-----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, FbP2yYf7az6CzQ5iW4m5SmvMq+K6YAdgwBvBVPVjl9hMepN4oDUJnwbYmIwwLMM6 0eK393oOPtTu6VUNdZcC9A== 0000950172-95-000460.txt : 19951202 0000950172-95-000460.hdr.sgml : 19951202 ACCESSION NUMBER: 0000950172-95-000460 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19951130 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 033-64641 FILM NUMBER: 95597885 BUSINESS ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 BUSINESS PHONE: 2013373800 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 S-2 1 Registration No. 33- As filed with the Securities and Exchange Commission on November 30, 1995 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 13-2632319 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5 SYLVAN WAY PARSIPPANY, NEW JERSEY 07054 (201) 898-1500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) MARK S. NEWMAN 5 SYLVAN WAY PARSIPPANY, NEW JERSEY 07054 (201) 898-1500 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: MARK N. KAPLAN, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM 919 THIRD AVENUE NEW YORK, NEW YORK 10022 (212) 735-3000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. (X) If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. ( ) If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ( ) If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ( ) If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ( ) CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------ Proposed Proposed Maximum Maximum Amount Offering Aggregate Amount of Title of Each Class of to be Price Per Offering Registrat- Securities to be Registered Registered Security(1) Price (1) ion Fee - ------------------------------------------------------------------------------ 9% Senior Subordinated Convertible Debentures Due 2003 $25,000,000 100% $25,000,000 $8,620.69 - ------------------------------------------------------------------------------ Class A Common Stock, $.01 par value(2) (3) --- --- (3) - ------------------------------------------------------------------------------ ________________ (1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457. The price shown for the Debentures is based on the offering price of the Debentures on their initial issuance. (2) Represents shares issuable upon conversion of the Debentures. (3) Such indeterminable number of shares of Class A Common Stock as may be issuable upon conversion of the Debentures. No additional consideration will be received for the shares of Class A Common Stock upon exercise of the conversion privilege and therefore no registration fee is required pursuant to Rule 457(i). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Cross Reference Sheet Pursuant to Rule 501(b) of Regulation S-K, Showing Location in Prospectus of Information Required by Part I of Form S-2 Item No. Caption Location in Prospectus 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus . . . Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus . . . . . . . . . . . . Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges . . . . Prospectus Summary; Risk Factors; The Company; Selected Consolidated Financial Data 4. Use of Proceeds . . . . . . . . . . . Use of Proceeds 5. Determination of Offering Price . . . Plan of Distribution 6. Dilution . . . . . . . . . . . . . . Not Applicable 7. Selling Security Holders . . . . . . Selling Security Holders 8. Plan of Distribution . . . . . . . . Outside Front Cover Page; Plan of Distribution 9. Description of Securities to be Registered. Description of the Debentures; Description of Capital Stock 10. Interests of Named Experts and Counsel. . Legal Matters 11. Information with Respect to the Registrant. .Prospectus Summary; The Company; Capitalization; Market Prices of Capital Stock; Dividend Policy; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Description of the Debentures; Description of Capital Stock; Plan of Distribution; Index to Financial Statements 12. Incorporation of Certain Information by Reference . . . . . . . . . . . . Incorporation of Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . Not Applicable [Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.] SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 30, 1995 PROSPECTUS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. $25,000,000 9% Senior Subordinated Convertible Debentures Due 2003 This Prospectus relates to $25,000,000 aggregate principal amount of 9% Senior Subordinated Convertible Debentures Due 2003 (the "Debentures") of Diagnostic/Retrieval Systems, Inc. (the "Company"), and the shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), of the Company which are issuable from time to time upon conversion of the Debentures. The Debentures or Class A Common Stock issued upon conversion may be offered from time to time for the account of holders of the Debentures named herein (the "Selling Security Holders"). The Debentures were originally issued by the Company on September 29, 1995 in a private placement (including the over-allotment option for $5,000,000 aggregate principal amount of the Debentures which was exercised on November 3, 1995) (the "Debenture Offering"), and the Company will not receive any proceeds from this offering. Interest on the Debentures is payable semi-annually on April 1 and October 1 of each year, commencing April 1, 1996. The Debentures are convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of Class A Common Stock of the Company, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. Prior to this offering there has not been any public market for the Debentures. The Debentures are eligible for trading in the Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market. The Company intends to apply for listing of the Debentures on the American Stock Exchange (the "AMEX"). The Company has been advised by Forum Capital Markets L.P. (the "Initial Purchaser") that it intends to make a market in the Debentures. The Initial Purchaser is, however, under no obligation to do so and may discontinue any such market making activity at any time without notice. There can be no assurance that a secondary market in the Debentures will develop or be maintained. The Company's Class A Common Stock is listed on the AMEX under the symbol "DRSA." On November 24, 1995, the last reported sale price of the Class A Common Stock on the AMEX was $7-1/8 per share. The Debentures are unsecured and subordinate to all Senior Indebtedness (as defined herein) and are effectively subordinated to all obligations of the subsidiaries of the Company. The Indenture (as defined herein) governing the Debentures provides that the Company will not (i) issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt is subordinate in right of payment to the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness or (ii) permit any of its subsidiaries to issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt provides that it will be subordinate in right of payment to distributions and dividends from such subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. At September 30, 1995, Senior Indebtedness (excluding current installments) was approximately $3.2 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.4 million. The Debentures will mature on October 1, 2003. The Company may not redeem the Debentures prior to October 1, 1998. On or after such date, the Company may redeem the Debentures, in whole or in part, at the redemption prices set forth herein plus accrued but unpaid interest to the date of redemption. Upon a Change of Control (as defined herein), the Company will offer to repurchase the Debentures at 100% of the principal amount thereof plus accrued but unpaid interest to the date of repurchase. In addition, upon a Net Worth Deficiency (as defined herein), the Company will offer to repurchase up to 10% of the aggregate principal amount of Debentures at 100% of the principal amount thereof plus accrued but unpaid interest to the date of repurchase. See "Description of the Debentures." SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Company has been advised by the Selling Security Holders that the Selling Security Holders, acting as principals for their own account, directly, through agents designated from time to time, or through dealers or underwriters also to be designated, may sell all or a portion of the Debentures or shares of Class A Common Stock offered hereby from time to time on terms to be determined at the time of sale. To the extent required, the aggregate principal amount of the Debentures or the number of shares of Class A Common Stock to be sold, the names of the Selling Security Holders, the purchase price, the name of any such agent, dealer or underwriter and any applicable commissions with respect to a particular offer will be set forth in an accompanying Prospectus Supplement or, if appropriate, a post-effective amendment to the Registration Statement of which this Prospectus is a part. The aggregate proceeds to the Selling Security Holders from the sale of Debentures and Class A Common Stock offered by the Selling Security Holders hereby will be the purchase price of such Debentures or Class A Common Stock less any commissions. For information concerning indemnification arrangements between the Company and the Selling Security Holders, see "Plan of Distribution." The Selling Security Holders and any broker-dealers, agents or underwriters that participate with the Selling Security Holders in the distribution of the Debentures or shares of Class A Common Stock may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), in which event any commissions received by such broker-dealers, agents or underwriters and any profit on the resale of the Debentures or shares of Class A Common Stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The date of this Prospectus is ___________, 1995 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "SEC"). Such reports and other information filed by the Company with the SEC in accordance with the Exchange Act may be inspected, without charge, at the Public Reference Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of all or any portion of the material may be obtained from the Public Reference Section of the SEC upon payment of the prescribed fees. Materials can also be inspected at the offices of the AMEX, 86 Trinity Place, New York, New York 10006, on which exchange the Company's Class A Common Stock is listed. The Company is required, pursuant to the terms of the Indenture under which the Debentures were issued, to deliver to the Trustee and the holders of the Debentures, within 15 days after the Company has filed the same with the SEC, copies of the annual reports and information, documents and other reports which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company has filed with the SEC a Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act, with respect to the Debentures and shares of Class A Common Stock offered pursuant to this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. For further information with respect to the Company, the Debentures and the Class A Common Stock, reference is made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus concerning the provisions of certain documents filed with, or incorporated by reference in, the Registration Statement are not necessarily complete, each statement being qualified in all respects by such reference. Copies of all or any part of the Registration Statement, including the document incorporated by reference therein and exhibits thereto, may be obtained, upon payment of the prescribed fees, at the offices of the SEC as set forth above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents and information heretofore filed with the SEC by the Company are hereby incorporated by reference into this Prospectus: 1. The Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995; 2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995; 3. The Company's Current Report on Form 8-K, dated July 5, 1995, as amended on August 8, 1995; and 4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. A copy of any document incorporated by reference other than exhibits to such document (unless such exhibits are specifically incorporated by reference in this Prospectus), will be provided without charge to each person, including any beneficial owner, to whom a copy of this Prospectus has been delivered upon the written or oral request of such person. Requests for such copies should be made to Diagnostic/Retrieval Systems, Inc., 5 Sylvan Way, Parsippany, New Jersey 07054, Attention: Patricia Williamson, telephone number (201) 898-1500. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" include Diagnostic/Retrieval Systems, Inc. and its consolidated subsidiaries. THE COMPANY Diagnostic/Retrieval Systems,Inc. ("DRS" or the "Company") designs, manufactures and markets high-technology computer workstations for the United States (the "U.S.") Department of Defense, electro-optical targeting systems for military customers and image and data storage products for both military and commercial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "commercial-off-the- shelf" ("COTS") product designs, whereby commercial electronic components are adapted, upgraded and "ruggedized" for application in harsh military environments. The Company believes that military expenditures on electronic systems and equipment will grow in coming years as the nature of modern warfare dictates increasing reliance on real-time, accurate battlefield information and the electronic content and sophistication of defense systems increases. During its last three fiscal years, the Company has restructured its management team and implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the cold war, military budget constraints and the COTS mandate. The Company's strategies include: * expanding and diversifying the Company's technology and product base into complementary military and commercial markets primarily through acquisitions and the forging of strategic relationships; * increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and * enhancing financial performance through specific cost reduction measures and increased manufacturing efficiencies. To effect these strategies, the Company has (i) acquired several businesses with complementary military and commercial products and technologies over the last three years; (ii) forged strategic relationships with other defense suppliers such as Loral Corporation and Westinghouse Electric Corporation, among others; (iii) emphasized the development of COTS-based products as well as products and systems that are easily adapted to similar weapons platforms for use by all branches of the military; and (iv) implemented cost reduction programs to reduce its fixed-cost base, allow for growth and maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last three fiscal years. Although the Company experienced operating losses in fiscal 1990 through 1992, primarily due to cost overruns on a single fixed- price development contract, a shift over the last several years in the nature of military development contracting from fixed- price to cost-type contracts has reduced the Company's exposure in this area. For the fiscal year ended March 31, 1995, the Company had revenues of $69.9 million, net income of $2.6 million and earnings per share of $.50, representing increases of 20.9%, 61.2% and 66.7%, respectively, compared with the year ended March 31, 1994. For the six months ended September 30, 1995 the Company had revenues of $40.1 million, net income of $1.6 million and fully diluted earnings per share of $.28, representing increases of 26.5%, 45.7% and 33.3%, respectively, compared with the same six-month period ended September 30, 1994. SUMMARY FINANCIAL INFORMATION
Six Months Year Ended March 31, Ended September 30, ______________________________________________________________________ __________________________ 1995 1994 1993 1992 1991 1995 1994 ______________ _____________ _____________ _____________ _____________ ____________ _____________ SUMMARY OF OPERATIONS DATA: Revenues . . $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 28,925,000 $ 47,762,000 $ 40,065,000 $ 31,662,000 Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 36,907,000 29,406,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 3,158,000 2,256,000 Interest and Related Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (697,000) (677,000) Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 114,000 216,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Earnings (Loss) before Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 2,575,000 1,795,000 Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,004,000 717,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Net Earnings (Loss) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 1,571,000 $ 1,078,000 Net Earnings (Loss) per share of Class A and Class B Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .28 $ .21 OTHER OPERATIONS DATA: EBITDA(2) . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 4,447,000 $ 3,508,000 Ratio of Earnings to Fixed Charges(3)(4) 2.9x 2.3x 1.8x - - 3.3x 2.6x Ratio of Earnings to Fixed Charges, as adjusted(3)(5) 1.8x 2.0x
September 30, 1995 __________________________________ Actual As Adjusted(6) BALANCE SHEET DATA: Working Capital $ 37,201,000 $ 39,431,000 Net Property, Plant and Equipment $ 13,292,000 $ 13,292,000 Total Assets $ 83,840,000 $ 83,840,000 Long-Term Debt, Excluding Current Installments $ 30,690,000 $ 33,170,000 Net Stockholders' Equity $ 24,252,000 $ 24,252,000 _______________________________________________________________________________ (1) No cash dividends have been distributed during any of the years in the five-year period ended March 31, 1995 or the three months ended June 30, 1995. (2) EBITDA is defined as operating income (loss) plus depreciation and amortization. EBITDA is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (3) Earnings used in computing the ratio of earnings to fixed charges consist of earnings before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs and the portion of the Company's rent expense that the Company believes is representative of the interest factor. (4) Earnings were inadequate to cover fixed charges in fiscal 1992 and fiscal 1991. Earnings (Loss) before Income Taxes (Benefit) in fiscal 1992 and fiscal 1991 include fixed charges of approximately $2.7 million and $2.9 million, respectively. (5) Adjusted to reflect the Debenture Offering which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995) and the initial application of the proceeds therefrom. See "Use of Proceeds." (6) Adjusted to give effect to the Debenture Offering which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995) and the application of the net proceeds therefrom (after deducting discounts and commissions and estimated offering expenses payable by the Company pursuant thereto). See "Use of Proceeds." THE OFFERING Debentures Offered . . . . . $25,000,000 principal amount of Senior Subordinated Convertible Debentures Due 2003. Maturity Date . . . . . . . . October 1, 2003 Interest Payment Dates . . . April 1 and October 1 Interest . . . . . . . . . . 9.0% per annum Conversion . . . . . . . . . Convertible into Class A Common Stock at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $8.85 per share, subject to adjustment in certain circumstances. Redemption at the Option of the Company . . . . . . . . . . Redeemable at the option of the Company, in whole or in part at any time on or after October 1, 1998, upon not less than 30 nor more than 60 days' notice, at the redemption prices set forth herein plus accrued but unpaid interest to the date of redemption. See "Description of the Debentures -- Redemption." Redemption at the Option of the Holders . . . . . . . . . Upon a Change of Control (as defined herein), the Company will offer to repurchase the Debentures at 100% of the principal amount thereof plus accrued but unpaid interest to the date of repurchase. See "Description of the Debentures -- Change of Control." In the event the Company's Consolidated Net Worth (as defined herein) at the end of any two consecutive fiscal quarters is below $18.0 million (a "Net Worth Deficiency"), the Company will offer to repurchase up to 10% of the aggregate principal amount of Debentures at 100% of the principal amount thereof plus accrued but unpaid interest to the date of repurchase. See "Description of the Debentures -- Maintenance of Consolidated Net Worth." Ranking . . . . . . . . . . . The Debentures are subordinated to all Senior Indebtedness (as defined herein) and will be effectively subordinated to all obligations of the subsidiaries of the Company. The Indenture (as defined herein) governing the Debentures provides that the Company will not (i) issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) is subordinate in right of payment to the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness or (ii) permit any of its subsidiaries to issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) provides that it will be subordinate in right of payment to distributions and dividends from such subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. At September 30, 1995, Senior Indebtedness (excluding current installments) was approximately $3.2 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.4 million. See "Description of the Debentures -- Ranking." Registration Rights . . . . . Pursuant to a registration rights agreement (the "Registration Rights Agreement") between the Company and the Initial Purchaser, the Company has agreed to file a shelf registration statement (the "Shelf Registration Statement") relating to the Debentures and the shares of Class A Common Stock which are issuable from time to time upon conversion of the Debentures. The Company has agreed to use its reasonable best efforts to maintain the effectiveness of the Shelf Registration Statement until the third anniversary of the issuance of the Debentures, except that it will be permitted to suspend the use of the Shelf Registration Statement during certain periods under certain circumstances. Upon default by the Company with respect to certain of its obligations under the Registration Rights Agreement, liquidated damages will be payable on the Debentures and Class A Common Stock affected by such default. See "Description of the Debentures -- Registration Rights; Liquidated Damages." Restrictive Covenants . . . . The indenture under which the Debentures were issued (the "Indenture") limits (i) the issuance of additional debt by the Company, (ii) the payment of dividends on the capital stock of the Company and investments by the Company, (iii) certain transactions with affiliates, (iv) incurrence of liens, (v) issuance of preferred stock by the Company or its subsidiaries, (vi) stock splits, consolidations and reclassifications and (vii) sales of assets and subsidiary stock. The Indenture also prohibits certain restrictions on distributions from subsidiaries. However, all these limitations and prohibitions are subject to a number of important qualifications. See "Description of the Debentures -- Certain Covenants of the Company." Use of Proceeds . . . . . . . The Company will not receive any proceeds from the sale of the Debentures or shares of Class A Common Stock offered pursuant to this Prospectus. The Selling Security Holders will receive all of the net proceeds from any sale of the Debentures or shares of Class A Common Stock offered hereby. See "Use of Proceeds" and "Selling Security Holders." RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following factors before purchasing the Debentures offered hereby. AMOUNT AND RISKS OF GOVERNMENT BUSINESS Substantially all the Company's revenues are derived from contracts or subcontracts with domestic and foreign government agencies of which a significant portion is attributed to United States Navy (the "U.S. Navy") procurements. The development and success of the Company's business in the future will depend upon the continued willingness of the U.S. Government to commit substantial resources to such U.S. Navy programs and, in particular, upon continued purchases of the Company's products. See "Business -- Company Organization and Products." The Company's business with the U.S. Government is subject to various risks, including termination of contracts at the convenience of the U.S. Government; termination, reduction or modification of contracts or subcontracts in the event of changes in the U.S. Government's requirements or budgetary constraints; shifts in spending priorities; and when the Company is a subcontractor, the failure or inability of the prime contractor to perform its prime contract. Certain contract costs and fees are subject to adjustment as a result of audits by government agencies. In addition, all defense businesses are subject to risks associated with the frequent need to bid on programs in advance of design completion (which may result in unforeseen technological difficulties and/or cost overruns). Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the foreign government. See "Business -- Contracts." REDUCED SPENDING IN DEFENSE INDUSTRY Reductions in U.S. Government expenditures for defense products are likely to continue during the 1990's. These reductions may or may not have an effect on the Company's programs; however, in the event expenditures for products of the type manufactured by the Company are reduced and not offset by greater foreign sales or other new programs or products, there will be a reduction in the volume of contracts or subcontracts awarded to the Company. Unless offset, such reductions would adversely affect the Company's earnings. LIMITED TERM OF CONTRACTS The Company's contracts with the U.S. Government are for varying fixed terms, and there can be no assurance that a renewal or follow-on contract will be awarded to the Company by the U.S. Government upon the expiration of any such contract. Certain of the Company's U.S. Government contracts account for a substantial portion of the Company's revenues (i.e., the AN/UYQ-65 production contract). The loss of revenue resulting from the failure to obtain a renewal or follow-on contract with respect to any significant contract or a number of lesser contracts, in either case without the substitution of revenues from the award of new contracts, would have a material adverse effect upon the Company's results of operations and financial position. In addition, from time to time the Company enters into U.S. Government contracts with a full funded backlog but in which the price per unit may not be determined at the time of award. If the price per unit which is ultimately determined is significantly less than anticipated by the Company, the net revenues of the Company would be adversely affected. HOLDING COMPANY STRUCTURE; SUBORDINATION The Debentures are a direct obligation of DRS, which derives a majority of its revenues from the operations of its subsidiaries. The ability of DRS to make interest payments on or redeem the Debentures and to pay dividends, if any, on the Class A Common Stock will be primarily dependent upon the receipt of dividends or other distributions from such subsidiaries. The payment of dividends from the subsidiaries to the Company and the payment of any interest on or the repayment of any principal of any loans or advances made by the Company to any of its subsidiaries may be subject to statutory or contractual restrictions and are contingent upon the earnings of such subsidiaries. Although the Company believes that distributions and dividends from its subsidiaries will be sufficient to pay interest on the Debentures as well as to meet the Company's other obligations, there can be no assurance they will be sufficient. The Debentures are subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including all indebtedness under the Company's credit agreements. By reason of such subordination, in the event of an insolvency, liquidation or other reorganization of the Company, the Senior Indebtedness must be paid in full before the principal of, premium if any, and interest on the Debentures may be paid. At September 30, 1995, Senior Indebtedness (excluding current installments) was approximately $3.2 million. Because a majority of the Company's operations are conducted through subsidiaries, claims of the creditors of such subsidiaries will have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of the Company, including holders of the Debentures, even though such obligations do not constitute Senior Indebtedness, except to the extent the Company is itself recognized as a creditor of such subsidiary or such other creditors have agreed to subordinate their claims to the payment of the Debentures. The Company's subsidiaries had indebtedness (excluding liability for income taxes) of approximately $16.4 million at September 30, 1995. The Debentures are not secured by any of the assets of the Company or its subsidiaries. In addition, certain obligations of the Company are secured by pledges of certain assets of the Company or its subsidiaries. SUBSTANTIAL INDEBTEDNESS Following the issuance of the Debentures, the Company continues to have indebtedness that is substantial in relation to its stockholders' equity. See "Capitalization." The Indenture imposes significant operating and financial restrictions on the Company. Such restrictions will affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company to incur additional indebtedness and pay dividends. These restrictions, in combination with the leveraged nature of the Company, could limit the ability of the Company to effect future financings or otherwise may restrict corporate activities. See "Description of the Debentures." The Indenture permits the Company to incur additional indebtedness under certain conditions, and the Company expects to obtain additional indebtedness as so permitted. The Company's high degree of leverage could have important consequences to the holders of the Debentures, including the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for other purposes; (iii) the Company's substantial degree of leverage may hinder its ability to adjust rapidly to changing market conditions; and (iv) could make it more vulnerable in the event of a downturn in general economic conditions or its business. See "Description of the Debentures." COMPETITION The military electronics industry is characterized by rapid technological change. The Company's products are sold in markets containing many competitors which are substantially larger than the Company, devote substantially greater resources to research and development and generally have greater resources. Certain of such competitors are also suppliers to the Company. In the military sector, the Company competes with many first- and second-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. The Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. The introduction by competitors of new products with greater capabilities could adversely affect the Company's business. RELIANCE ON SUPPLIERS The Company's manufacturing process for its products, excluding electro-optical products, consists primarily of the assembly of purchased components and testing of the product at various stages in the assembly process. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are the Company's sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. The Company has not experienced significant production delays attributable to supply shortages, but occasionally experiences procurement problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to the Company's electro- optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. ATTRACTING AND RETAINING TECHNICAL PERSONNEL There is a continuing demand for qualified technical personnel, and the Company believes that its future growth and success will depend upon its ability to attract, train and retain such personnel. An inability to maintain a sufficient number of trained personnel could have a material adverse effect on the Company's contract performance or on its ability to capitalize on market opportunities. FUNDING OF REPURCHASE OBLIGATIONS; ABSENCE OF SINKING FUND There is no sinking fund with respect to the Debentures, and at maturity the entire outstanding principal amount thereof will become due and payable by the Company. Also, upon the occurrence of certain events the Company will be required to offer to repurchase all or a portion of the outstanding Debentures. The source of funds for any such payment at maturity or earlier repurchase will be the Company's available cash or cash generated from operating or other sources, including, without limitation, borrowings or sales of assets or equity securities of the Company. There can be no assurance that sufficient funds will be available at the time of any such event to pay such principal or to make any required repurchase. See "Description of the Debentures." SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of substantial amounts of Class A Common Stock in the public market could adversely affect the prevailing market price of the Debentures and the Class A Common Stock into which the Debentures are convertible and could impair the Company's ability to raise additional capital through the sale of its securities. The Debentures offered hereby are convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of Class A Common Stock, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. As of November 24, 1995, there was an aggregate of 3,307,324 shares of Class A Common Stock outstanding (excluding 432,639 shares of Class A Common Stock in treasury) and an aggregate of 2,194,734 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock") outstanding (excluding 21,619 shares of Class B Common Stock in treasury). Of such shares, 754,819 shares of the Class A Common Stock and 356,473 shares of the Class B Common Stock are "restricted" under the Securities Act and are resalable pursuant to the limitations of Rule 144 under the Securities Act. After giving effect to the application of $5.0 million in net proceeds acquired by the Company pursuant to the Debenture Offering to repurchase $5.0 million in principal amount of the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 1998 (the "1998 Debentures"), the remaining outstanding 1998 Debentures will be convertible into an additional 330,866 shares of Class B Common Stock at $15 per share. Each share of Class A Common Stock is convertible at any time into one share of the Class B Common Stock, subject to adjustment under certain circumstances. See "Description of Capital Stock." The Company is considering setting forth a proposal to its stockholders to amend the Company's Certificate of Incorporation to convert the Class A Common Stock and Class B Common Stock into a single class of common stock, as well as to include certain other charter amendments. LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE At present, the Debentures are owned by a small number of institutional investors, and prior to this offering there has not been any public market for the Debentures. The Company intends to apply for listing of the Debentures on the AMEX. The Debentures are eligible for trading in the PORTAL Market of the National Association of Securities Dealers, Inc. There can be no assurance regarding the future development of a market for the Debentures or the ability of holders of the Debentures to sell their Debentures or the price at which such holders may be able to sell their Debentures. If such a market were to develop, the Debentures could trade at prices that may be higher or lower than the initial offering price depending on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. The Initial Purchaser has advised the Company that it currently intends to make a market in the Debentures. The Initial Purchaser is not obligated to do so, however, and any market-making with respect to the Debentures may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the Debentures or that an active public market for the Debentures will develop. The Class A Common Stock of the Company is listed on the AMEX. The market for the Class A Common Stock has historically been characterized by limited trading volume and a limited number of holders. The Company is considering setting forth a proposal to its stockholders to amend the Company's Certificate of Incorporation to convert the Class A Common Stock and Class B Common Stock into a single class of common stock, however, there can be no assurance that such proposal will be approved by the stockholders, or if approved, that a more active trading market for the resulting class of common stock will develop. THE COMPANY GENERAL The Company designs, manufactures and markets high- technology computer workstations for the U.S. Department of Defense, electro-optical targeting systems for military customers and image and data storage products for both military and commercial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "commercial-off-the- shelf" ("COTS") product designs, whereby commercial electronic components are adapted, upgraded and "ruggedized" for application in harsh military environments. The Company believes that military expenditures on electronic systems and equipment will grow in coming years as the nature of modern warfare dictates increasing reliance on real-time, accurate battlefield information and the electronic content and sophistication of defense systems increases. Using COTS designs, the Company develops and delivers its products with significantly less development time and expense compared to traditional military product cycles, generally resulting in shorter lead times, lower costs and the employment of the latest information and computing technologies. The COTS process entails the purchasing, refitting, upgrading (of both hardware and software) and "ruggedization" (repackaging, remounting and stress testing to withstand harsh military environments) of readily available commercial components. The design and manufacture of COTS-based products is a complex process requiring specific engineering capabilities, extensive knowledge of military platforms to which the equipment will be applied and in-depth understanding of military operating environments and requirements. STRATEGY During its last three fiscal years, the Company has restructured its management team and implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the cold war, military budget constraints and the COTS mandate. The Company's strategies include: * expanding and diversifying the Company's technology and product base into complementary military and commercial markets primarily through acquisitions and the forging of strategic relationships; * increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and * enhancing financial performance through specific cost reduction measures and increased manufacturing efficiencies. To effect these strategies, the Company has (i) acquired several businesses with complementary military and commercial products and technologies over the last three years; (ii) forged strategic relationships with other defense suppliers such as Loral Corporation and Westinghouse Electric Corporation, among others; (iii) emphasized the development of COTS-based products as well as products and systems that are easily adapted to similar weapons platforms for use by all branches of the military; and (iv) implemented cost reduction programs to reduce its fixed-cost base, allow for growth and maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last three fiscal years. Although the Company experienced operating losses in fiscal 1990 through 1992, primarily due to cost overruns on a single fixed- price development contract, a shift over the last several years in the nature of military development contracting from fixed- price to cost-type contracts has reduced the Company's exposure in this area. For the fiscal year ended March 31, 1995, the Company had revenues of $69.9 million, net income of $2.6 million and earnings per share of $.50, representing increases of 20.9%, 61.2% and 66.7%, respectively, compared with the year ended March 31, 1994. For the six months ended September 30, 1995, the Company had revenues of $40.1 million, net income of $1.6 million and fully diluted earnings per share of $.28, representing increases of 26.5%, 45.7% and 33.3%, respectively, compared with the same six-month period ended September 30, 1994. COMPANY ORGANIZATION The Company is organized into three operating groups: Electronic Systems Group ("ESG," 54% of fiscal 1995 revenues), Electro-Optical Systems Group ("EOSG," 18% of fiscal 1995 revenues) and Media Technology Group ("MTG," 28% of fiscal 1995 revenues). See "Business -- Company Organization and Products." ESG designs and manufactures COTS-based computer workstations designed for military information processing applications. This equipment is designed to cost-effectively replace and upgrade anti-submarine warfare ("ASW") systems, tactical (combat/attack) workstations and training equipment. ESG's products are a direct outgrowth of the ASW and Naval systems expertise that has formed the core of DRS' business base since the Company's inception. Major products include: (i) computer workstations used in ASW systems for ship and land-based (harbors and coastal areas) detection networks, (ii) tactical workstations used to coordinate and control personnel and weapons systems on the military's most advanced ship, air and submarine- based platforms, and (iii) military display emulators ("MDE"), which are used for combat system operator training at a fraction of the cost of fully-militarized, field-ready versions of the display. ESG's workstation products, which are PC-based, open architecture, networked systems designed for flexibility and adaptability to a wide variety of applications, have been developed to replace many of the mainframe-based systems currently in use, while preserving the U.S. Navy's existing investment in such technology. ESG's systems process incoming sonar, radar and other information through complex customized software, enabling operators to interpret data quickly and relay information to command personnel. These workstations are an integral part of the U.S. Navy's Aegis defense program and the U.S. coastal defense strategy. MDE systems are used for training of combat system operators and to maintain and improve the operation skills of naval reserve personnel. ESG operates a field service division for system maintenance, installation and upgrade services and general product support. ESG's manufacturing division (which is 80% owned through a partnership) produces ESG's new generation products and also supplies complex wire harness assemblies and other products to the military and commercial aerospace industry. EOSG manufactures precision electro-optical assemblies used in infrared seeker heads of Stinger, Sidewinder and new generation missiles and produces proprietary Multiple Platform Boresight Equipment ("MPBE") used to align the weapons systems with the airframes and pilot sighting systems on Apache and Cobra helicopters. Originally supplying only the primary mirror for infrared seeker heads, EOSG now supplies the primary, secondary, tertiary and fold mirrors, as well as the mirror housing and nose domes. EOSG is currently under contract to produce infrared components and subassemblies on many of the next generation infrared missile systems. The MPBE boresight system was originally deployed on the Army's Apache attack helicopters and has been adapted for use on Marine Corps' Cobra helicopters. EOSG is under contract to supply the next generation laser-based MPBE for these platforms. Due to the inherent flexibility and economics of MPBE's multiple platform design, EOSG has submitted proposals to adapt the system for use on fixed-wing aircraft such as the F-15 and C-130. The Company recently acquired substantially all of the assets of Opto Mechanik, Inc. through its subsidiary OMI Acquisition Corp. ("OMI"). Through OMI, EOSG now supplies the electro-optical sighting and targeting systems used on TOW anti-tank missiles, the military's primary anti-tank weapon, and other electro-optical military products. The Company is also under contract with the primary contractor for work on the anti-tank Improved TOW Acquisition System. MTG manufactures products used by military and commercial customers for image and data storage. The group designs military recorder systems by adapting commercial video recording products to operate in and withstand harsh military environments. With MTG's recorder products, the COTS process entails the purchasing, refitting, upgrading (hardware and software) and "ruggedization" (repackaging, remounting and vibration/thermal stress testing to withstand harsh military operating environments) of readily available commercial components. These systems are used to record cockpit video of jet fighter, helicopter and light armored vehicle missions. MTG's commercial operations manufacture burnish, glide and test heads which are used in the manufacture of computer hard disks, listing among its customers many of the major disk drive manufacturers in the United States. MTG also manufactures specialty recorder heads and refurbishes the head assemblies of high-end video recording products used by broadcasters worldwide. The Company was incorporated in Delaware in June 1968. The Company's executive offices are located at 5 Sylvan Way, Parsippany, New Jersey, 07054, and its telephone number is (201) 898-1500. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Debentures or shares of Class A Common Stock offered pursuant to this Prospectus. The Selling Security Holders will receive all of the net proceeds from any sale of the Debentures or shares of Class A Common Stock offered hereby. The net proceeds received by the Company pursuant to the Debenture Offering (including the exercise of the over-allotment option) were approximately $23,750,000. The Company intends to use approximately $5.0 million of such net proceeds to redeem $5.0 million aggregate principal amount of the Company's 1998 Debentures ($2,480,000 of which is classified as current as of September 30, 1995), and the balance for general corporate purposes, including acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity -- The Debenture Offering." Although the Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in discussions regarding potential acquisitions, the Company does not currently have any agreement or understanding regarding any potential acquisition. CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at September 30, 1995 as adjusted to give effect to the Debenture Offering (including the over- allotment option for $5,000,000 aggregate principal amount of the Debentures which was exercised on November 3, 1995) and the application of the estimated net proceeds therefrom. The information presented below should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this Prospectus. September 30, 1995 Actual As Adjusted ______________ ___________ Long-term debt, excluding current installments(1): Senior Indebtedness(2) . . . . . . . . $ 3,190,000 $ 3,190,000 8-1/2% Convertible Subordinated Debentures due August 1, 1998 . . . . . 7,500,000 4,980,000 Senior Subordinated Convertible Debentures due 2003 . . . . . . . . . . 20,000,000 25,000,000 ______________ ___________ Total long-term debt . . . 30,690,000 33,170,000 Stockholders' equity: Preferred Stock, $10 par value 2,000,000 shares authorized; no shares issued . . . . . . -- -- Class A Common Stock, $.01 par value, 10,000,000 shares authorized; 3,739,963 shares issued . . . . . 37,000 37,000 Class B Common Stock, $.01 par value, 20,000,000 shares authorized; 2,216,353 shares issued . . . . . . 22,000 22,000 Additional paid-in capital . 