOSS (NOL) CARRYFORWARDS $ 5,575,000 $ -- STATE NOL CARRYFORWARDS 3,085,000 2,840,000 COSTS ACCRUED ON UNCOMPLETED CONTRACTS 1,860,000 1,112,000 DEFERRED FINANCING COSTS (NOTE 7) 1,066,000 -- INVENTORY CAPITALIZATION 3,217,000 1,984,000 OTHER 3,426,000 1,503,000 - -------------------------------------------------------------------------------- TOTAL GROSS DEFERRED TAX ASSETS 18,229,000 7,439,000 LESS VALUATION ALLOWANCE (6,886,000) (1,455,000) - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS 11,343,000 5,984,000 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: DEPRECIATION AND AMORTIZATION 1,120,000 4,255,000 GENERAL AND ADMINISTRATIVE COSTS 5,795,000 4,248,000 FEDERAL IMPACT OF THE STATE BENEFITS 498,000 749,000 FOREIGN DEFERRED REVENUES -- 863,000 OTHER (16,000) 463,000 - -------------------------------------------------------------------------------- TOTAL GROSS DEFERRED TAX LIABILITIES 7,397,000 10,578,000 - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS (LIABILITIES) $3,946,000 $(4,594,000) - -------------------------------------------------------------------------------- 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 U.S. Federal and state net operating loss carryforwards, due to the uncertainty of future Company earnings and the status of applicable statutory regulation that could limit or preclude utilization of these benefits in future periods. Based upon the level of historical taxable income and projections for future taxable income over the period in which the Company's deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 1999. Current and noncurrent deferred tax assets of $984,000 and $2,962,000, respectively, are included in the Consolidated Balance Sheets as of March 31, 1999 and 1998, respectively. There were no net deferred tax assets as of March 31, 1998. At March 31, 1999, approximately $16,398,000 of U.S. Federal and $39,519,000 of state NOL carryforwards, which will expire between fiscal years 2000 and 2019, were available in various tax jurisdictions. All of the Company's U.S. Federal and $984,000 of its state NOL carryforwards were acquired in connection with the NAI Merger (see Note 2). A reconciliation of the expected U.S. Federal income tax expense to the effective income tax expense follows:
Years Ended March 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- EXPECTED U.S. INCOME TAX EXPENSE $ 1,613,000 $3,286,000 $3,157,000 DIFFERENCE BETWEEN U.S. AND FOREIGN TAX RATES (74,000) (97,000) -- STATE INCOME TAX, NET OF FEDERAL INCOME TAX BENEFIT 310,000 483,000 232,000 UTILIZATION OF CAPITAL LOSS CARRYFORWARD -- (193,000) -- NONDEDUCTIBLE EXPENSES 492,000 262,000 270,000 U.S. TAX, NET OF FOREIGN TAX CREDIT UTILIZED 196,000 -- -- U.S. TAX BENEFITS NOT PREVIOUSLY RECOGNIZED (629,000) -- -- OTHER (152,000) (449,000) (38,000) - ----------------------------------------------------------------------------------------------------------------- TOTAL $ 1,756,000 $3,292,000 $3,621,000 - -----------------------------------------------------------------------------------------------------------------
The provision for income taxes includes all estimated income taxes payable to Federal, state and foreign governments, as applicable. Cash payments for income taxes, net of refunds received, during fiscal 1999, 1998 and 1997 amounted to $3,577,000, $4,449,000 and $2,813,000, respectively. -44- - ------------------------ On February 19, 1999, DRS Merger Sub, Inc., a New York corporation and wholly-owned subsidiary of NOTE 9 DRS Technologies, Inc., a Delaware Corporation ("DRS"), merged (the "Merger") with and into NAI Common Stock, Stock Technologies, Inc., a New York corporation Option Plans and ("NAI"), with NAI being the surviving corporation Employee Benefit Plans and continuing as a direct wholly-owned subsidiary of DRS (see Note 2). As a result of the Merger: holders of NAI common stock received 0.25 of a share of DRS common stock for each share of NAI common stock; each NAI 12% Convertible Subordinated Promissory Note due January 15, 2001 is convertible into 0.25 of a share of DRS common stock; each issued and outstanding NAI warrant to purchase NAI common stock at an exercise price of $2.50 per share was converted into DRS warrants at a conversion