13,579,000 13,579,000 Retained earnings . . . . . . 12,490,000 12,490,000 ______________ ___________ 26,128,000 26,128,000 Less Treasury Stock -at cost: 432,639 shares of Class A Common Stock and 21,619 shares of Class B Common Stock . . . . . . . . . . . (1,617,000) (1,617,000) Less unamortized restricted stock compensation . . . . . . . . (259,000) (259,000) ______________ ___________ Net stockholders' equity . . 24,252,000 24,252,000 ______________ ___________ Total capitalization . . . . . $ 54,942,000 $ 57,422,000 _________________ (1) See Note 6 to Consolidated Financial Statements for further information with respect to the Company's debt obligations. (2) Consisting of Industrial Revenue Bonds due 1998 and other obligations. See Note 6 to Consolidated Financial Statements. MARKET PRICES OF CAPITAL STOCK The Company's Class A Common Stock and Class B Common Stock trades on the AMEX (Symbols: DRSA and DRSB, respectively). The following table sets forth for each period indicated the high and low closing sales prices of the Company's Class A Common Stock and Class B Common Stock, as reported by the American Stock Exchange Monthly Market Statistics: Class A Common Stock* Class B Common Stock* High Low High Low Year Ended March 31, 1994: First Quarter . . . . . . . . $ 4-3/8 $ 2-3/4 $ 4-1/4 $ 2-13/16 Second Quarter . . . . . . . 3-7/8 3-1/16 3-13/16 3 Third Quarter . . . . . . . . 3-11/16 2-15/16 3-1/2 2-3/4 Fourth Quarter . . . . . . . 4-1/16 3 4 3 Year Ended March 31, 1995: First Quarter . . . . . . . 5-1/4 3-5/8 5-1/8 3-3/4 Second Quarter . . . . . . . 4-3/4 3-3/4 4-5/8 3-3/4 Third Quarter . . . . . . . 4-5/16 3-15/16 4-3/8 3-7/8 Fourth Quarter . . . . . . . 5-1/4 4 5-1/2 3-7/8 Year Ended March 31, 1996: First Quarter . . . . . . . . 6-5/8 4-3/4 6-13/16 4-7/8 Second Quarter . . . . . . . 7-13/16 6-3/16 7-7/8 5-3/4 Third Quarter (through November 24, 1995) 7-7/8 6-7/8 7-7/8 6-5/8 ________________ * As of November 24, 1995, the Class A Common Stock was held by 1,422 stockholders (of which 307 were registered holders and 1,115 were beneficial holders) and the Class B Common Stock was held by 839 stockholders (of which 209 were registered holders and 630 were beneficial holders). See "Risk Factors -- Lack of Public Market; Restrictions on Resale." DIVIDEND POLICY The Company has not paid any cash dividends since 1976. The Company intends to retain future earnings for use in its business and does not expect to declare cash dividends in the foreseeable future on the Class A Common Stock or the Class B Common Stock, which rank pari passu as to dividends and distributions. The Company's 1998 Debentures limit the Company's ability to pay dividends or make other distributions on its Class A Common Stock and Class B Common Stock. See Note 6 of Notes to Consolidated Financial Statements for information concerning restrictions on the declaration or payment of dividends. The Company's Restated Certificate of Incorporation, as amended, also limits the payment of dividends under certain circumstances. See "Description of Capital Stock -- Dividends and Distributions." Any future declaration of dividends will be subject to the discretion of the Board of Directors of the Company. The timing, amount and form of any future dividends will depend, among other things, on the Company's results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by the Board of Directors. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated statements of operations and balance sheet data for the periods indicated. The information for, and as of the end of, each of the twelve months in the five year period ended March 31, 1995 is derived from the consolidated financial statements of the Company for such periods which have been audited by KPMG Peat Marwick LLP. The selected consolidated statements of operations data for the six months ended September 30, 1995 and 1994 and the selected consolidated balance sheet data as of September 30, 1995 are derived from the unaudited consolidated statements of the Company, which include all adjustments which management considers necessary for a fair presentation of the data for such periods and at such dates, all of which were of a normal recurring nature. The results of the six months ended September 30, 1995 are not necessarily indicative of results to be expected for the full year. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and the notes thereto, and other financial information included elsewhere in this Prospectus.
Six Months Year Ended March 31, Ended September 30, ______________________________________________________________________ __________________________ 1995 1994 1993 1992 1991 1995 1994 ______________ _____________ _____________ _____________ _____________ ____________ _____________ SUMMARY OF OPERATIONS DATA: Revenues . . $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 28,925,000 $ 47,762,000 $ 40,065,000 $ 31,662,000 Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 36,907,000 29,406,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 3,158,000 2,256,000 Interest and Related Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (697,000) (677,000) Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 114,000 216,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Earnings (Loss) before Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 2,575,000 1,795,000 Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,004,000 717,000 ______________ _____________ _____________ _____________ _____________ ____________ _____________ Net Earnings (Loss) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 1,571,000 $ 1,078,000 Net Earnings (Loss) per share of Class A and Class B Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .28 $ .21 OTHER OPERATIONS DATA: EBITDA(2) . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 4,447,000 $ 3,508,000 Ratio of Earnings to Fixed Charges(3)(4) 2.9x 2.3x 1.8x - - 3.3x 2.6x Ratio of Earnings to Fixed Charges, as adjusted(3)(5) 1.8x 2.0x
March 31, September 30, 1995 ______________________________________________________________________ __________________________ 1995 1994 1993 1992 1991 Actual As Adjusted(6) ______________ _____________ _____________ _____________ _____________ ____________ _____________ BALANCE SHEET DATA: Working Capital . $ 20,317,000 $ 19,803,000 $ 17,994,000 $ 17,747,000 $ 24,833,000 $37,201,000 $ 39,431,000 Net Property, Plant and Equipment 9,849,000 8,893,000 9,768,000 11,602,000 13,904,000 13,292,000 13,292,000 Total Assets . . 64,590,000 58,836,000 51,948,000 53,904,000 58,527,000 83,840,000 83,840,000 Long-Term Debt, Excluding Current Installments 11,732,000 14,515,000 17,290,000 19,958,000 22,240,000 30,690,000 33,170,000 Net Stockholders' Equity 22,509,000 19,759,000 18,115,000 17,047,000 22,300,000 24,252,000 24,252,000 ____________________ (1) No cash dividends have been distributed during any of the years in the five-year period ended March 31, 1995 or the three months ended June 30, 1995. (2) EBITDA is defined as operating income (loss) plus depreciation and amortization. EBITDA is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (3) Earnings used in computing the ratio of earnings to fixed charges consist of earnings before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs and the portion of the Company's rent expense that the Company believes is representative of the interest factor. (4) Earnings were inadequate to cover fixed charges in fiscal 1992 and fiscal 1991. Earnings (Loss) before Income Taxes (Benefit) in fiscal 1992 and fiscal 1991 include fixed charges of approximately $2.7 million and $2.9 million, respectively. (5) Adjusted to reflect the Debenture Offering which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995) and the initial application of the proceeds therefrom. See "Use of Proceeds." (6) Adjusted to give effect to the Debenture Offering which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995) and the application of the net proceeds therefrom (after deducting discounts and commissions and estimated offering expenses payable by the Company pursuant thereto). See "Use of Proceeds."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the consolidated financial condition and results of operations of the Company for the six months ended September 30, 1995 and 1994, and for each of the years in the three year period ended March 31, 1995. This section should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto and other financial information included elsewhere in this Prospectus. OVERVIEW During the last three fiscal years, the Company, in connection with its strategic plan, acquired several businesses with complementary military and commercial products and technologies. The businesses of Technology Applications & Service Company ("TAS"), CMC Technology ("CMC") and Laurel Technologies ("Laurel"), which joined the Company in the latter part of fiscal 1994, became an integral part of the fiscal 1995 business base and significantly contributed to the Company's fiscal 1995 financial performance. In November 1994, the Company acquired Ahead Technology Corporation ("Ahead"), located in Los Gatos, California. RECENT DEVELOPMENTS In July 1995, the Company, through its subsidiary OMI, acquired substantially all of the assets of Opto Mechanik, Inc., located in Melbourne, Florida. OMI designs and manufactures electro-optical sighting and targeting systems used primarily in military fire-control devices and in various weapons systems. Shortly after the close of fiscal 1995, the Company signed a non-binding letter of intent contemplating the merger of the Company with NAI Technologies, Inc. ("NAI"), which the Company terminated on July 13, 1995. Discussions between the Company and NAI are continuing relating to the possibility of acquiring certain businesses, however, no agreement or understanding has been reached and no assurances can be given that any agreement or understanding will be reached. In August 1995, Mr. Leonard Newman was elected Chairman Emeritus of the Company and retired as the Chairman of the Board and Secretary of the Company. The Company is currently negotiating an employment, non-competition and retirement agreement between the Company and Mr. Leonard Newman. See "-- Financial Condition and Liquidity - Contingencies." Subsequent to the close of fiscal 1995, the Company has received various contract awards totalling approximately $58.7 million. As of October 29, 1995, backlog totalled approximately $157.1 million, which includes approximately $15.5 million of backlog from the OMI acquisition. RESULTS OF OPERATIONS The following table sets forth items in the consolidated statements of operations as a percentage of revenues and the percentage increase or decrease of those items as compared with the prior period. Percentage of Revenues Percentage Change __________________________________ ___________________________ Six Months Six Months Ended Year Ended March 31, Ended September 30, September 1995 30, vs. _____________________ ____________ Fiscal Fiscal Six Months 1995 1994 Ended vs. vs. September 30, 1995 1994 1993 1995 1994 1994 1993 1994 ____ ____ ____ ____ ____ ______ ______ _____________ Revenues . . 100.0% 100.0% 100.0% 100.0% 100.0% 20.9% 21.0% 26.5% Costs and Expenses . . 92.7 94.0 95.2 92.1 92.9 19.2 19.6 25.5 ----- ----- ----- ----- ----- Operating Income . . . 7.3 6.0 4.8 7.9 7.1 47.7 49.2 40.0 Interest and Related Expenses . . (2.0) (2.7) (3.6) (1.7) (2.1)(12.8) (9.3) 3.0 Other Income, Net . . . . . .8 1.4 2.6 0.2 0.7 (36.0) (31.9) (47.2) ---- --- ---- --- --- Earnings before Income Taxes . . . . 6.1 4.7 3.8 6.4 5.7 57.2 50.4 43.5 Income Taxes . . 2.4 1.9 1.5 2.5 2.3 51.1 52.9 40.0 --- --- --- --- --- Net Earnings . . 3.7% 2.8% 2.3% 3.9% 3.4% 61.2% 48.8% 45.7% --- --- --- --- --- COMPARISON OF THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1995 WITH THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1994 Revenues for the three-month period ended September 30, 1995 increased 45.6% to $22.8 million from $15.7 million for the same three-month period in fiscal 1995. On a year-to-date basis, revenues increased 26.5% to $40.1 million from $31.7 million for the same six-month period in fiscal 1995. The revenue growth was due primarily to increased shipments of display workstations coupled with shipments, in the current fiscal year, of magnetic head products by Ahead Technology, Inc., whose net assets were acquired in November 1994, and revenues from the acquisition of substantially all of the assets of Opto Mechanik, Inc. on July 5, 1995, which increased the Company's electro-optical sighting systems business. Operating income for the three-month period ended September 30, 1995 increased 56.3% to $1.8 million from $1.2 million for the same three-month period in fiscal 1995. On a year-to-date basis, operating income increased 40.0% to $3.2 million from $2.3 million for the same six-month period in fiscal 1995. Operating income as a percentage of revenues was 8.1% and 7.9% for the three-month and six-month periods ended September 30, 1995, respectively, as compared with 7.5% and 7.1%, respectively, for the comparable prior year periods. Higher operating income in both periods was due primarily to the overall increase in revenues, together with higher margins earned on the company's commercial products, display systems product line and manufacturing services. Interest and related expenses was $0.4 million and $0.7 million for the three-month period ended September 30, 1995 and six-month period ended September 30, 1995, respectively as compared to $0.3 million and $0.7 million for the comparable prior year periods. The increase for the second quarter was primarily due to the increase in debt associated with the OMI acquisition at the beginning of the second quarter of fiscal 1996, offset in part by a reduction in interest from repurchases of the Company's 1998 Debentures. Other income, net, was $27,000 and $0.1 million for the three-month and six-month periods ended September 30, 1995, respectively, representing decreases from comparable prior year periods, primarily due to the lower average cash balances. The Company's effective tax rate for the three-month and six-month periods ended September 30, 1995 was 39%, as compared to 37.0% and 40.0% for the comparable prior year periods. The Company records income tax expense based on an estimated effective income tax rate for the full fiscal year. The effective income tax rate and the components of income tax expense for the second quarter and first half of fiscal 1996 did not significantly change from those of the fiscal year ended March 31, 1995. The provision for income taxes includes all estimated income taxes payable to federal and state governments as applicable. COMPARISON OF FISCAL 1995 WITH FISCAL 1994 Revenues for fiscal 1995 increased 21% to $69.9 million from $57.8 million in fiscal 1994. The increase during fiscal 1995 was primarily attributable to revenues from the display, manufacturing and video broadcast product lines of TAS, CMC and Laurel, which were included in the Company's results for the full year. In addition, commercial revenues increased $4.3 million to approximately $6.4 million in fiscal 1995 primarily as a result of the Company's November 1994 acquisition of Ahead, which contributed approximately $2.7 million in revenues for the fiscal 1995 period. Revenues from the Company's core signal processing, display, data storage and optical product lines experienced a slight decrease during fiscal 1995, as development efforts on several major programs were substantially completed, and the receipt of certain new awards was delayed into the latter part of the year. Operating income for fiscal 1995 increased 48% to $5.1 million from $3.4 million in fiscal 1994. Operating income as a percentage of revenues was 7% for fiscal 1995 as compared to 6% in fiscal 1994. Such increases are attributable to higher fiscal 1995 revenues and the contribution of higher margin commercial products to the Company's business base and the positive impact of management's continuing cost reduction efforts. Interest and related expenses for fiscal 1995 decreased 13% to $1.4 million from $1.6 million in fiscal 1994. The decrease was a result of the reduction in the Company's long-term debt. The Company repurchased approximately $2.7 million of its 1998 Debentures during fiscal 1995, which were used principally to satisfy the August 1, 1994 mandatory sinking fund requirement for the debt. Other income, net, for fiscal 1995 decreased 36% to $.5 million from $.8 million in fiscal 1994. This decrease was primarily attributable to lower gains from the repurchases of 1998 Debentures of $.2 million. Substantially all 1998 Debentures repurchased during fiscal 1995 were at prices approximating par value. The Company's effective income tax rate in fiscal 1995 and 1994 was 39% and 40%, respectively. COMPARISON OF FISCAL 1994 WITH FISCAL 1993 Revenues for fiscal 1994 increased 21% to $57.8 million from $47.8 million in fiscal 1993. The revenue increase reflects the contribution of the recently acquired product lines of TAS, CMC and Laurel. Revenues from core signal processing, display, recording and optical product lines shifted to those from contracts awarded primarily within the 1994 and 1993 fiscal years. Revenues from older contracts for such products were not as significant as in fiscal 1993, as a result of the completion or near-completion of these contracts during the year. Operating income for fiscal 1994 increased 49% to $3.4 million from $2.3 million in fiscal 1993. Operating income as a percentage of revenues was 6% in fiscal 1994 as compared to 5% in fiscal 1993. Such increases are attributable to higher fiscal 1994 revenues, lower costs as a result of improved efficiencies and the substantial completion during fiscal 1993 of two fixed- price development contracts on which the Company incurred write- offs for cost overruns. Interest and related expenses decreased 9% to $1.6 million in fiscal 1994 from $1.7 million in fiscal 1993. This decrease reflects the Company's retirement of $2.5 million of principal on its 1998 Debentures during the first half of fiscal 1994, pursuant to the mandatory sinking fund requirement for the debt. The Company also repurchased an additional $.1 million in principal amount of the 1998 Debentures during the latter half of fiscal 1994. Other income, net, for fiscal 1994 decreased 32% to $.8 million from $1.2 million in fiscal 1993. Fiscal 1994 results included gains on the repurchases of 1998 Debentures, described previously, of approximately $.3 million, while fiscal 1993 gains for similar transactions amounted to $.5 million. The Company's effective income tax rate in both fiscal 1994 and 1993 was 40%. FINANCIAL CONDITION AND LIQUIDITY Cash and Cash Flow. Cash and cash equivalents at September 30, 1995 and March 31, 1995 represented approximately 25% and 17%, respectively, of total assets. During the six-month period ended September 30, 1995, cash increased $9.8 million. This increase was primarily the result of the private placement of $20,000,000 in aggregate principal amount of the Debentures on September 29, 1995. In addition, approximately $2.4 million was generated from sales of certain fixed assets. These contributions to cash were offset by uses of: (i) approximately $4.1 million in the OMI acquisition; (ii) approximately $2.2 million for repurchases of outstanding 1998 Debentures in satisfaction of the August 1, 1995 sinking fund requirement for such debt; and (iii) approximately $2.0 million for capital expenditures. Additionally, approximately $3.3 million was used in support of operations, primarily to settle accounts payable and other current obligations of the Company. Cash and cash equivalents at March 31, 1995 of $11.2 million was down $4.3 million from the balance at March 31, 1994. Cash represented 17% of total assets at the end of fiscal 1995, as compared with 26% in fiscal 1994. During fiscal 1995, cash generated by operations amounted to $2.5 million. In comparison, cash generated by operations during fiscal 1994 was $10.2 million. The reduction in the amount of cash generated by operations during fiscal 1995 was primarily attributable to the build-up in inventory which occurred during fiscal 1995 in preparation for the fiscal 1996 production and shipment of products under several significant development contracts. Cash used in investing and financing activities during fiscal 1995 totalled $3.8 million and $3.0 million, respectively, primarily attributable to purchases of capital equipment for $2.5 million, the acquisition of Ahead for $1.5 million and the repurchase of 1998 Debentures for $2.7 million. Capital expenditures during fiscal 1996 are expected to approximate $4.4 million. The majority of these expenditures will be for computer and laboratory-related equipment, as well as for facilities improvements, which will be required to support the Company's growth, particularly for its commercial product lines. As of August 1995, the Company satisfied its $2.5 million sinking fund obligation under the 1998 Debentures. During the first quarter of fiscal 1996, the Company obtained a $5.0 million unsecured line of credit from NatWest Bank which may be used to supplement its working capital needs. As of September 30, 1995, there were no balances outstanding under this line of credit. The net proceeds from the Debenture Offering will be used to repurchase $5.0 million in principal amount of outstanding 1998 Debentures, for working capital requirements and for future acquisition-related transactions. Although the Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in discussions regarding potential acquisitions, the Company does not currently have any agreement or understanding regarding any potential acquisition. The Company believes that its current working capital position is sufficient to support operational needs as well as its near-term business objectives. Accounts Receivable and Inventories. Accounts receivable increased approximately $1.5 million in the six-month period ended September 30, 1995, primarily as a result of the OMI acquisition, offset in part by decreases in existing account balances. Accounts receivable were approximately $17.4 million at March 31, 1995, an increase of $1.9 million from the balance at March 31, 1994. This increase was primarily attributable to significant shipments on several contracts which occurred toward the end of the fiscal year. The Company receives progress payments on certain contracts from the U.S. Government of between 80-100% of allowable costs incurred. The remainder, including profits and incentive fees, is billed to its customers based upon delivery and final acceptance of all products. In addition, the Company may bill its customers based upon units delivered. Generally, there are no contract provisions for retainage, and all accounts receivable are expected to be collected within one year. Inventories increased by approximately $3.8 million during the first half of fiscal 1996, also reflecting the effect of the OMI acquisition. The increase in inventories was also due, in part, to increased material procurement related to the production of certain display workstation programs. The net inventory balance at March 31, 1995 was $11.7 million, an increase of $6.7 million from the balance at March 31, 1994. As mentioned previously, the Company experienced a build-up in inventory during fiscal 1995 in preparation for production and shipment on several major development contracts. In addition, the terms of certain production contracts in process during fiscal 1995, specifically those with foreign governments, did not provide for progress billings. In such cases, the Company is required to fund the cost of inventory until such time as shipments are made. Long-Term Debt. Long-term debt outstanding increased by approximately $19.0 million during the six-month period ended September 30, 1995 to $30.7 million, primarily due to the Company's private placement of $20,000,000 in aggregate principal amount of the Debentures pursuant to the Debenture Offering. Long-term debt outstanding decreased by approximately $2.8 million during fiscal 1995. The reduction in outstanding debt during fiscal 1995 was primarily attributable to the $2.5 million mandatory sinking fund obligation on the 1998 Debentures, as well as the mandatory redemption of $.2 million in principal amount on the Company's industrial revenue bonds (the "Revenue Bonds") on January 1, 1995. The Company is subject to annual redemptions on the Revenue Bonds through 1998. At March 31, 1995, the Company had approximately $1.9 million in principal amount of Revenue Bonds outstanding, subject to annual redemptions through 1998. The principal amount of the Revenue Bonds to be redeemed varies each year in accordance with the redemption schedule provided in the indenture. Under the terms of the Revenue Bonds, the Company is a guarantor under a letter of credit arrangement and has agreed to certain financial covenants (see Note 6 of Notes to Consolidated Financial Statements). The Company must realize a certain level of profits during each quarter of fiscal 1996 to be in compliance with these covenants. Stockholders' Equity. Net stockholders' equity increased by $1.7 million during the six-month period ended September 30, 1995 to $24.3 million and increased by $2.8 million during fiscal 1995 to $22.5 million, primarily as a result of net earnings of $1.6 million and $2.6 million generated for the respective periods. In July 1994, pursuant to a stock purchase agreement between the Company and David E. Gross, its former President and Chief Technical Officer, the Company purchased 659,220 shares of its Class A Common Stock and 45,179 shares of its Class B Common Stock owned by Mr. Gross, at a price of $4.125 and $4.00 per share, respectively, totalling approximately $2.9 million in cash (the "Buy-back"). On October 18, 1994, the Company filed a registration statement on form S-2 and on November 10, 1994, the Company filed Amendment No. 1 to such registration statement with the SEC for the purpose of selling shares of its common stock purchased in the Buy-back. The Company sold 650,000 shares of its Class A Common Stock and 45,000 shares of its Class B Common Stock, at prices of $4.125 and $4.00 per share, respectively, totalling approximately $2.9 million pursuant to the offering. Backlog. At September 30, 1995, the Company's backlog of orders was approximately $160 million as compared to $126 million at March 31, 1995. The increase in backlog for the first half of the year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $15.5 million of backlog from the OMI acquisition. New contract awards of approximately $58.7 million were booked during the six-month period ended September 30, 1995. As of October 29, 1995, backlog totalled approximately $157.1 million, which includes approximately $15.5 million of backlog from the OMI acquisition. The Company closed fiscal 1995 with a funded backlog of $126.0 million representing an $8.5 million decrease from backlog at March 31, 1994. Included in the fiscal 1995 year-end backlog is approximately $2.2 million of commercial orders. New business awards during fiscal 1995 totalled approximately $61.4 million and included approximately $5.8 million of new commercial orders. Significant awards received during the year included $5.9 million in contracts from the Naval Air Systems Command to produce additional quantities of A/U36M-1(V) Weapons Boresight Equipment for the Marine Corps' AH-1W Cobra helicopters, approximately $9.4 million from the Government Systems Group of Unisys Corporation to provide portions of the AN/UYQ-70 Advanced Display System and a $4.9 million contract with the U.S. Navy to provide Readiness Trainer Systems for the Mobile In-shore Undersea Warfare System Upgrade program. Contract awards for the Company's 8mm video recorder products totalled approximately $5.4 million and included a $3.1 million award from the Naval Air Systems Command to equip the U.S. Navy's F/A-18 Hornet carrier-based aircraft with WRR-818 8mm video recorders. The Company also received funding under a $12.5 million not-to-exceed contract from Lockheed Aeronautical Systems Company to provide engineering services and modified AN/USH-42 Mission Recording Systems for deployment on the U.S. Navy's S-3B Viking carrier-based jet aircraft, as well as additional funding under a multi-year contract with the U.S. Navy, initially received in fiscal 1994, to provide combat-system display consoles for land-based applications. Approximately 84%, 94% and 83% of revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from contracts or subcontracts with the U.S. Government, principally the U.S. Navy. Included in revenues for fiscal 1995, 1994 and 1993 were $18.8 million, $27.5 million and $19.2 million, respectively, of customer-sponsored research and development, which were the result of contract agreements directly or indirectly with the U.S. Government. The Debenture Offering. On September 29, 1995 (the "Debenture Closing Date"), the Company issued $20,000,000 in aggregate principal amount of the Debentures pursuant to the Debenture Offering. Net proceeds from the private placement of these Debentures were approximately $19,000,000. On November 3, 1995, the Company issued an additional $5,000,000 in aggregate principal amount of the Debentures, upon exercise of the over- allotment option pursuant to the Purchase Agreement between the Company and the Initial Purchaser, dated, September 22, 1995. Net proceeds from the exercise of the over-allotment option were approximately $4,750,000. Pursuant to the related Registration Rights Agreement dated September 22, 1995 between the Company and the Initial Purchaser, acting on behalf of holders of the Debentures (the "Registration Rights Agreement"), the Company has agreed to file, within ninety (90) days after the Debenture Closing Date, a shelf registration statement relating to the Debentures and the shares of Class A Common Stock which are issuable from time to time upon conversion of the Debentures, and to cause the shelf registration statement to become effective within one hundred fifty (150) days after the Debenture Closing Date. In addition, the Company has agreed to use its reasonable best efforts to keep the shelf registration statement effective until at least the third anniversary of the issuance of the Debentures. The Company has filed a registration statement on Form S-2 of which this Prospectus is a part in compliance with its obligation under the Registration Rights Agreement to file a shelf registration statement. In connection with these transactions, the Company expects to incur approximately $500,000 of professional fees and other costs. These costs, together with the Initial Purchaser's commissions in connection with the Debenture Offering, will be amortized ratably through the maturity date of the Debentures. See "Description of the Debentures." Letter of Credit. The Company's Revenue Bonds are supported by an irrevocable, direct-pay letter of credit in an amount equal to the principal balance plus interest thereon for 45 days. At September 30, 1995, the contingent liability of the Company as guarantor under the letter of credit was approximately $1,930,000. The Company has collateralized the letter of credit with accounts receivable and has also agreed to certain financial covenants, including the maintenance of: (i) a certain minimum ratio of consolidated tangible net worth to total debt (the "Debt Ratio"), (ii) a certain minimum quarterly ratio of earnings before interest and taxes to interest (the "Interest Ratio"), and (iii) a certain minimum balance of billed and unbilled accounts receivable ("Eligible Receivables"). At September 30, 1995, the covenants required: (i) a Debt Ratio of 0.6:1, (ii) an Interest Ratio of 1.5:1 and (iii) Eligible Receivables of $2,500,000. As a result of the issuance of $20,000,000 aggregate principal amount of the Debentures on September 29, 1995, the Debt Ratio at September 30, 1995 was 0.4:1. The Company has obtained a waiver, renewable annually, from the bank of the required debt ratio and is in compliance with all covenants under the letter of credit. Contingencies. The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency. The Company is not a party to any legal proceedings with the U.S. Government. Certain Agreements. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the "Gross Agreement") and a Stock Purchase Agreement (the "Gross Stock Purchase Agreement") with David E. Gross, its former President and Chief Technical Officer. Under the terms of the Gross Agreement, Mr. Gross will receive a total of $600,000 over a five-year period as compensation for his services pursuant to a five-year consulting arrangement with the Company and a total of $750,000 over a five-year period as consideration for a five-year non-compete arrangement. The payments will be charged to expense over the term of the Gross Agreement as services are performed and obligations are fulfilled by Mr. Gross. Mr. Gross will also receive at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period as deferred compensation. The net present value of the payments to be made to Mr. Gross pursuant to the deferred compensation portion of the Gross Agreement approximated the amount of the Company's previous deferred compensation arrangement with Mr. Gross. In addition to the Buy-back, the Gross Stock Purchase Agreement also provides that (i) the Company has a right of first refusal with respect to the sale by Mr. Gross of any of the remaining shares of common stock of the Company held by Mr. Gross in excess of 20,000 shares, (ii) any shares of common stock of the Company held by Mr. Gross must be voted pro rata in accordance with the vote of the Company's other stockholders and (iii) in the event of a change in control of the Company within three years from the date of the Gross Stock Purchase Agreement, Mr. Gross will receive a percentage of the difference between the price per share paid to Mr. Gross pursuant to the Buy-back and the price per share received by the stockholders of the Company pursuant to the change of control transaction, less an interest factor, as defined in the Gross Stock Purchase Agreement, on the aggregate amount paid to Mr. Gross pursuant to the Buy-back. The Company is currently negotiating an employment, non- competition and retirement agreement (the "Newman Agreement") between the Company and Leonard Newman, its former Chairman of the Board and Secretary of the Company. Pursuant to the Newman Agreement, it is expected that Mr. Newman will receive certain compensation from the Company over a five-year period for consulting services and a non-compete arrangement. In addition, Mr. Newman will receive certain retirement benefits payable over a ten-year period at the conclusion of such initial five-year period. Results of operations for fiscal 1995 reflect a charge of $1.5 million representing the estimated net present value of the Company's obligation under the Newman Agreement. The corresponding amount was included in Other Liabilities in the Consolidated Balance Sheet at March 31, 1995 as an addition to the accrual which had been established to cover the Company's liability to Mr. Newman under a previous deferred compensation arrangement. Inflation. The Company has experienced the effects of inflation through increased costs of labor, services and raw materials. Although a majority of the Company's revenues are derived from long-term contracts, the selling prices of such contracts generally reflect estimated costs to be incurred in the applicable future periods. ACCOUNTING STANDARDS Income Taxes. In February 1992, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective April 1, 1993, the Company adopted SFAS 109. Until March 31, 1993, the Company used the asset and liability method of accounting for income taxes, as set forth in Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"). Under SFAS 96, deferred income taxes are recognized by applying statutory tax rates to the difference between the financial statement carrying amounts and tax bases of assets and liabilities. The statutory tax rates applied are those applicable to the years in which the differences are expected to reverse. The cumulative effect of adopting SFAS 109 was not material to the Company's consolidated results of operations or financial position. Postretirement Benefits Other Than Pensions. In December 1990, the FASB issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). The Company adopted SFAS 106 during the first quarter of fiscal 1994, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. Postemployment Benefits. In November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). The Company adopted SFAS 112 during the first quarter of fiscal 1995, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. ACQUISITIONS AND RELATED ACTIVITIES On October 1, 1993, the Company acquired, through TAS Acquisition Corp., a wholly-owned subsidiary of the Company, a 95.7% equity interest in TAS, a Maryland corporation, pursuant to a stock purchase agreement (the "TAS Agreement") dated as of August 6, 1993. TAS, headquartered in Gaithersburg, Maryland, was a privately-held company incorporated in early 1991. Under the terms of the TAS Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and outstanding shares of common stock, par value $.01 per share, of TAS. The price paid by the Company for the shares of TAS common stock was obtained from the Company's working capital. On September 30, 1993, the Company, in anticipation of the acquisition, advanced $1.8 million to TAS pursuant to a demand promissory note. Such advance was converted to an intercompany liability on the date of the acquisition and was eliminated in consolidation. On November 1, 1993, Articles of Merger were filed in order to merge TAS into TAS Acquisition Corp. The name TAS Acquisition Corp. was changed to Technology Applications & Service Company. The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $.4 million and will be amortized on a straight-line basis over 30 years, or $14,000 annually. On December 13, 1993, the Company, through its wholly-owned subsidiary, DRSSMC, entered into a partnership with Laurel Technologies, Inc. of Johnstown, Pennsylvania. Pursuant to a Joint Venture Agreement dated November 3, 1993 and a Partnership Agreement dated December 13, 1993, between DRSSMC and Laurel Technologies, Inc., Laurel was formed for the purposes of electronic cable and harness manufacturing, military-quality circuit card assembly and other related activities. The Company's contribution to Laurel consisted of cash, notes and equipment valued at approximately $.6 million, representing an 80% controlling interest in Laurel. As a result, the financial position and results of operations of Laurel since December 13, 1993 have been consolidated with those of the Company's. The related minority interest in Laurel has been included in "Other Liabilities" and "Other Income, Net," respectively, in the Company's consolidated financial statements for the period ended March 31, 1995 and 1994. Also during December 1993, the Company acquired certain assets of CMC, located in Santa Clara, California, for approximately $.4 million. CMC primarily refurbishes magnetic video recording rotary-head scanner assemblies for post- production facilities and television broadcast stations worldwide. This acquisition provides the Company with a key customer base in the commercial video recording systems industry. On November 17, 1994, the Company acquired, through a wholly-owned subsidiary of Precision Echo ("Precision Acquisition"), the net assets of Ahead, pursuant to an asset purchase agreement (the "Ahead Asset Purchase Agreement"), dated October 28, 1994. Under the terms of the Ahead Asset Purchase Agreement, Precision Acquisition paid, on the date of acquisition, approximately $1.1 million for the net assets of Ahead. In addition, Precision Acquisition entered into a Covenant and Agreement Not to Compete (the "Covenant"), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant Agreement, the total cash consideration to be paid by Precision Acquisition consisted of approximately $.4 million payable at the acquisition date, and an additional $.5 million, payable in equal monthly installments over a period of five years from the acquisition date. The acquisition has been accounted for using the purchase method of accounting and, therefore, Ahead's financial statements are included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $.9 million and will be amortized on a straight-line basis over 5 years, or approximately $.2 million annually. The acquisition had no significant effect on the Company's consolidated financial position or results of operations. After the close of fiscal 1995, the Company, through its subsidiary OMI, acquired in July 1995 substantially all of the assets of Opto Mechanik, Inc., located in Melbourne, Florida. OMI designs and manufactures electro-optical sighting and targeting systems used primarily in military fire-control devices and in various weapons systems. BUSINESS GENERAL The Company designs, manufactures and markets high- technology computer workstations for the U.S. Department of Defense, electro-optical targeting systems for military customers and image and data storage products for both military and commercial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "commercial-off-the- shelf" ("COTS") product designs, whereby commercial electronic components are adapted, upgraded and "ruggedized" for application in harsh military environments. The Company believes that military expenditures on electronic systems and equipment will grow in coming years as the nature of modern warfare dictates increasing reliance on real-time, accurate battlefield information and the electronic content and sophistication of defense systems increases. Using COTS designs, the Company develops and delivers its products with significantly less development time and expense compared to traditional military product cycles, generally resulting in shorter lead times, lower costs and the employment of the latest information and computing technologies. The COTS process entails the purchasing, refitting, upgrading (of both hardware and software) and "ruggedization" (repackaging, remounting and stress testing to withstand harsh military environments) of readily available commercial components. The design and manufacture of COTS-based products is a complex process requiring specific engineering capabilities, extensive knowledge of military platforms to which the equipment will be applied and in-depth understanding of military operating environments and requirements. STRATEGY During its last three fiscal years, the Company has restructured its management team and implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the cold war, military budget constraints and the COTS mandate. The Company's strategies include: * expanding and diversifying the Company's technology and product base into complementary military and commercial markets primarily through acquisitions and the forging of strategic relationships; * increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and * enhancing financial performance through specific cost reduction measures and increased manufacturing efficiencies. To effect these strategies, the Company has (i) acquired several businesses with complementary military and commercial products and technologies over the last three years; (ii) forged strategic relationships with other defense suppliers such as Loral Corporation and Westinghouse Electric Corporation, among others; (iii) emphasized the development of COTS-based products as well as products and systems that are easily adapted to similar weapons platforms for use by all branches of the military; and (iv) implemented cost reduction programs to reduce its fixed-cost base, allow for growth and maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last three fiscal years. Although the Company experienced operating losses in fiscal 1990 through 1992, primarily due to cost overruns on a single fixed- price development contract, a shift over the last several years in the nature of military development contracting from fixed- price to cost-type contracts has reduced the Company's exposure in this area. For the fiscal year ended March 31, 1995, the Company had revenues of $69.9 million, net income of $2.6 million and earnings per share of $.50, representing increases of 20.9%, 61.2% and 66.7%, respectively, compared with the year ended March 31, 1994. For the six months ended September 30, 1995, the Company had revenues of $40.1 million, net income of $1.6 million and fully diluted earnings per share of $.28, representing increases of 26.5%, 45.7% and 33.3%, respectively, compared with the same six-month period ended September 30, 1994. Acquisitions. In October 1993 the Company acquired TAS, a designer and supplier of advanced command and control software and hardware. TAS' business, which focuses primarily on radar displays, augments the Company's core expertise in sonar signal processing, allowing the Company to offer complete command and control system solutions to its naval customers. In December 1993, the Company purchased its 80% interest in Laurel, then primarily an assembler of wire harness products for aerospace customers. The addition of Laurel has provided the Company with the opportunity to consolidate manufacturing operations at ESG and enables the Company to solicit and bid effectively for long- term system development and manufacturing contracts. The Company acquired CMC in December 1993 and Ahead in November 1994. These acquisitions provide the Company with an established computer and recorder products commercial base, provide advanced manufacturing capabilities in the area of magnetic recorder heads and allow the Company to apply its expertise in high technology recorder products to select commercial markets. In July 1995, the Company acquired substantially all of the assets that now constitute OMI. This acquisition enables EOSG to expand its electro-optical targeting products and manufacturing activities in a lower cost manufacturing facility, adds backlog in complementary product areas and allows for expansion of the MPBE program. Strategic Relationships. The Company has established relationships with other defense suppliers such as Loral Corporation and Westinghouse Electric Corporation, among others. The Company acts as a subcontractor to these major contractors and may also engage in other development work with such contractors. This enables the Company to diversify its program base and increase its opportunities to participate in larger military procurement programs. Adaptable Product Designs. The Company's recent focus has been on the design and development of products that can be used by all branches of the military. This enables the Company to increase revenues, reduce product costs and decrease reliance on U.S. Navy procurement programs. The Company's systems, originally designed under a U.S. Navy development contract, are open architecture information processing workstations that can be applied for use in other branches of the military. Similarly, the Company's boresight products, originally designed for use with the U.S. Army's Apache attack helicopter, were specifically designed to be adaptable to other air, sea or land-based weapons platforms. The boresight system has been successfully applied to the U.S. Marine Corps' Cobra helicopter and proposals have been submitted for its use on F-15 and C-130 fixed-wing platforms. Cost Reduction Programs. During the last three fiscal years, the Company has streamlined personnel levels, decreased rent expenses through facility consolidation and acquired low- cost manufacturing operations. The Company is