ratio of 0.25 of a share of DRS common stock to one share of NAI common stock; each NAI stock option outstanding under the NAI 1991 Stock Option Plan, 1993 Stock Option Plan for Directors, and 1996 Stock Option Plan ("Option"), whether vested or unvested, was assumed by DRS and now constitutes an option to acquire, on the same terms and conditions as were applicable under such Option prior to the Merger, the number of DRS common stock equal to the product (rounded down to the nearest whole number) of 0.25 and the number of shares of NAI common stock, subject to such Option prior to the merger at a per-share exercise price equal to four times the exercise price of such Option prior to the Merger. In connection with the Merger, the Company issued 2,858,266 shares of Common Stock, including 546,187 shares issued upon conversion of approximately $4.4 million of then outstanding 12% Notes. In addition, the Company issued stock options and warrants to purchase a total of 161,230 and 603,175 shares, respectively, of DRS Common Stock (as adjusted for the exchange ratio). The terms of the NAI stock options assumed, except for the exercise price and number of shares, were not amended. As of March 31, 1999, the warrants assumed in the Merger remained outstanding. These warrants are exercisable at $10.00 per share and expire February 15, 2002. On February 7, 1991, the Company's Board of Directors (Board) adopted the 1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000 shares of Common Stock. The Company's stockholders approved the Stock Option Plan on August 8, 1991. Under the terms of the Stock Option Plan, options to purchase shares of Common Stock may be granted to key employees, directors and consultants of the Company. Options granted under the Stock Option Plan are at the discretion of the Board (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, 1999, 156,550 shares were reserved for future grants under the Stock Option Plan. On June 17, 1996, the Board adopted, and on August 7, 1996, the stockholders approved the 1996 Omnibus Plan (Omnibus Plan). On November 20, 1998, the Board adopted, and on February 11, 1999, the stockholders approved an amendment to the Omnibus Plan, increasing the number of shares of Common Stock reserved for issuance under the Omnibus Plan from 500,000 to 1,400,000 shares, subject to adjustment under certain circumstances. 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, 1999, 600,800 shares were reserved for future grants under the Omnibus Plan. Pursuant to the terms of exercise under the grant, the excess of the fair-market value of shares under option at the date of grant over the option price may be charged to unamortized restricted stock compensation or to earnings as compensation expense and credited to additional paid-in capital. The unamortized restricted stock compensation, if any, is charged to net earnings as the options become exercisable, in accordance with the terms of the grant. The amount of compensation charged to earnings in fiscal 1999, 1998 and 1997 was $67,000, $98,000 and $80,000, respectively, and related solely to options granted under the Stock Option Plan. -45- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The Board may, at its discretion, grant equity-based compensation awards, subject to certain regulatory restrictions. In fiscal 1999, the Board issued options to purchase up to 250,000 shares of DRS Common Stock with vesting terms similar to awards issued in fiscal 1999 under the Omnibus Plan at exercise prices in excess of the market price on the date of grant. The per share weighted-average fair value and exercise price of these options were $1.89 and $10.44, respectively. When stock is issued on exercise of options, the par value of each share ($.01) is credited to Common Stock, and the remainder of the option price is credited to paid-in capital. No charge is made to operations. A summary of stock option transactions follows:
NUMBER OF SHARES WEIGHTED AVERAGE OF COMMON STOCK EXERCISE PRICE - ---------------------------------------------------------------------------------------------------------------- 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 GRANTED 204,800 $ 9.72 EXERCISED (23,480) $ 3.70 EXPIRED (16,000) $ 9.41 - ---------------------------------------------------------------------------------------------------------------- OUTSTANDING AT MARCH 31, 1998 (OF WHICH 303,100 SHARES WERE EXERCISABLE) 706,100 $ 7.33 GRANTED 893,930 $ 9.34 EXERCISED (63,600) $ 2.24 EXPIRED (45,200) $ 10.27 - ---------------------------------------------------------------------------------------------------------------- OUTSTANDING AT MARCH 31, 1999 (OF WHICH 461,579 SHARES WERE EXERCISABLE) 1,491,230 $ 8.66 - ----------------------------------------------------------------------------------------------------------------
Information regarding all options outstanding at March 31, 1999 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------------------- NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED OF AVERAGE AVERAGE REMAINING OF AVERAGE 0PTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE - -------------------------------------------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES LESS THAN $5.00 170,000 $ 2.92 1.1 YEARS 158,000 $ 3.14 $5.00 - $9.99 805,662 $ 8.41 8.6 YEARS 140,687 $ 8.11 GREATER THAN $9.99 515,568 $10.95 7.0 YEARS 162,892 $10.91 - --------------------------------------------------------------------------------------------------------------------- TOTAL 1,491,230 $ 8.66 7.2 years 461,579 $ 7.39 - ---------------------------------------------------------------------------------------------------------------------
Pro forma information regarding net earnings and earnings per share, as required by SFAS 123, has been determined as if the Company had accounted for its employee stock options under the fair-value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.0%, 6.0% and 6.5% in fiscal 1999, 1998 and 1997, respectively; dividend yield of 0%; volatility factor related to the expected market price of the Company's Common Stock of 0.2974 in fiscal 1999, 0.2824 in fiscal 1998, and 0.2764 in fiscal 1997; and weighted-average expected option life of five years. The weighted-average fair values of options granted at market during fiscal 1999, 1998 and 1997 were $2.95, $3.94 and $3.68 per share, respectively. The per share weighted-average fair value and exercise price of options granted with an exercise price less than market value during 1999 and 1998 were $3.96 and $8.20, and $9.99 and $0.01, respectively. For purposes of pro forma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. Accordingly, the pro forma results for fiscal 1999, 1998 and 1997 presented below include 49%, 67% and 49%, 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: 1999 1998 1997 - -------------------------------------------------------------------------------- PRO FORMA NET EARNINGS $7,000 $5,869,000 $5,446,000 PRO FORMA EARNINGS PER SHARE: BASIC $ -- $ 1.04 $ 0.99 DILUTED $ -- $ 0.88 $ 0.81 - -------------------------------------------------------------------------------- The Company maintains defined contribution plans covering substantially all domestic full-time eligible employees. The Company's contributions to these plans for fiscal 1999, 1998 and 1997 amounted to $1,184,000, $743,000 and $629,000, respectively. -46- Certain employees of DRS Hadland and DRS Flight Safety and Communications participate in defined benefit pension plans sponsored by the Company. Plan assets are invested in publicly traded equity and fixed-income securities. Retirement benefits are based on various factors, including remuneration and years of service. DRS funds these plans based on independent actuarial valuations. The net pension obligations and related expenses associated with these plans are not material to the consolidated financial position and results of operations of the Company. On February 1, 1996, the Company established a Supplemental Executive Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant to the SERP, the Company will provide retirement benefits to each key executive, based on years of service and final average annual compensation as defined therein. In addition, the Company will advance premiums for life insurance policies providing a death benefit equal to five times the participants' salary at time of death. In the event of a change in control, as defined therein, benefits become fully vested. The SERP is non-contributory and unfunded. Benefits under the SERP currently are being funded from working capital. As of March 31, 1999 and 1998, the Company's liability for benefits accrued under the SERP was approximately $1,494,000 and $1,377,000, respectively, and is included in Other Noncurrent Liabilities in the Consolidated Balance Sheets. Charges of $462,802, $436,000 and $270,000 relating to the SERP were included in the results of operations for fiscal 1999, 1998 and 1997, respectively. - ------------------------ At March 31, 1999, the Company was party to NOTE 10 various noncancellable operating leases (principally for administration, engineering and Commitments, production facilities) with minimum rental Contingencies payments as follows: and Related Party Transactions - -------------------------------------------------------------------------------- 2000 $ 8,325,000 2001 8,368,000 2002 8,230,000 2003 5,821,000 2004 4,613,000 THEREAFTER 11,440,000 - -------------------------------------------------------------------------------- TOTAL $ 46,797,000 - -------------------------------------------------------------------------------- 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 $4,924,000, $3,585,000 and $3,237,000 in fiscal 1999, 1998 and 1997, respectively. In April 1984, the Board of Directors approved a lease agreement with LDR Realty Co. (wholly-owned by the former Chairman of the Board of Directors and former President) for additional office and manufacturing space for the Company. In August 1997, the lease was amended, extending the term of the lease through June 2002. The Company pays an annual rent of $233,000 and is required to pay all real-estate taxes, maintenance and repairs to the facility. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the Gross Agreement) with David E. Gross, who retired as President and Chief Technical Officer of the Company on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross will receive a total of $600,000 as compensation for his services under a five-year consulting agreement with the Company and $750,000 as consideration for a five-year non-compete arrangement. The payments are being charged to expense over the five-year term as services are performed and obligations are fulfilled by Mr. Gross. He also will receive, at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period, commencing in July 1999, as deferred compensation. The approximate net present value of the deferred compensation payments to be made to Mr. Gross is included in Other Noncurrent Liabilities in the Consolidated Balance Sheets. The Company's Flight Safety and Communications segment receives assistance from the Canadian Government for research and development activities which is applied to reduce the cost of the related expenditures. Government assistance in the amount of approximately $2.4 million is repayable through royalties in the event the related research and development projects successfully are commercialized. The royalties are calculated on the basis of 2 to 3% of total related sales and continue in effect until the assistance received has been repaid or until the technology ceases to contribute to commercialization of related products. -47- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) In the first quarter of fiscal 1999, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to certain equipment manufactured by DRS Photronics, Inc. (Photronics), a subsidiary of the Company. These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. The Company itself is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Since a substantial amount of the Company's revenues are derived from contracts or subcontracts with the U.S. Government and foreign governments, future revenues and profits will be dependent upon continued contract awards, Company performance and volume of Government business. The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency and similar foreign agencies. - ------------------------ DRS is organized into operating segments on the NOTE 11 basis of products and services offered: the Electronic Systems Group (ESG), the Data Systems Operating Segments Group (DSG), the Electro-Optical Systems Group (EOSG), the Flight Safety and