also utilizing more efficient manufacturing methods on several projects that are set to enter full-scale production in fiscal 1996. COMMERCIAL-OFF-THE-SHELF (COTS) PRODUCT DESIGNS The concept of designing and manufacturing military products and systems through the integration and adaptation of existing commercial and military products was developed in response to both decreasing military budgets and the increasing pace of technology. Management believes that the adaptation of available commercial components and existing military systems to new military applications offers two primary advantages over traditional military systems development and procurement cycles: (i) it has the potential to save significant amounts of time and expenditures in the area of research and development and (ii) as commercial product development and production cycles become shorter than their military equivalents, the adaptation of commercial technology to battlefield systems has the potential to shorten military product cycles. As a result of some of these advantages, the use of COTS computer hardware and software that can be integrated in common (open architecture) applications and systems was mandated by the Joint Chiefs of Staff in 1992. COTS entails the purchasing, refitting, upgrading and "ruggedization" (repackaging, remounting and stress- testing to withstand harsh military operating environments) of available commercial components. Application of the COTS concept to electronic systems includes open architecture designs and the customization of software for increased flexibility, performance and compatibility with existing and future systems. The Company strives to apply a COTS design to most new product designs at ESG, EOSG and MTG. For example, the combination of COTS components integrated in an open architecture design allows ESG to provide products compatible with existing systems and which provide improved performance and the ability to upgrade systems at significant cost savings versus the previous generation military systems they are intended to replace. MARKET OVERVIEW According to a recent Electronics Industry Association survey (reportedly based on extensive audits, surveys and interviews of Department of Defense and Congressional records and personnel), U.S. military expenditures for electronics and related equipment were $37 billion in 1994 and are projected to grow slowly over the next decade. The Company believes that the market for military electronics and related equipment will grow slowly in coming years due to two primary factors: First, the nature of modern warfare dictates increasing reliance on timely and accurate battlefield information to ensure that increasingly costly assets are efficiently deployed and to minimize destruction of nonmilitary targets. In general, military engagements have evolved from large-scale undertakings, where numerical superiority was the key to dominance, to "surgical strikes" where the ability to observe and strike accurately and at will from afar has become a major means of both deterrence and loss minimization. Advanced technology has been a major factor enabling the increasing precision strike capability of the U.S. military and has increased the "per shot" cost of arms. These factors combine to produce a military, economic and political environment requiring increased weapons efficiency and accuracy. In addition, real time data is needed for in-theatre evaluation, damage assessment and training, as well as to reduce and minimize incidents of U.S. casualties due to friendly fire. Second, it is often more cost-effective to refit and upgrade existing weapons platforms than to replace them. With the development and unit costs of new platforms increasing rapidly amid a political and economic environment demanding decreasing overall military expenditures, Congress and the military have delayed or canceled the implementation of many proposed weapons systems, opting instead to improve the performance, and extend the life, of existing weapons through improved battlefield intelligence and equipment enhancements. This increasing focus on cost efficiencies has manifested itself in the military's COTS program. INDUSTRY CONSOLIDATION As the size of the overall defense industry has decreased in recent years, there has been an increase in the number of consolidations and mergers of defense suppliers and this trend is expected to continue. As the industry consolidates, the large (first-tier) defense contractors are narrowing their supplier base and awarding increasing portions of projects to strategic second- and third-tier suppliers, and in the process becoming oriented more toward system integration and assembly. As an example of the changing nature of supplier relationships, Photronics Corp. has been awarded increasing content in the infrared detector assemblies of several missile systems by its prime contractors. In 1988, Photronics Corp. supplied only the primary mirror for these systems. Photronics Corp. now supplies the primary, secondary, tertiary and fold mirrors, as well as the housing and nose domes for the missiles, and is working directly with these prime contractors on the electro-optical assemblies for the next generation missiles. COMPANY ORGANIZATION AND PRODUCTS The Company is organized into three operating groups: Electronic Systems Group ("ESG," 54% of fiscal 1995 revenues), Electro-Optical Systems Group ("EOSG," 18% of fiscal 1995 revenues) and Media Technology Group ("MTG," 28% of fiscal 1995 revenues). ELECTRONIC SYSTEMS GROUP ("ESG") ESG consists of DRS Military Systems ("Military Systems"), located in Oakland, New Jersey, TAS, located in Gaithersburg, Maryland, and Laurel, located in Johnstown, Pennsylvania. Also, under the direction of TAS is Technical Services Division ("TSD"), located in Norfolk, Virginia and San Diego, California. Military Systems designs, manufactures and markets signal processors and display workstations which are installed on naval ships for antisubmarine warfare (ASW) purposes and in land-based surveillance systems used for underwater surveillance of harbors and coastal locations. These workstations receive signals from a variety of sonar-type sensors, processing the information and arranging it in a display format enabling operators to quickly interpret the data and inform command personnel of potential threats. Major product lines and contracts include: * AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical workstation to be qualified by the U.S. Navy and was designed to comply with the stringent requirements of the Aegis (DDG-51) shipbuilding program. Replacing the sensor displays in the SQQ-89 ASW Combat Suite, it employs dual processors enabling simultaneous I/O and graphics processing. This new approach allows for required high bandwidth processing while maintaining response times for operator/machine interfaces. The system architecture can be adapted to meet various interface, cooling, memory, storage and processing requirements. See "Risk Factors -- Limited Term of Contracts." * AN/SQR-17A(V)3: These Mobile In-Shore Undersea Warfare (MIUW) systems are deployed in land-based vans, utilizing sonobuoys and anchored passive detectors for harbor defense, coastal defense and amphibious operations surveillance, as well as to enhance drug interdiction efforts. This system is currently being procured for utilization in 22 field installations. Military Systems is under contract to provide various upgrades to these field installations. * AN/SQQ-TIA: These are portable training systems used onboard MIUW vans to simulate actual sonar signal processing sets currently used by the U.S. Navy and are employed primarily for Navy Reserve training. TAS produces tactical (e.g., combat/attack) information systems and training systems. Major product lines and contracts include: * AN/UYQ-70: The AN/UYQ-70 is an advanced, open architecture display system designed for widespread application through software modification, and is to be deployed on Aegis and other surface ships, submarines and airborne platforms. This system was developed for the U.S. Navy under subcontract with the Government Systems Group of Loral (Unisys) Corporation. The AN/UYQ-70 is a self-contained, microprocessor-based unit complete with mainframe interface software offering advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a shipboard mainframe computer at approximately 25% of the cost of the older units. This project is currently in the pre-production phase. Based upon the size of the naval surface fleet and the average number of workstations to be deployed on each ship, the Company believes that the potential market for this workstation product may be in excess of 5,000 units over the next decade. * Military Display Emulators: These are workstations that are functionally identical to existing U.S. Navy Mil-spec shipboard display consoles, but are built with low cost COTS components suitable for landbased laboratory environments. These Military Display Emulators are used in U.S. Navy development, test and training sites as plug compatible replacements for the more expensive shipboard qualified units. The Company is currently delivering these Military Display Emulators for use in the Aegis and other U.S. Navy programs. Laurel, which is 80% owned by DRS through a partnership with Laurel Technologies, Inc., and was purchased in December 1993, functions as a low-cost manufacturing facility and focuses on two areas. First, Laurel provides manufacturing and product integration services for Military Systems and TAS. ESG's workstation and simulator systems, among other products, are manufactured in this facility. Second, Laurel manufactures complex cable and wire harness assemblies for large industrial customers that are involved in the military and commercial aerospace industry. These products are then installed by the customers in a wide variety of rotary blade and fixed-wing aerial platforms. TSD performs field service and depot level repairs for ESG products, as well as other manufacturers' systems. Principal locations are in close proximity to U.S. Naval yards in Norfolk, Virginia and San Diego, California. Services including equipment and field change installation, configuration audit, repair, testing and maintenance, are performed for the U.S. Navy and, to a lesser extent, commercial customers. TSD has also performed work for foreign navies including those of Australia, the Republic of China, Egypt, Turkey and Greece. MEDIA TECHNOLOGY GROUP ("MTG") MTG consists of Precision Echo, Inc. ("PE") located in Santa Clara, California, Ahead located in Los Gatos, California and CMC located in Santa Clara, California. PE manufactures a variety of digital and analog recording systems utilized for military applications including reconnaissance, ASW and other information warfare data storage requirements, and is a predominant U.S. manufacturer of 8 millimeter military recorders supplied to the U.S. armed forces. PE's products include: * AN/USH-42: This system was originally developed for deployment in the U.S. Navy's A-6E attack aircraft. PE is currently under contract to modify the USH-42 for use on the Navy's S-3B ASW aircraft to record radar, infrared, bus, navigation and voice data. * WRR-818: This ruggedized video recorder, uses certain components from commercial video recording equipment, has been selected for use in U.S. F/A-18 aircraft and several foreign military aircraft. It has also been selected by the U.S. Army for use in its Kiowa warrior reconnaissance helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's light armored reconnaissance vehicles. * AN/AQH-9 and AN/AQH-12: These products are high- quality helicopter mission recording systems utilized to record sonar and mine hunting information and other intelligence data. Ahead manufactures burnish, glide and test heads used in the production of computer disk drives. These consumable products are used by many U.S. disk drive manufacturers to hone the surface and ensure the quality of magnetic disks used in computer hard drives. Customers include Seagate, Conner, Quantum, Komag, Store Media, Akashic and Western Digital. CMC manufactures and refurbishes commercial video recording products for broadcasters operating world-wide. CMC can refurbish pre-1993 head assemblies located on these machines at a significant cost savings compared to replacement. CMC is developing, in conjunction with Ahead, the ability to refurbish post-1993 recorders used by its customer base. Ahead also has the capability to manufacture recording heads for CMC. In order to foster operational synergies and to allow space for growth, Ahead and CMC will be moving into a new joint facility in late calendar 1995. ELECTRO-OPTICAL SYSTEMS GROUP ("EOSG") EOSG consists of Photronics Corp. ("Photronics Corp.") located in Hauppauge, New York and OMI located in Melbourne, Florida. Photronics Corp. produces boresighting equipment (used to align and harmonize rotary-wing aircrafts', and armored vehicles' navigation, targeting, and weapon systems, as well as pilots' helmet sighting system) and electro-optical components used in Sidewinder, Stinger and new generation air-to-air and surface-to- air missiles. Photronics Corp. has specialized coating and manufacturing processes for primary mirrors used in missiles, giving the company a competitive advantage. Photronics Corp.'s primary lines include: * Multiple Platform Boresight Equipment (MPBE): These products can be used on both rotary and fixed-wing aircraft, as well as armored vehicles. MPBE is currently used on the Army's Apache helicopters and Apache Longbow helicopters and the Marine Corps' Cobra helicopters. Proposals have been submitted to employ the system on the C-130 transport and the F-15 fighter. This technology is proprietary to the Company. * Missile Components: The components produced by Photronics Corp. originally consisted of primary mirrors used in the nose-mounted infrared seeker of Sidewinder and Stinger missiles. Photronics Corp.'s development efforts have resulted in its ability to provide increased content to include the secondary, tertiary and fold mirrors, housing and nose dome. Photronics Corp. is currently under contract to produce infrared components and subassemblies on many of the next generation infrared missile systems. Photronics Corp. has produced all major electro-optical components such as MPBE and missile products in Hauppauge since 1986. In July 1995, DRS acquired substantially all of the assets of Opto Mechanik, Inc., located in Melbourne, Florida through OMI. In order to reduce its production costs, Photronics Corp. plans to consolidate a significant portion of its manufacturing operations to a new facility in Melbourne, Florida. In addition, the move will create space for the expansion of Photronics Corp.'s MPBE programs in Hauppauge. Primary product programs at OMI include: * Gunners Auxiliary Sight: This is an electro-optical device used as a primary or backup sight on M1 Abrams battle tanks and contains a very sophisticated electro- optical train and a laser protective filter. OMI has produced over 2,000 of these instruments and continues to operate as a repair and retrofit facility for the M1A2 upgrade program, which will continue through 1997, with options through 1999. * TOW Optical Sight: OMI is currently the only U.S. qualified producer of this device. This complex electro-optical system is the main component of the U.S.'s premier anti-tank weapon system. * TOW Traversing Unit: This unit provides target tracking accuracy for the TOW anti-tank weapon, acting as the mount for the TOW Optical Sight and the missile launch tube. OMI is currently the only qualified manufacturer of this tightly toleranced assembly, and is currently working on modification and retrofit programs. OMI has also been contracted to modify a version for use by an overseas customer. * Day/Night Tank Sighting System: This system was developed in concert with a major primary contractor. OMI is a major subcontractor, currently supplying three of the major assemblies. * Eyesafe Laser Rangefinder: OMI competed against the U.S. Army's historical primary laser supplier for this contract and was awarded an initial contract for preproduction units. * Improved TOW Acquisition System: Working with the same primary contractor as referred to above, this antitank system was developed for the U.S. Army's humvee vehicle. CUSTOMERS A significant portion of the Company's products are sold to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or subcontractors thereof. Approximately 84%, 94% and 83% of total consolidated revenues for fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies. See "Export Sales" below for information concerning sales to foreign governments. BACKLOG The following table sets forth the Company's backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated: March 31, March 31, March 31, 1995 1994 1993 ____________ ____________ ____________ Government Products: U.S. Government $115,200,000 $123,700,000 $123,900,000 Foreign Government 8,600,000 5,800,000 1,000,000 ____________ ____________ ____________ 123,800,000 129,500,000 124,900,000 Commercial Products 2,200,000 5,100,000 1,200,000 ____________ ____________ ____________ $126,000,000 $134,600,000 $126,100,000 Approximately 54% of the backlog at March 31, 1995 is expected to result in revenues during the fiscal year ending March 31, 1996. At September 30, 1995, the Company's backlog of orders was approximately $160 million compared to $126 million at March 31, 1995. The increase in backlog for the first half of the year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $15.5 million of backlog from the OMI acquisition. New contract awards of approximately $58.7 million were booked during the six-month period ended September 30, 1995. As of October 29, 1995, backlog totalled approximately $157.1 million, which includes approximately $15.5 million of backlog from the OMI acquisition. "Backlog" refers to the aggregate revenues remaining to be earned at the specified date under contracts held by the Company, including, for U.S. Government contracts, the extent of the funded amounts thereunder which have been appropriated by Congress and allotted to the contract by the procuring Government agency. Fluctuations in backlog amounts relate principally to the timing and amount of Government contract awards. RESEARCH AND DEVELOPMENT The military electronics industry is subject to rapid technological changes and the Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, the Company's technological expertise has been an important factor in its growth. A portion of its research and development activities has taken place in connection with customer-sponsored research and development contracts. All such customer-sponsored activities are the result of contracts directly or indirectly with the U.S. Government. The Company also invests in Company-sponsored research and development. Such expenditures were $800,000, $500,000 and $500,000 for fiscal 1995, 1994 and 1993, respectively. Revenues recorded by the Company for customer-sponsored research and development were $18,800,000, $27,500,000 and $19,200,000 for fiscal 1995, 1994 and 1993, respectively. CONTRACTS The Company's contracts are normally for production, service or development. Production and service contracts are typically of the fixed-price variety with development contracts currently of the cost-type variety. Because of their inherent uncertainties and consequent cost overruns, development contracts historically have been less profitable than production contracts. Fixed-price contracts may provide for a firm-fixed price or they may be fixed-price-incentive contracts. Under the firm- fixed-price contracts, the Company agrees to perform for an agreed-upon price and, accordingly, derives benefits from cost savings, but bears the entire risk of cost overruns. Under the fixed-price-incentive contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts, the savings are apportioned between the customer and the Company. However, if actual costs under such a contract exceed estimated costs, excess costs are apportioned between the customer and the Company up to a ceiling. The Company bears all costs that exceed the ceiling. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which the Company is committed to deliver without regard to performance cost, cost-type contracts normally obligate the Company to use its best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of the Company's reduced risk. Under cost-plus-incentive-fee contracts, the incentive may be based on cost or performance. When the incentive is based on cost, the contract specifies that the Company is reimbursed for allowable incurred costs plus a fee adjusted by a formula based on the ratio of total allowable costs to target cost. Target cost, target fee, minimum and maximum fee and adjustment formula are agreed upon when the contract is negotiated. In the case of performance-based incentives, the Company is reimbursed for allowable incurred costs plus an incentive, contingent upon meeting or surpassing stated performance targets. The contract provides for increases in the fee to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. In some instances, incentive contracts also may include a combination of both cost and performance incentives. Under cost-plus-fixed-fee contracts, the Company is reimbursed for costs and receives a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. The percentages of revenues during fiscal 1995, 1994 and 1993 attributable to the Company's contracts by contract type were as follows: Year Ended March 31, 1995 1994 1993 Firm-fixed-price 74% 65% 88% Fixed-price-incentive - 1% - Cost-plus-incentive-fee 6% 17% 10% Cost-plus-fixed-fee 20% 17% 2% The increased percentage of cost-type contracts between fiscal 1993 and fiscal 1995 reflects the U.S. Government's increased use of cost-type development contracts, and the continued predominance of fixed-price contracts reflects the fact that production contracts comprise a significant portion of the Company's U.S. Government contract portfolio. The Company negotiates for and, generally, receives progress payments from its customers of between 80-100% of allowable costs incurred on the previously described contracts. Included in its reported revenues are certain amounts which the Company has not billed to customers. These amounts, approximately $7.9 million, $5.9 million and $8.1 million as of March 31, 1995, 1994 and 1993, respectively, consist of costs and related profits, if any, in excess of progress payments for contracts on which sales are recognized on a percentage-of-completion basis. Under generally accepted accounting principles, all U.S. Government contract costs, including applicable general and administrative expenses, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations ("FAR"), incorporated by reference in U.S. Government contracts, provide that Company-sponsored research and development costs are allowable general and administrative expenses. To the extent that general and administrative expenses are included in inventory, research and development costs also are included. Unallowable costs, pursuant to the FAR, have been excluded from costs accumulated on U.S. Government contracts. Work-in-process inventory included general and administrative costs (which include Company-sponsored research and development costs) of $6.6 million and $3.8 million at March 31, 1995 and 1994, respectively. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the foreign government. MARKETING The Company's marketing activities are conducted by its staff of marketing personnel and engineers. The Company's domestic marketing approach begins with the development of information concerning the present and future requirements of its current and potential customers for defense electronics, as well as those in the security and commercial communities serviced by the Company's products. Such information is gathered in the course of contract performance, research into the enhancement of existing systems and inquiries into advances being made in hardware and software development, and is then evaluated and exchanged among marketing, research and engineering groups within the Company to devise proposals responsive to the needs of customers. The Company markets its products abroad through independent marketing representatives. COMPETITION The military electronics defense industry is characterized by rapid technological change. The Company's products are sold in markets containing a number of competitors which are substantially larger than the Company, devote substantially greater resources to research and development and generally have greater financial resources. Certain of such competitors are also suppliers to the Company. The extent of competition for any single project generally varies according to the complexity of the product and the dollar volume of the anticipated award. The Company believes that it competes on the basis of the performance of its products, its reputation for prompt and responsive contract performance, and its accumulated technical knowledge and expertise. The Company's future success will depend in large part upon its ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, the Company competes with many first- and second-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. PATENTS The Company has patents on many of its recording products and certain commercial products. The Company does not believe patent protection to be significant to its current operations; however, future programs may generate the need for patent protection. MANUFACTURING AND SUPPLIERS The Company's manufacturing process for its products, excluding optical products, consists primarily of the assembly of purchased components and testing of the product at various stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors and insulated wire and cables. In addition, many of the Company's products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components have been fabricated to Company designs and specifications. The manufacturing process for the Company's optics products includes the grinding, polishing and coating of various optical materials and machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are the Company's sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. The Company has not experienced significant production delays attributable to supply shortages, but occasionally experiences procurement problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to the Company's optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. EXPORT SALES The Company currently sells several of its products and services in the international marketplace to countries such as Canada, Germany, Australia and the Republic of China. Foreign sales accounted for approximately 7%, 3% and 17% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. The Company's foreign contracts are generally payable in United States' dollars. EMPLOYEES At March 31, 1995, the Company employed 565 employees. None of the Company's employees are represented by a labor union, and the Company has experienced no work stoppages. There is a continuing demand for qualified technical personnel, and the Company believes that its future growth and success will depend upon its ability to attract, train and retain such personnel. PROPERTIES The Company leases approximately 6,000 square feet of office space for its corporate headquarters in an office building at 5 Sylvan Way, Parsippany, New Jersey under a lease that expires in fiscal 2001. The Company leases approximately 25,000 square feet of space for administrative and engineering facilities at 138 Bauer Drive, Oakland, New Jersey. The Company leases the Oakland building from LDR Realty Co., a partnership wholly-owned by Leonard Newman and David E. Gross, under a lease which expires in fiscal 1999. The Company believes that this lease was consummated on terms no less favorable than those that could have been obtained by the Company from an unrelated third party in a transaction negotiated on an arms-length basis. Precision Echo's engineering and principal operations are located in a 55,000 square foot building at 3105 Patrick Henry Drive, Santa Clara, California, under a lease which expires in fiscal 2001. The operations of CMC and Ahead are conducted from leased facilities in Santa Clara, California and Los Gatos, California, respectively. These leased facilities, containing 71,000 square feet and 12,000 square feet, respectively, are covered by leases, which, with respect to the CMC facility, is on a month-to-month basis, and for the Ahead facility expires in fiscal 1998. The operations of CMC and Ahead are currently in the process of moving out of the facilities in Santa Clara and Los Gatos and into a new facility in San Jose, California, comprising 32,000 square feet pursuant to a five year lease expiring in fiscal 2001. Photronics Corp.'s principal and manufacturing facilities are located in a 45,000 square foot building at 270 Motor Parkway, Hauppauge, New York. The building, which is owned by the Company, was built in 1983. See Note 10 to Consolidated Financial Statements. TAS leases 40,000 square feet in a building at 200 Professional Drive, Gaithersburg, Maryland that houses its executive offices and principal engineering and manufacturing facilities under a lease which expires in fiscal 2000. It also conducts field service operations from locations in Virginia Beach and Chesapeake, Virginia and National City, California. These leased facilities, comprising 15,000 square feet, 20,000 square feet and 6,000 square feet, respectively, are covered by leases, which, with respect to the Virginia locations, expire in fiscal 1997, and for the California location, expires in fiscal 1999. Laurel's manufacturing facilities and administrative offices are located in a 29,000 square-foot building at 423 Walters Avenue in Johnstown, Pennsylvania. The lease for this facility expires in fiscal 1999. The Company also leases approximately 2,000 square feet of office space in Arlington, Virginia under a lease which expires in fiscal 1998. OMI leases 53,910 square feet in a building in Woodlake Commerce Park, Palm Bay, Florida, for its operations and administration offices. The related leases expire in fiscal 2006. Total rent expense aggregated $2.5 million, $1.7 million and $1.5 million in fiscal 1995, 1994 and 1993, respectively. ENVIRONMENTAL PROTECTION The Company believes that its manufacturing operations and properties are in material compliance with existing federal, state and local provisions enacted or adopted to regulate the discharge of materials into the environment, or otherwise protect the environment. Such compliance has been achieved without material effect on the Company's earnings or competitive position. LEGAL PROCEEDINGS The Company is a party to various legal actions and claims arising in the ordinary course of its business. In the Company's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names of the directors and executive officers of the Company, their positions and offices with the Company, and their ages are set forth below: NAME POSITIONS WITH THE COMPANY AGE Mark S. Newman . . Chairman of the Board, President, 46 Chief Executive Officer and Director Nancy R. Pitek . . Controller, Treasurer and 39 Secretary Paul G. Casner, Jr. Vice President; President of DRS 57 Electronic Systems Group; President of TAS Stuart F. Platt . . Vice President and Director; 62 President of Precision Echo Richard Ross . . . Vice President; President of 40 Photronics Corp. Leonard Newman . . Director and Chairman Emeritus 71 Jack Rachleff . . . Director 82 Theodore Cohn . . . Director 71 Mark N. Kaplan . . Director 65 Donald C. Fraser . Director 54 Mark S. Newman has been employed by the Company since 1973, was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of the Company in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of the Company and in August 1995 became Chairman of the Board. Mark Newman is the son of Leonard Newman. Nancy R. Pitek joined the Company in 1984 as Manager of Accounting. She became Assistant Controller in 1985 and Director of Internal Audit in 1988. Ms. Pitek became Director of Corporate Finance in 1990 and has been the Controller since 1993. In May 1994, she was also appointed to the position of Treasurer and in August 1995 became Secretary. Paul G. Casner, Jr. joined the Company in 1993 as President of TAS. In 1994 he also became President of DRS Electronic Systems Group and a Vice President of the Company. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. He was the president of TAS prior to its acquisition by the Company. Stuart F. Platt has been a Director of the Company since 1991 and became the President of Precision Echo in July 1992. He was named Vice President of the Company in May 1994. Rear Admiral Platt is a co-founder and director of FPBSM Industries, Inc., a holding company and management consulting firm for defense, aerospace and other technology-based companies, and the Chairman of Stuart Platt & Partners, a management consulting firm handling principally defense-related issues. He also serves as director for Harding Associates, Inc. None of these companies is a parent, subsidiary or affiliate of the Company. Rear Admiral Platt held various positions as a military officer in the Department of the Navy, retiring as Competition Advocate General of the Navy in 1986. Richard Ross was employed by the Company as Assistant Vice President and Director, Sales in 1986 and Assistant Vice President, Corporate Development in 1987. In 1988, he became Vice President of the Company, and in 1990, he became President of Photronics Corp. Leonard Newman has been a Director of the Company since 1968 and was Chairman of the Board and Secretary of the Company from 1971 until August 1995. In August 1995, Mr. Newman was appointed Chairman Emeritus. From 1971 until May 1994, Mr. Newman also served as the Company's Chief Executive Officer. Leonard Newman is the father of Mark S. Newman. Jack Rachleff has been a Director of the Company since 1968. Mr. Rachleff has been employed since 1952 by Fablok Mills, Inc., a textile manufacturer, and has been its President since February 1982. Theodore Cohn has been a Director of the Company since 1980. He has been an independent management consultant since 1974. Mr. Cohn also serves as a director of Dynatech Corporation. Mark N. Kaplan has been a Director of the Company since 1986. Mr. Kaplan has been a member of the law firm of Skadden, Arps, Slate, Meagher & Flom since 1979. Mr. Kaplan also serves as director of American Biltrite Inc., Grey Advertising Inc., Harvey Electronics Inc., REFAC Technology Inc., Congoleum Corporation, MovieFone, Inc. and Volt Information Sciences, Inc. Donald C. Fraser became a Director of the Company in 1993. He currently serves as director of the Boston University Center for Photonics Research and as professor of engineering and physics at the university. From 1991 to 1993, Dr. Fraser was the Principal Deputy Under Secretary of Defense, Acquisition, with primary responsibility for managing the Department of Defense acquisition process, including setting policy and executing programs. He also served as Deputy Director of Operational Test and Evaluation for Command, Control, Communication and Intelligence, from 1990 to 1991, a position which included top level management and oversight of the operational test and evaluation of all major Department of Defense communication, command and control, intelligence, electronic warfare, space and information management system programs. From 1981 to 1988, Dr. Fraser was employed as the Vice President, Technical Operations at Charles Stark Draper Laboratory and, from 1988 to 1990, as its Executive Vice President. DESCRIPTION OF THE DEBENTURES The Debentures were issued under an indenture (the "Indenture") dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as trustee (the "Trustee"), a copy of which is available upon request from the Company. The statements under this caption address the material terms of the Debentures but are summaries and do not purport to be complete. The summaries make use of terms defined in the Indenture and are qualified in their entirety by reference to the Indenture, including the definitions therein of certain terms. Whenever reference is made to defined terms of the Indenture and not otherwise defined herein, such defined terms are incorporated herein by reference. GENERAL The Debentures are general unsecured senior subordinated obligations of the Company, are limited to $25,000,000 aggregate principal amount and will mature on October 1, 2003. As of November 30, 1995, $25 million aggregate principal amount of the Debentures were outstanding. The Debentures bear interest at the rate per annum shown on the cover page hereof from the date of original issue, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, and accrued but unpaid interest will be payable semi- annually on April 1 and October 1 of each year commencing April 1, 1996 (each, an "Interest Payment Date"). Interest will be paid to Debentureholders of record ("Holders") at the close of business on the March 15 or September 15, respectively, immediately preceding the relevant Interest Payment Date (each, a "Regular Record Date"). Interest will be computed on the basis of a 360-day year of twelve 30-day months. Principal of and premium, if any, and interest on the Debentures will be payable, the transfer of the Debentures will be registrable and the Debentures will be exchangeable at the office or agency of the Company maintained for that purpose in Jersey City, New Jersey (which initially will be the corporate trust office of the Trustee), except that, at the option of the Company, payment of interest may be made by check mailed to the address of the Holder entitled thereto as it appears in the Debenture Register on the related record date. The Debentures were issued in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any transfer or exchange of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. All monies paid by the Company to the Trustee or any Paying Agent for the payment of principal of and premium, if any, and interest on any Debenture which remain unclaimed for two years after such principal, premium or interest became due and payable may be repaid to the Company. Thereafter the Holder of such Debenture may, as an unsecured general creditor, look only to the Company for payment thereof. Initially, the Trustee will act as paying agent and registrar of the Debentures. The Company may change any paying agent and registrar without notice. CONVERSION RIGHTS Holders are entitled, at any time and from time to time prior to maturity (subject to earlier redemption or repurchase, as described below), to convert their Debentures (or any portion thereof that is an integral multiple of $1,000), at 100% of the principal amount thereof, into Class A Common Stock of the Company at the conversion price set forth on the cover page hereof, subject to adjustment under certain circumstances as described below. After a call for redemption of Debentures, through optional redemption or otherwise, the Debentures or portion thereof called for redemption will be convertible if duly surrendered on or before, but not after, the business day preceding the date fixed for redemption in respect thereof. The conversion price is subject to adjustment upon certain events, including: (i) the issuance of Common Stock (including a distribution of Common Stock held in the Company's treasury) as a dividend or distribution on any class of Capital Stock of the Company or any Subsidiary which is not wholly owned by the Company; (ii) a subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) the issuance or distribution of Capital Stock of the Company or of rights or warrants to acquire Capital Stock of the Company at less than the Current Market Price (as defined below) on the date of issuance or distribution (provided that the issuance of Capital Stock upon the exercise of warrants or options will not cause an adjustment in the conversion price if no such adjustment would have been required at the time such warrant or option was issued); and (iv) the distribution to the holders of any class of Capital Stock of the Company generally and to holders of Capital Stock of any Subsidiary which is not wholly owned by the Company of evidences of indebtedness or assets (including cash and securities, but excluding dividends or distributions payable in shares of Common Stock and warrants and options for which adjustment is made as described above and further excluding cash dividends paid out of cumulative retained earnings of the Company arising after the date of the Indenture). Notwithstanding the foregoing, (a) if the rights or warrants described in clause (iii) of the preceding paragraph are exercisable only upon the occurrence of certain triggering events, then the conversion price will not be adjusted until such triggering events occur and (b) if rights or warrants expire unexercised, the conversion price shall be readjusted to take into account only the actual number of such rights or warrants which were exercised. In addition, the provisions of the preceding paragraph will not apply to the issuance of Common Stock upon the exercise of the Company's outstanding stock options under the 1981 Incentive Stock Option Plan, 1981 Non- Qualified Stock Option Plan and 1991 Stock Option Plan, unless the exercise price thereof is changed after the date of the Indenture (other than solely by operation of the anti-dilution provisions thereof), or the issuance of Common Stock upon the conversion of currently outstanding 1998 Debentures, unless the conversion price thereof is changed after the date of the Indenture (other than solely by operation of the anti-dilution provisions thereof). No adjustment will be made to the conversion price until cumulative adjustments to the conversion price amount to at least 1% of the conversion price, as last adjusted. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock, or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing, or the payment of dividends on the Common Stock. Fractional shares of Class A Common Stock will not be issued upon conversion. A person otherwise entitled to a fractional share of Class A Common Stock upon conversion shall receive cash equal to the equivalent fraction of the Current Market Price of a share of Class A Common Stock on the business day prior to conversion. The Company from time to time may, to the extent permitted by law, reduce the conversion price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such reduction to each Holder, if the Board of Directors of the Company has made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. The Company is entitled to make such reductions in the conversion price as it may in its discretion determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock shall not be taxable to its stockholders. If at any time the Company makes a distribution of property to its stockholders which would be taxable to such stockholders as a dividend for federal income tax purposes (e.g., distribution of evidence of indebtedness or assets of the Company, but generally not stock dividends or rights to subscribe for Common Stock) and, pursuant to the anti- dilution provisions of the Indenture, the conversion price of the Debentures is reduced or the conversion price of the Debentures is reduced other than in connection with certain anti-dilution adjustments, such a reduction may be considered as resulting in the distribution of a dividend to Holders for federal income tax purposes. A Holder who surrenders a Debenture (or portion thereof) for conversion between the close of business on a Regular Record Date and the next Interest Payment Date will receive interest on such Interest Payment Date with respect to such Debenture (or portion thereof) so converted through such Interest Payment Date. Subject to such payments in the event of conversion after the close of business on a Regular Record Date, no payment or adjustment shall be made upon any conversion on account of any interest accrued but unpaid on the Debentures surrendered for conversion. Subject to any applicable right of the Holders to cause the Company to purchase Debentures upon a Change of Control (as described below), in case of any consolidation or merger to which the Company is a party, other than a transaction in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation or other entity, there will be no adjustment of the conversion price, but each Holder will have the right thereafter to convert such Holder's Debentures into the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale or conveyance had such Debenture been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale or conveyance. In the case of a cash merger of the Company with another corporation or other entity or any other cash transaction of the type mentioned above, the effect of these provisions would be that the conversion features of the Debentures would thereafter be limited to converting the Debentures at the conversion price then in effect into the same amount of cash that such Holder would have received had such Holder converted the Debentures into Class A Common Stock immediately prior to the effective date of such cash merger or transaction. Depending upon the terms of such cash merger or transaction, the aggregate amount of cash so received on conversion could be more or less than the principal amount of the Debentures. The Company has covenanted under the Indenture to reserve and keep available at all times out of its authorized but unissued Class A Common Stock, for the purpose of effecting conversions of Debentures, the full number of shares of Class A Common Stock deliverable upon the conversion of all outstanding Debentures. REDEMPTION Optional Redemption by the Company. The Debentures are not redeemable at the option of the Company prior to October 1, 1998. Thereafter, the Debentures will be redeemable at any time prior to maturity, at the option of the Company, in whole or from time to time in part, upon not less than 30 days' nor more than 60 days' prior notice of the redemption date, mailed by first class mail to each Holder's last address as it appears in the Debenture Register, at the Redemption Prices established for the Debentures, together with accrued but unpaid interest, if any, to the date fixed for redemption. The Redemption Prices for the Debentures (expressed as a percentage of the principal amount) shall be as follows: AFTER OCTOBER 1, PERCENTAGE 1998 105 % 1999 103.75 2000 102.50 2001 101.25 Selection of Debentures Redeemed. If less than all the Debentures are to be redeemed, selection of the Debentures for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Debentures are listed, or, if the Debentures are not listed, on a pro rata basis by lot or by such method that complies with applicable legal requirements and that the Trustee considers fair and appropriate. The Trustee may select for redemption portions of the principal of Debentures that have a denomination larger than $1,000. Debentures and portions thereof will be redeemed in the amount of $1,000 or integral amounts of $1,000. The Trustee will make the selection from Debentures outstanding and not previously called for redemption. CHANGE OF CONTROL If a Change of Control occurs, the Company shall offer to repurchase each Holder's Debentures pursuant to an offer as described below (the "Change of Control Offer") at a purchase price equal to 100% of the principal amount of such Holder's Debentures, plus accrued but unpaid interest, if any, to the date of purchase. The Change of Control purchase feature of the Debentures may in certain circumstances make