Communications Group (FSCG); and Corporate operations. Each operating unit is comprised of separate and distinct businesses. During the current fiscal year, DRS's military recording systems subsidiary, DRS Precision Echo, Inc., was combined with DRS Flight Safety and Communications for management purposes, based on business and product synergies. DRS Precision Echo, Inc. previously had been managed, together with DRS Ahead Technology, Inc., as part of DSG. DSG now consists solely of the operations of DRS Ahead Technology, Inc., which principally serves commercial markets. Prior-year balances and results of operations for both FSCG and DSG have been restated to give effect to this management change. In addition, as a result of acquisitions completed in fiscal 1999, ESG and EOSG now include the operations of NAI Technologies, Inc. and the EOS Business of Raytheon, respectively (see Note 2). ESG designs, manufactures and integrates complex systems using advanced commercial technology to meet the performance and environmental requirements of military customers. Current products include tactical display and processing systems for military ships and aircraft, surveillance systems for coastal and harbor regions, radar and acoustic sensor systems, and low-cost emulators of legacy military systems for test and training support. ESG also provides manufacturing services and technical support services for both DRS products and those of other suppliers. DSG provides a variety of magnetic head products and services used in the commercial aviation, airline, television broadcast, computer disk drive, security, banking, transportation and retail sales industries. Many of these products test or read and write information on magnetic data storage media, including magnetic tapes, strips and ink. The Group's magnetic heads are used in commercial and military flight recorders, in computer back-up systems and in every day uses, such as medical monitoring devices, fare and toll collection, vending machine operation, airline ticketing, debit and phone cards, and airplane phones. The Group also produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. EOSG integrates advanced commercial technology with military requirements to design and manufacture advanced electro-optical sighting, targeting, weapons and aircraft optical alignment systems, assemblies and components used primarily in the aerospace and defense industries. The Group is a leader in ultra high-speed digital imaging systems for a variety of industrial, laboratory and military applications and in aircraft boresighting equipment. EOSG also produces night vision and directional devices, as well as eye-safe, laser-based products for military applications. FSCG designs and manufactures advanced flight safety systems, naval communications systems and other advanced electronics primarily for defense and commercial aerospace applications. FSCG is a prominent global supplier of deployable aircraft locator beacons and flight data recorders used in emergencies to locate aircraft; its shipboard communications systems integrate commercial technology and are used in conjunction with surveillance satellites. FCSG also utilizes advanced commercial technology to design and manufacture multi-sensor digital, analog and video capture and recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. Corporate operations include the activities of the parent company, DRS Corporate Headquarters, and several non-operating subsidiaries of the Company. Included in this segment are the results of operations from the Company's DRS Medical Systems partnership. This partnership was formed in February 1996; the net assets of the partnership were subsequently sold in September 1997 (see Note 2). The results of operations of this partnership were not material to the consolidated operating results of the Company during this period. -48- The accounting policies of the segments are consistent with those described in the summary of significant accounting policies (see Note 1). The Company evaluates segment level performance based on revenues and operating income as presented in the consolidated statements of earnings. Operating income, as shown, includes amounts allocated from Corporate operations. Information about the Company's operations in these segments for the three years ended March 31, 1999 is as follows:
CORPORATE AND (In thousands) ESG DSG EOSG FSCG OTHER TOTAL - --------------------------------------------------------------------------------------------------------------- FISCAL 1999: REVENUES $ 123,558 $ 19,460 $ 78,186 $52,224 $ -- $273,428 OPERATING INCOME (LOSS) BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 9,497 $ (1,964) $ 5,296 $ 5,457 $ (743) $ 17,543 OPERATING INCOME (LOSS) $ 9,292 $ (2,526) $ 3,661 $ 4,608 $ (790) $ 14,245 IDENTIFIABLE ASSETS $ 84,475 $ 14,015 $161,217 $56,369 $14,268 $330,344 DEPRECIATION AND AMORTIZATION $ 1,356 $ 2,279 $ 5,356 $ 2,648 $ 772 $ 12,411 CAPITAL EXPENDITURES $ 1,916 $ 538 $ 1,906 $ 2,091 $ 415 $ 6,866 - --------------------------------------------------------------------------------------------------------------- FISCAL 1998: REVENUES $ 95,054 $ 25,307 $ 31,396 $37,387 $ 1,710 $190,854 OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 9,481 $ 2,252 $ 1,270 $ 2,344 $ 218 $ 15,565 OPERATING INCOME $ 9,454 $ 1,681 $ 1,134 $ 1,847 $ 143 $ 14,259 IDENTIFIABLE ASSETS $ 35,706 $ 17,355 $ 42,401 $57,000 $11,011 $163,473 DEPRECIATION AND AMORTIZATION $ 923 $ 1,897 $ 2,037 $ 1,217 $ 985 $ 7,059 CAPITAL EXPENDITURES $ 1,091 $ 1,569 $ 2,461 $ 383 $ 1,066 $ 6,570 - --------------------------------------------------------------------------------------------------------------- FISCAL 1997: REVENUES $ 81,157 $ 22,255 $ 25,134 $11,597 $ 3,435 $143,578 OPERATING INCOME BEFORE AMORTIZATION OF GOODWILL AND RELATED INTANGIBLES $ 6,405 $ 4,843 $ 1,431 $ 916 $ (288) $ 13,307 OPERATING INCOME (LOSS) $ 6,348 $ 4,541 $ 1,295 $ 690 $ (292) $ 12,582 IDENTIFIABLE ASSETS $ 27,354 $ 17,666 $ 21,755 $16,546 $14,352 $ 97,673 DEPRECIATION AND AMORTIZATION $ 1,310 $ 1,058 $ 1,286 $ 611 $ 762 $ 5,027 CAPITAL EXPENDITURES $ 1,766 $ 1,899 $ 449 $ 574 $ 540 $ 5,228 - ---------------------------------------------------------------------------------------------------------------
Revenues, total assets and long-lived assets by geographic location are presented in the table below. Revenues were attributed to countries based on the physical location of the operating unit generating the revenues. Information about the Company's operations in these geographic locations for the three years ended March 31, 1999 is as follows:
ALL OTHER (In thousands) TOTAL UNITED STATES CANADA COUNTRIES - ------------------------------------------------------------------------------------------------------------------ FISCAL 1999: REVENUES $273,428 $229,061 $29,554 $14,813 TOTAL ASSETS $330,344 $272,013 $30,679 $27,652 LONG-LIVED ASSETS $ 34,163 $ 30,454 $ 2,240 $ 1,469 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1998: REVENUES $190,854 $176,392 $12,216 $ 2,246 TOTAL ASSETS $163,473 $114,442 $33,694 $15,337 LONG-LIVED ASSETS $ 22,972 $ 19,384 $ 1,755 $ 1,833 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1997: REVENUES $143,578 $143,578 $ -- $ -- TOTAL ASSETS $ 97,673 $ 97,673 $ -- $ -- LONG-LIVED ASSETS $ 19,987 $ 19,987 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------
-49- DRS TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) - -------------------- The following table sets forth unaudited quarterly NOTE 12 financial information for fiscal 1999 and 1998: Quarterlly Financial Information (Unaudited)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED MARCH 31, 1999: REVENUES $45,988,000 $46,126,000 $76,991,000 $104,323,000 OPERATING INCOME $ 2,066,000 $ 1,749,000 $ 4,006,000 $ 6,424,000 EARNINGS BEFORE EXTRAORDINARY ITEM $ 324,000 $ 57,000 $ 664,000 $ 1,941,000 NET EARNINGS (LOSSES) $ 324,000 $ 57,000 $(1,642,000) $ 1,941,000 BASIC EARNINGS PER SHARE EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.05 $ 0.01 $ 0.10 $ 0.25 NET EARNINGS (LOSSES) $ 0.05 $ 0.01 $ (0.26) $ 0.25 DILUTED EARNINGS PER SHARE: EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.05 $ 0.01 $ 0.10 $ 0.22 NET EARNINGS (LOSSES) $ 0.05 $ 0.01 $ (0.25) $ 0.22 - ------------------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED MARCH 31, 1998: REVENUES $38,997,000 $38,738,000 $49,915,000 $ 63,204,000 OPERATING INCOME $ 2,899,000 $ 3,285,000 $ 3,715,000 $ 4,360,000 NET EARNINGS $ 1,343,000 $ 1,467,000 $ 1,560,000 $ 2,002,000 BASIC EARNINGS PER SHARE $ 0.24 $ 0.26 $ 0.28 $ 0.35 DILUTED EARNINGS PER SHARE $ 0.20 $ 0.21 $ 0.22 $ 0.29 - -------------------------------------------------------------------------------------------------------------------
DRS TECHNOLOGIES INC. AND SUBSIDIARIES COMMON STOCK FISCAL 1999 FISCAL 1998 - -------------------------------------------------------------------------------- AS TRADED ON THE AMERICAN STOCK EXCHANGE HIGH LOW HIGH LOW - ------------------------------------------------------------------------------ FIRST QUARTER 15 3/8 11 5/8 11 3/8 9 5/8 SECOND QUARTER 12 1/16 9 1/16 15 1/8 10 1/4 THIRD QUARTER 11 7 14 13/16 11 7/8 FOURTH QUARTER 11 7 5/8 14 7/8 11 1/4 - ------------------------------------------------------------------------------- As of June 9, 1999, the Common Stock of the Company was held by 982 and 3,291 stockholders of record and beneficial owners, respectively. -50- DRS TECHNOLOGIES INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders, DRS Technologies, Inc.: We have audited the accompanying consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DRS Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Short Hills, New Jersey May 11, 1999 EX-21 6 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 DRS TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1999 SUBSIDIARY PLACE OF INCORPORATION - ----------- ---------------------- DRS Electronic Systems, Inc. United States of America (Delaware) DRS Technical Services, Inc. United States of America (Delaware) DRS Systems Management Corporation United States of America (Delaware) DRS Laurel Technologies United States of America (Delaware) DRS Precision Echo, Inc. United States of America (Delaware) DRS Ahead Technology, Inc. United States of America (Delaware) DRS Photronics, Inc. United States of America (New York) DRS Optronics, Inc. United States of America (Delaware) DRS Technologies Canada, Inc. United States of America (Delaware) DRS Technologies Canada Company Canada (Nova Scotia) DRS Technologies (Europe) Ltd. United Kingdom DRS Technologies (UK) Ltd. United Kingdom DRS Hadland Ltd. United Kingdom DRS Hadland GmbH Federal Republic of Germany DRS Hadland, Inc. United States of America (Delaware) DRS Air, Inc. United States of America (Delaware) DRS/MS, Inc. United States of America (Delaware) DRS International, Inc. United States of America (Delaware) Diagnostic/Retrieval Systems (DRS) Technologies Netherlands Parsippany B.V. DRS Ahead Technology, Inc. Republic of Bulgaria (Bulgaria) AD NAI Technologies, Inc. United States of America (New York) DRS Rugged Systems (Europe) Ltd. United Kingdom DRS Rugged Systems (Australia) Pty. Ltd. Australia DRS Rugged Systems, Inc. United States of America (Colorado) DRS Advanced Programs, Inc. United States of America (New York) DRS FPA, Inc. United States of America (Delaware) DRS Infrared Technologies, LP United States of America (Delaware) DRS Sensor Systems, Inc. United States of America (Delaware) EX-23.1 7 ACCOUNTANTS' CONSENT EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors, DRS Technologies, Inc.: We consent to the incorporation by reference in the registration statements (No. 2-87303, No. 2-99986, No. 333-14487 No. 33-33125, No. 33-42886, and No. 333-69751) on Form S-8 and (No. 33-64641, and No. 333-04929) on Form S-3 of DRS Technologies, Inc. of our reports dated May 11, 1999, relating to the consolidated balance sheets of DRS Technologies, Inc. as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended March 31, 1999, which reports appear or are incorporated by reference in the March 31, 1999 Annual Report on Form 10-K of DRS Technologies, Inc. KPMG LLP Short Hills, New Jersey June 28, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DRS TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. US Dollars 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 1 10,154,000 0 77,389,000 (1,254,000) 72,907,000 163,512,000 72,893,000 38,730,000 330,344,000 150,021,000 102,091,000 0 0 96,000 73,346,000 330,344,000 273,428,000 273,428,000 259,183,000 259,183,000 (876,000) 0 9,358,000 4,742,000 1,756,000 2,986,000 0 2,306,000 0 680,000 0.10 0.10
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