more difficult or discourage a takeover of the Company. Under the Indenture, a "Change of Control" means the occurrence of any of the following events: (i) any person (as the term "person" is used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes the direct or indirect beneficial owner of shares of the Company's Capital Stock representing greater than 50% of the total voting power of all shares of Capital Stock of the Company entitled to vote in the election of directors under ordinary circumstances; (ii) the Company sells, transfers or otherwise disposes of all or substantially all of the assets of the Company; or (iii) during any period of two consecutive years (or, in the case this event occurs within the first two years after the date of issue of the Debentures, such shorter period as shall have commenced on the date of original issue), Continuing Directors cease for any reason to constitute a majority of the Board of Directors of the Company then in office. Within 30 days after any Change of Control, unless the Company has previously mailed a notice of optional redemption by the Company of all of the Debentures, the Company shall mail a notice of the Change of Control Offer to each Holder by first class mail at such Holder's last address as it appears on the Debenture Register stating: (i) that a Change of Control has occurred and that the Company is offering to repurchase all of such Holder's Debentures; (ii) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma income, cash flow and capitalization of the Company after giving effect to such Change of Control); (iii) the repurchase price; (iv) the expiration date of the Change of Control Offer, which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed; (v) the date such purchase shall be effected, which shall be no later than 30 days after expiration date of the Change of Control Offer; (vi) that any Debentures not accepted for payment pursuant to the Change of Control Offer shall continue to accrue interest; (vii) that, unless the Company defaults in the payment of the Change of Control Payment, all Debentures accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (viii) the name and address of the paying agent; (ix) that Debentures must be surrendered to the paying agent to collect the repurchase price; (x) any other information required by applicable law to be included therein; and (xi) the procedures determined by the Company, consistent with the Indenture, that a Holder must follow in order to have such Debentures repurchased. In the event that the Company is required to make a Change of Control Offer, the Company will comply with any applicable securities laws and regulations, including, to the extent applicable, Section 14(e), Rule 14e-1 and any other tender offer rules under the Exchange Act which may then be applicable in connection with any offer by the Company to purchase Debentures at the option of the Holders thereof. The Company, could, in the future, enter into certain transactions, including certain recapitalizations of the Company, that would not constitute a Change in Control under the Debentures, but that would increase the amount of Senior Indebtedness (or any other indebtedness) outstanding at such time. The Company's ability to create any additional Senior Indebtedness or additional Subordinated Indebtedness is limited as described in the Debentures and the Indenture although, under certain circumstances, the incurrence of significant amounts of additional indebtedness could have an adverse effect on the Company's ability to service its indebtedness, including the Debentures. If a Change in Control were to occur, there can be no assurance that the Company would have sufficient funds at the time of such event to pay the Change in Control purchase price for all Debentures tendered by the Holders. A default by the Company on its obligation to pay the Change in Control purchase price could, pursuant to cross-default provisions, result in acceleration of the payment of other indebtedness of the Company outstanding at that time. Certain of the Company's existing and future agreements relating to its indebtedness could prohibit the purchase by the Company of the Debentures pursuant to the exercise by a Holder of the foregoing option, depending on the financial circumstances of the Company at the time any such purchase may occur, because such purchase could cause a breach of certain covenants contained in such agreements. Such a breach may constitute an event of default under such indebtedness and thereby restrict the Company's ability to purchase the Debentures. See "--Ranking." MAINTENANCE OF CONSOLIDATED NET WORTH The Company is required to maintain a Consolidated Net Worth of at least $18 million. The Indenture provides that if the Company's Consolidated Net Worth is less than $18 million at the end of any fiscal quarter, the Company is required to furnish to the Trustee an Officer's Certificate within 45 days after the end of such fiscal quarter (90 days after the end of any fiscal year) notifying the Trustee that the Company's Consolidated Net Worth has declined below $18 million. If, at any time or from time to time, the Company's Consolidated Net Worth at the end of each of any such two consecutive fiscal quarters (the last day of the second fiscal quarter being referred to as a "Deficiency Date") is less than $18 million, then the Company shall, in each such event, no later than 50 days after each Deficiency Date (100 days if a Deficiency Date is also the end of the Company's fiscal year), mail to the Trustee and each Holder at such Holder's last address as it appears on the Debenture Register a notice (the "Deficiency Notice") of the occurrence of such deficiency, which shall include an offer by the Company (the"Deficiency Offer") to repurchase Debentures as described below. The Deficiency Notice shall state: (i) that a deficiency has occurred; (ii) that the Company is offering to repurchase 10% of the aggregate principal amount of Debentures originally issued (or such lesser amount as may be outstanding at the time of the Deficiency Notice) (the "Deficiency Repurchase Amount"); (iii) that the repurchase price shall be 100% of the principal amount of the Debentures repurchased plus accrued but unpaid interest, if any, to the date of purchase; (iv) the expiration date of the Deficiency Offer, which shall be no earlier than 30 days nor later than 45 days after the date such notice is mailed; (v) the date such purchase shall be effected, which shall be no later than 20 days after expiration date of the Deficiency Offer; (vi) that Debentures not accepted for payment pursuant to the Deficiency Offer shall continue to accrue interest; (vii) that, unless the Company defaults in payment of the Deficiency Repurchase Amount, all Debentures accepted for payment pursuant to the Deficiency Offer shall cease to accrue interest after the Deficiency Payment Date; (viii) that if any Debenture is repurchased in part, a new Debenture or Debentures in principal amount equal to the unrepurchased portion will be issued; (ix) the name and address of the paying agent; (x) that Debentures to be repurchased must be surrendered to the paying agent to collect the repurchase price; (xi) any other information required by applicable law to be included therein; and (xii) the procedures determined by the Company, consistent with the Indenture, that a Holder must follow in order to have such Debentures repurchased. The Company shall purchase the Deficiency Repurchase Amount of Debentures or, if less than the Deficiency Repurchase Amount has been delivered for repurchase, all Debentures delivered for repurchase in response to the Deficiency Offer. If the aggregate principal amount of Debentures delivered for repurchase exceeds the Deficiency Repurchase Amount, the Company will purchase the Debentures delivered to it pro rata (in $1,000 increments only) among the Debentures delivered based on principal amount. The Company will comply with all applicable securities laws and regulations in connection with each Deficiency Offer. In no event shall the failure to meet the minimum Consolidated Net Worth requirement set forth above at the end of any fiscal quarter be counted toward the making of more than one Deficiency Offer. The Company may credit against the principal amount of Debentures to be repurchased in any Deficiency Offer 100% of the principal amount (excluding premium) of Debentures acquired by the Company subsequent to the Deficiency Date through purchase (otherwise than pursuant to this provision or a Change of Control Offer), optional redemption, conversion or exchange and surrendered for cancellation. If a Consolidated Net Worth deficiency were to occur, there can be no assurance that the Company would have sufficient funds at the time of such event to purchase the Deficiency Repurchase Amount of Debentures. A default by the Company to so purchase the Deficiency Repurchase Amount of Debentures could, pursuant to cross-default provisions, result in acceleration of the payment of other indebtedness of the Company outstanding at that time. Certain of the Company's existing and future agreements relating to its indebtedness could prohibit the purchase by the Company of the Debentures pursuant to the exercise by a Holder of the foregoing option, depending on the financial circumstances of the Company at the time any such purchase may occur, because such purchase could cause a breach of certain covenants contained in such agreements. Such a breach may constitute an event of default under such indebtedness and thereby restrict the Company's ability to purchase the Debentures. See "--Ranking." RANKING The payment of principal of and premium, if any, and interest on the Debentures will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined below). Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshalling of assets, whether voluntary, involuntary or in receivership, bankruptcy, insolvency or similar proceedings, the holders of all Senior Indebtedness will be first entitled to receive payment in full of all amounts due or to become due thereon before any payment is made on account of principal of and premium, if any, and interest on the Debentures or on account of any other monetary claims under or in respect of the Debentures, and before any distribution is made to acquire any of the Debentures for any cash, property or securities. No payments on account of principal of and premium, if any, and interest on the Debentures shall be made if at the time thereof: (i) there is a default in the payment of all or any portion of the obligations under any Senior Indebtedness or (ii) there shall exist a default in any covenant with respect to the Senior Indebtedness (other than as specified in clause (i) of this sentence), and, in such event, such default shall not have been cured or waived or shall not have ceased to exist, the Trustee and the Company shall have received written notice from any holder of such Senior Indebtedness stating that no payment shall be made with respect to the Debentures and such default would permit the maturity of such Senior Indebtedness to be accelerated, provided that no such default will prevent any payment on, or in respect of, the Debentures for more than 120 days unless the maturity of such Senior Indebtedness has been accelerated. The Holders will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made on Senior Indebtedness upon any distribution of assets in any such proceedings out of the distributive share of the Debentures. "Senior Indebtedness" is defined to mean the principal of and premium, if any, and interest on (a) the Debt of the Company or any of its Subsidiaries which is outstanding on the date of the Indenture and has been provided by a bank that is not an Affiliate of the Company or by any State or local government or agency thereof, (b) any Debt incurred after the date of the Indenture by the Company or any of its Subsidiaries which expressly states that it is senior in right of payment to the Debentures and is provided by a bank that is not an Affiliate of the Company, (c) any Debt, whether outstanding on the date of the Indenture or thereafter incurred, which evidences the Company's obligation to refund any progress payments or deposits to the United States or any foreign government or any instrumentality thereof or any prime contractor for any such government or instrumentality and (d) amendments, renewals, extensions, modifications and refundings of any such Debt, whether any such Debt described in (a), (b) or (c) is outstanding on the date of the Indenture or thereafter created, incurred or assumed, unless in any case, the instrument creating or evidencing any such Debt pursuant to which the same is outstanding provides that such Debt is not superior in right of payment to the Debentures. The Company's ability to incur Senior Indebtedness after the date of the Indenture is limited. See "-- Certain Covenants of the Company - Limitation of Debt and Senior Indebtedness." Only indebtedness of the Company that is Senior Indebtedness will rank senior to the Debentures in accordance with the provisions of the Indenture. The Company has agreed that it will not issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) will be subordinate in right of payment to the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. The Company has also agreed that it will not permit any of its Subsidiaries to issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) shall provide that such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) will be subordinate in right of payment to distributions and dividends from such Subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures at least to the same extent the Debentures are subordinate to Senior Indebtedness. The Debentures are senior in right of payment to the Company's 1998 Debentures. The Debentures are unsecured obligations of the Company, and, accordingly, will rank pari passu with all trade debt and obligations of the Company and its Subsidiaries that arise by operation of law or are imposed by any judicial or governmental authority, except that any such trade debt or other obligation may be senior in right of payment to the Debentures to the extent the same is entitled to any security interest arising by operation of law. The Debentures are obligations exclusively of the Company, and the Debentures, as a practical matter, will be effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables and lease obligations) of the Subsidiaries. The right of the Company, and, therefore, the right of creditors of the Company (including Holders) to receive assets of any such Subsidiary upon the liquidation or reorganization of such Subsidiary or otherwise, as a practical matter, will be effectively subordinated to the claims of such Subsidiary's creditors, except to the extent the Company is itself recognized as a creditor of such Subsidiary or such other creditors have agreed to subordinate their claims to the payment of the Debentures, in which case the claims of the Company would still be subordinate to any secured claim on the assets of such Subsidiary and any indebtedness of such Subsidiary senior to that held by the Company. At September 30, 1995, Senior Indebtedness (excluding current installments) was approximately $3.2 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.4 million. The Company expects that it will from time to time incur additional indebtedness constituting Senior Indebtedness. CERTAIN COVENANTS OF THE COMPANY The Indenture contains, among others, the covenants summarized below, which are applicable (unless waived or amended) so long as any of the Debentures are outstanding. Limitation on Debt and Senior Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or directly or indirectly guarantee or in any other manner become directly or indirectly liable for ("incur") any Debt (including Acquired Debt) or Senior Indebtedness other than Permitted Debt (as defined); provided, however, that the Company and, subject to the other limitations set forth herein, its Subsidiaries may incur Debt or Senior Indebtedness if the Debt to Operating Cash Flow Ratio of the Company and its Subsidiaries at the time of incurrence of such Debt, after giving pro forma effect thereto, is 6.5:1 or less; provided that any such Debt incurred by the Company that is not Senior Indebtedness shall have a Weighted Average Life to Maturity longer than the Weighted Average Life to Maturity of the Debentures. Notwithstanding the foregoing, at any time the Debt to Operating Cash Flow Ratio of the Company exceeds 6.5:1, the Company will be permitted to incur additional Senior Indebtedness pursuant to lines of credit for working capital of up to $5 million. For purposes of the foregoing limitations "Permitted Debt" means (i) Debt evidenced by the Debentures in an aggregate principal amount not to exceed $25.0 million, (ii) Debt owed by the Company to any wholly owned Subsidiary of the Company, (iii) Debt owed by any wholly owned Subsidiary of the Company to the Company or any other wholly owned Subsidiary of the Company, (iv) Debt owed to Leonard Newman pursuant to the Newman Agreement, (v) Capitalized Lease Obligations not in excess of an aggregate of $2 million at any one time outstanding, plus any Capitalized Lease Obligations from an acquisition outstanding on the date of such acquisition, (vi) performance bonds or letters of credit incurred in the ordinary course of business or in connection with government contracts, (vii) deferred income taxes as defined in accordance with GAAP, (viii) Debt constituting inter-company payables or receivables between or among the Company and its Subsidiaries incurred in the ordinary course of business or (ix) Refinancing Debt. A calculation of the Debt to Operating Cash Flow Ratio as required by this covenant shall be made, in each case, for the period of four full consecutive fiscal quarters next preceding the date on which Debt is proposed to be incurred ("Reference Period"). In addition, for purposes of the pro forma calculations required to be made above, (i) (x) the amount of Debt to be incurred (plus all other Debt previously incurred during such Reference Period), and the amount (valued at its liquidation value and including any accrued but unpaid dividends) of Disqualified Stock to be issued (plus all other Disqualified Stock previously issued during such Reference Period) will be presumed to have been incurred or issued on the first day of such Reference Period and (y) the amount of any Debt redeemed, refinanced or repurchased with the proceeds of the Debt referred to in clause (x) will be presumed to have been redeemed, refinanced or repurchased on the first day of such Reference Period, (ii) if any Asset Disposition occurred during such Reference Period, the calculations included in the computation of the Debt to Operating Cash Flow Ratio shall be adjusted to give effect to such Asset Disposition on a pro forma basis as if such Asset Disposition had occurred on the first day of such Reference Period, (iii) if an acquisition of a business or entity occurred during such Reference Period, the calculations included in the computation of the Debt to Operating Cash Flow Ratio will be adjusted to give effect to such acquisition on a pro forma basis as if such acquisition had occurred on the first day of such Reference Period and (iv) if such new Debt is being incurred in connection with an acquisition, no pro forma effect will be given to negative operating cash flow or losses attributable to the assets or business so acquired. Limitation on Additional Debt After Default. The Company will not, and will not permit any of its Subsidiaries to, incur any additional Debt (other than Permitted Debt) or Senior Indebtedness following the occurrence of an Event of Default (as defined below) unless such Event of Default (and all other Events of Default then pending) is cured or waived. Limitation on Preferred Stock. The Company will not, and will not permit any of its Subsidiaries to, issue any shares of Disqualified Stock. Limitation on Dividend Restrictions Affecting Subsidiaries. The Company may not, and may not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction of any kind on the ability of any Subsidiary of the Company to (a) pay to the Company dividends or make to the Company any other distribution on its Capital Stock, (b) pay any Debt owed to the Company or any of its Subsidiaries, (c) make loans or advances to the Company or any of the Company's Subsidiaries or (d) transfer any of its property or assets to the Company or any of its Subsidiaries, other than such encumbrances or restrictions existing or created under or by reason of (i) applicable law, (ii) the Indenture, (iii) covenants or restrictions contained in any instrument governing Debt of the Company or any of its Subsidiaries existing on the date of the Indenture, (iv) customary provisions restricting subletting, assignment and transfer of any lease governing a leasehold interest of the Company or any of its Subsidiaries or in any license or other agreement entered into in the ordinary course of business, (v) any agreement governing Debt of a person acquired by the Company or any of its Subsidiaries in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrances or restrictions are not applicable to any person, or the property or assets of any person, other than the person, or the property or assets of the person so acquired, (vi) any restriction with respect to a Subsidiary imposed pursuant to an agreement entered into in accordance with the terms of the Indenture for the sale or disposition of Capital Stock or property or assets of such Subsidiary, pending the closing of such sale or disposition, (vii) with respect to any Subsidiary, the terms of any contract with the United States or any foreign government or any instrumentality thereof or any prime contractor for any such contract pertaining to retention of funds by such Subsidiary equivalent to any progress payments or deposits made pursuant to such contract or (viii) any Refinancing Debt; provided, however, that the encumbrances or restrictions contained in the agreements governing any such Refinancing Debt shall be no more restrictive than the encumbrances or restrictions set forth in the agreements governing the Debt being refinanced as in effect on the date of the Indenture. Limitation on Liens. The Company will not, and will not permit any of its Subsidiaries, directly or indirectly, to create, incur, assume or permit to exist any Lien (other than Permitted Liens) upon or with respect to any of the Property of the Company or any such Subsidiary, whether owned on the date of the Indenture or thereafter acquired, or on any income or profits therefrom, to secure any Debt which is pari passu with or subordinate in right of payment to the Debentures. Limitation on Restricted Payments and Investments. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, (i) declare or pay any distribution or dividend on or in respect of any class of its Capital Stock (except dividends or distributions payable by wholly owned Subsidiaries of the Company and dividends or distributions payable in Qualified Stock of the Company or in options, warrants or other rights to purchase Qualified Stock of the Company); (ii) purchase, repurchase, prepay, redeem, defease or otherwise acquire or retire for value (other than in Qualified Stock of the Company or in options, warrants or other rights to purchase Qualified Stock of the Company) any Capital Stock in the Company or any of its Subsidiaries (other than a wholly owned Subsidiary of the Company); (iii) make or permit any Subsidiary to make an Investment (other than Permitted Investments) in any of its or their Affiliates or any Related Person, or any payment on a guaranty of any obligation of any of its or their Affiliates or any Related Person (other than (a) of any wholly owned Subsidiary or (b) of any other Subsidiary in an amount equal to the amount of the obligation with respect to which such guaranty relates multiplied by the fraction whose numerator is the ownership percentage of such Subsidiary by the Company and its wholly owned Subsidiaries and whose denominator is 100%); or (iv) repay, prepay, redeem, defease, retire or refinance, prior to scheduled maturity or scheduled sinking fund payment, any other Debt which is pari passu with, or subordinate to, the Debentures (other than (x) by the payment of Qualified Stock of the Company or of options, warrants or other rights to purchase Qualified Stock of the Company or (y) up to $10.0 million aggregate principal amount of the 1998 Debentures) except, in the case of this clause (iv), if the proceeds used for such repayment, prepayment, redemption, defeasance, retirement or refinancing are generated from the issuance of Refinancing Debt (any such declaration, payment, distribution, purchase, repurchase, prepayment, redemption, defeasance or other acquisition or retirement or Investment referred to in clauses (i) through (iv) above being hereinafter referred to as a "Restricted Payment"); unless at the time of and after giving effect to a proposed Restricted Payment (the value of any such payment, if other than cash, as determined by the Board of Directors, including the affirmative vote of the Independent Directors, whose determination shall be conclusive and evidenced by a board resolution) (a) no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall have occurred and be continuing and, (b) the Company could incur an additional $1.00 of Debt pursuant to the first sentence under "Limitation on Debt and Senior Indebtedness" above. Limitation on Stock Splits, Consolidations and Reclassifications. The Company will not effect a stock split, consolidation or reclassification of any class of its Capital Stock unless (a) an equivalent stock split, consolidation or reclassification is simultaneously made with respect to each other class of Capital Stock of the Company and all securities exchangeable or exercisable for or convertible into any Capital Stock of the Company, and (b) after such stock split, consolidation or reclassification all of the relative voting, dividend and other rights and preferences of each class of Capital Stock of the Company are identical to those in effect immediately preceding such stock split, consolidation or reclassification. Notwithstanding the foregoing, the Company may combine its Class A Common Stock and Class B Common Stock into a single class of Common Stock, such that the holder of each share of Class A Common Stock or Class B Common Stock outstanding immediately prior to such combination shall, from and after such combination, be entitled to the same voting, dividend, liquidation and other rights and preferences with respect to such share as every other holder of Class A Common Stock or Class B Common Stock. Limitation on Sales of Assets and Subsidiary Stock. The Company will not, and will not permit any of its Subsidiaries to, make any Asset Disposition having a fair market value or resulting in gross proceeds to the Company or any such Subsidiary in excess of $1.0 million in any single transaction or series of related transactions or $5.0 million in the aggregate over the life of the Debentures, unless the Company or any such Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (as determined by the Board of Directors of the Company and evidenced by a board resolution) of the interests and assets subject to such Asset Disposition. Transactions with Related Persons. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with (a) any beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) of the Exchange Act) at the time of such transaction, (b) any officer, director or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company as described in clause (a) above or (c) any Related Person unless such transaction or series of transactions (i) involves an amount of $250,000 or less or (ii)(A) is on terms that are no less favorable to the Company or any such Subsidiary, as the case may be, than would be available in a comparable transaction with an unrelated third party and (B)(x) if such transaction or series of related transactions involve aggregate payments in excess of $400,000, the Company delivers an officers' certificate to the Trustee certifying that such transaction complies with clause (ii)(A) above and such transaction or series of transactions is approved by a majority of the Board of Directors of the Company including the approval of each of the Independent Directors or (y) if such transaction or series of related transactions involve aggregate payments in excess of $1.5 million, the Company obtains an opinion as to the fairness to the Company or such Subsidiary from a financial point of view issued by an investment banking firm, appraisal firm or accounting firm, in each case of national standing. Notwithstanding the foregoing, this provision will not apply to (i) any transaction entered into between the Company and Subsidiaries of the Company (but excluding transactions with any Subsidiary of which more than 20% of the outstanding voting securities (as determined in accordance with Section 13(d) under the Exchange Act) are beneficially owned by Persons who are (a) officers, directors or employees of the Company, of any of its Subsidiaries or of any beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction, (b) a beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) under the Exchange Act) or (c) Related Persons), (ii) the payment of compensation and provision of benefits to officers and employees of the Company and loans and advances to such officers and employees in the ordinary course of business, or any issuance of securities, or other payments, awards or grants in cash, securities or otherwise (including the grant of stock options or similar rights to officers, employees and directors of the Company or any Subsidiary) pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans or other benefit plans approved by the Independent Directors, (iii) the Newman Agreement and the Gross Agreement and (iv) transactions with any Person who is a director of the Company or of any of its Subsidiaries and, who is not (a) the beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) under the Exchange Act) or (b) an officer or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company at the time of such transaction. Limitation of Payments to Affiliates after Default. The Company shall not enter into any transaction with any Person who is an officer or director of the Company, or of any of its Subsidiaries, or of any beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction (but excluding the Persons identified below) unless it is provided that the Company's monetary obligations with respect thereto are subordinate in right of payment to the Debentures at least to the same extent as the Debentures are subordinate to Senior Indebtedness. The Company shall not permit any of its Subsidiaries to enter into any transaction with any Person who is an officer or director of the Company, or of any of its Subsidiaries or of any beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction (but excluding the Persons identified below) unless it is provided that such Subsidiary's monetary obligations with respect thereto are subordinate in right of payment to distributions and dividends from such Subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. Notwithstanding the foregoing, such limitation shall not apply to (i) the regular compensation payable to any person who is an employee of the Company, (ii) payments made pursuant to any pension or other plan made available to employees (including officers) of the Company and either existing on the date of the Indenture or thereafter approved by the Independent Directors, (iii) payments pursuant to the Newman Agreement or the Gross Agreement or (iv) any payment made to a director of the Company or of any of its Subsidiaries who is not (a) the beneficial owner of 20% or more of the outstanding voting securities of the Company (as determined in accordance with section 13(d) under the Exchange Act) or (b) an officer or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company at the time of such transaction. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company, without the consent of the Holders of any of the Debentures, may consolidate with or merge into any other entity or convey, transfer, sell or lease its assets substantially as an entirety to any person or entity, provided that: (i) either (a) the Company is the continuing corporation or (b) the corporation or other entity formed by such consolidation or into which the Company is merged or the person or entity to which such assets are conveyed, transferred, sold or leased is organized under the laws of the United States or any state thereof or the District of Columbia and expressly assumes all obligations of the Company under the Debentures and the Indenture, (ii) immediately after and giving effect to such merger, consolidation, conveyance, transfer, sale or lease no Event of Default, and no event which, after notice or lapse of time, would become an Event of Default, under the Indenture shall have occurred and be continuing, (iii) upon consummation of such consolidation, merger, conveyance, transfer, sale or lease, the Debentures and the Indenture will be a valid and enforceable obligation of the Company or such successor and (iv) the Company has delivered to the Trustee an officer's certificate and an opinion of counsel, each stating that such consolidation, merger, conveyance, transfer, sale or lease complies with the provisions of the Indenture. EVENTS OF DEFAULT The following will be Events of Default under the Indenture: (a) failure to pay principal of or premium, if any, on any Debenture when due and payable at maturity, upon redemption, upon a Change of Control Offer, Deficiency Offer or otherwise, whether or not such payment is prohibited by the subordination provisions of the Indenture; (b) failure to pay any interest on any Debenture when due and payable, which failure continues for 30 days, whether or not such payment is prohibited by the subordination provisions of the Indenture; (c) failure to perform the other covenants of the Company in the Indenture, which failure continues for 60 days after written notice as provided in the Indenture; (d) a default occurs (after giving effect to any applicable grace periods or any extension of any maturity date) in the payment when due of principal of and or acceleration of, any indebtedness for money borrowed by the Company or any of its Subsidiaries in excess of $1.0 million, individually or in the aggregate, if such indebtedness is not discharged, or such acceleration is not annulled, within 10 days after written notice as provided in the Indenture; and (e) certain events of bankruptcy, insolvency or reorganization of the Company or any Subsidiary. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. If an Event of Default shall occur and be continuing, either the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Debentures may accelerate the maturity of all Debentures; provided, however, that after such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of the then outstanding Debentures may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal, have been cured or waived as provided in the Indenture. For information as to waiver of defaults, see "Modification and Waivers." No Holder of any Debenture will have any right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder unless (i) such Holder shall have previously given to the Trustee written notice of a continuing Event of Default, (ii) the Holders of at least 25% in aggregate principal amount of the then outstanding Debentures shall have made written request, and offered indemnity satisfactory to the Trustee to institute such proceeding as trustee, (iii) the Trustee shall have failed to institute such proceeding within 60 days after the receipt of such notice and (iv) no direction inconsistent with such request shall have been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the then outstanding Debentures. The Company will be required to furnish annually to the Trustee a statement as to the performance by the Company of certain of its obligations under the Indenture and as to any default in such performance. MODIFICATIONS AND WAIVERS Modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the then outstanding Debentures held by persons other than Affiliates of the Company; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Debenture affected thereby, (i) change the stated maturity of, or any installment of interest on, any Debenture, (ii) reduce the principal amount of any Debenture or reduce the rate or extend the time of payment of interest on any Debenture, (iii) increase the conversion price (other than in connection with a reverse stock split as provided in the Indenture), (iv) change the place or currency of payment of principal of, or premium or repurchase price, if any, or interest on, any Debenture, (v) impair the right to institute suit for the enforcement of any payment on or with respect to any Debenture, (vi) adversely affect the right to exchange or convert Debentures, (vii) reduce the percentage of the aggregate principal amount of outstanding Debentures, the consent of the Holders of which is necessary to modify or amend the Indenture, (viii) reduce the percentage of the aggregate principal amount of outstanding Debentures, the consent of the Holders of which is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (ix) modify the provisions of the Indenture with respect to the subordination of the Debentures in a manner adverse to the Holders, (x) modify the provisions of the Indenture with respect to the right to require the Company to repurchase Debentures in a manner adverse to the Holders or (xi) modify the provisions of the Indenture with respect to the vote necessary to amend this provision. The Holders of a majority in aggregate principal amount of the outstanding Debentures held by persons other than Affiliates of the Company may, on behalf of all Holders, waive any past default under the Indenture or Event of Default, except a default in the payment of principal, premium, if any, or interest on any of the Debentures or in respect of a provision which under the Indenture cannot be modified without the consent of the Holder of each outstanding Debenture. DISCHARGE OF INDENTURE The Indenture provides that the Company may defease and be discharged from its obligations in respect of the Debentures while the Debentures remain outstanding (except for certain obligations to convert the Debentures into Common Stock, register the transfer, substitution or exchange of Debentures, to replace stolen, lost or mutilated Debentures and to maintain an office or agency and the rights, obligations and immunities of the Trustee), if all outstanding Debentures will become due and payable at their scheduled maturity within one year and the Company has irrevocably deposited, or caused to be deposited, with the Trustee (or another trustee satisfying the requirements of the Indenture), in trust for such purpose, (a) money in an amount, (b) U.S. Government Obligations (as defined below) which through the payment of principal, premium, if any, and interest in accordance with their terms will provide money in an amount, or (c) a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of, premium, if any, and interest on the outstanding Debentures at maturity or upon redemption, together with all other amounts payable by the Company under the Indenture. Such defeasance will become effective 91 days after such deposit only if, among other things, (x) no Default or Event of Default with respect to the Debentures has occurred and is continuing on the date of such deposit or occurs as a result of such deposit or at any time during the period ending on the 91st day after the date of such deposit, (y) such defeasance does not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound, and (z) the Company has delivered to the Trustee (A) either a private Internal Revenue Service ruling or an opinion of counsel that Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount, in the same manner, and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred, (B) an opinion of counsel to the effect that the deposit shall not result in the Company, the Trustee or the trust being deemed to be an "investment company" under the Investment Company Act of 1940, as amended, and (C) an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to a defeasance have been complied with. Notwithstanding the foregoing, the Company's obligations to pay principal, premium, if any, and interest on the Debentures shall continue until the Internal Revenue Service ruling or opinion of counsel referred to in clause (z) (B) above is provided. REPORTS TO HOLDERS So long as the Company is subject to the periodic reporting requirements of the Exchange Act it will continue to furnish the information required thereby to the Commission. The Indenture provides that even if the Company is entitled under the Exchange Act not to furnish such information to the Commission or to the Holders, it will nonetheless continue to furnish information under Section 13 of the Exchange Act to the Commission and the Trustee as if it were subject to such periodic reporting requirements. GOVERNING LAW The Indenture and the Debentures are governed by, and construed in accordance with, the laws of the State of New York, without giving effect to such State's conflicts of law principles. INFORMATION CONCERNING THE TRUSTEE The Company and its Subsidiaries may maintain deposit accounts and conduct other banking transactions with the Trustee or its affiliates in the ordinary course of business, and the Trustee and its affiliates may from time to time in the future provide the Company and its Subsidiaries with banking and financial services in the ordinary course of their businesses. CERTAIN DEFINITIONS Set forth below is a summary of certain defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms and for the definitions of other defined terms used in the Prospectus and not defined below. "Acquired Debt" of any specified person means Debt of any other person existing at the time such other person merged with or into or became a Subsidiary of such specified person, including Debt incurred in connection with, or in contemplation of, such other person becoming a Subsidiary of such specified person. "Affiliate" of any specified Person means (i) any other Person who, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person or (ii) any Person who is a director or officer (a) of such specified Person, (b) of any Subsidiary of such specified Person or (c) of any Person described in clause (i) above. For purpose of this definition, control of a person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" or "controlled" have meanings correlative to the foregoing. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) of Capital Stock of a Subsidiary, property or other asset (each referred to for the purposes of this definition as a "disposition") by the Company or any of its Subsidiaries other than (i) any disposition by any Subsidiary of the Company to the Company or by the Company or any Subsidiary of the Company to a wholly owned Subsidiary of the Company, (ii) a disposition of property or assets in the ordinary course of business and (iii) any issuance or sale by the Company of its Capital Stock, including any disposition by means of a merger, consolidation or similar transaction. "Capital Stock" of any person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in the common or preferred equity (however designated) of such person, including, without limitation, partnership interests. "Capitalized Lease Obligation" means, with respect to any person for any period, an obligation of such person to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of such obligation shall be the capitalized amount shown on the balance sheet of such person as determined in accordance with GAAP. "Common Stock" as applied to the Capital Stock of any corporation, means the common equity (however designated) of such Person. "Consolidated Net Income" means, for any fiscal period, the Net Income or loss of the Company and its Subsidiaries as the same would appear on a consolidated statement of earnings of the Company for such fiscal period prepared in accordance with GAAP, provided that (i) any extraordinary gain (but not loss) and any gain (but not loss) on sales of assets outside the ordinary course of business, in each case together with any related provisions for taxes, realized during such period shall be excluded, (ii) the results of operations of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) Net Income attributable to any person other than a Subsidiary that is at least 50% owned by the Company shall be included only to the extent of the amount of cash dividends or distributions actually paid to the Company or a Subsidiary of the Company during such period, (iv) any extraordinary charge resulting from the repurchase of the Debentures shall be excluded and (v) the cumulative effect of a change in accounting principles based upon the implementation of a change required by the Financial Accounting Standards Board shall be excluded. "Consolidated Net Worth" means, for any fiscal period, the net stockholders' equity of the Company and its Subsidiaries as the same would appear on the consolidated balance sheet of the Company as at the end of such fiscal period prepared in accordance with GAAP. "Continuing Directors" means any member of the Board of Directors of the Company who (i) is a member of that Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to the Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of the Board at the time of such nomination or election. "Current Market Price" means, when used with respect to any security as of any date, the last sale price, regular way, or, in case no such sale takes place on such date, the average of the closing bid and asked prices, regular way, in either case as reported for consolidated transactions on the New York Stock Exchange or, if the security is not listed or admitted to trading on the New York Stock Exchange, as reported for consolidated transactions with respect to securities listed on the principal national securities exchange on which such security is listed or admitted to trading or, if the security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or such other system then in use or, if the security is not quoted by any such organization, the average of the closing bid and asked prices furnished by a New York Stock Exchange member firm selected by the Company. "Current Market Price" means, when used with respect to any Property other than a security as of any date, the market value of such Property on such date as determined by the Board of Directors of the Company in good faith, which shall be entitled to rely for such purposes on the advice of any firm of investment bankers or appraisers having familiarity with such Property. "Debt" of any person as of any date means and includes, without duplication, (i) the principal of and premium, if any, in respect of indebtedness of such person, contingent or otherwise, for borrowed money, including, without limitation, all interest, fees and expenses owed with respect thereto (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments, or representing the deferred and unpaid balance of the purchase price of any property or interest therein or services, if and to the extent such indebtedness would appear as a liability (other than a liability for accounts payable and accrued expenses incurred in the ordinary course of business) upon a balance sheet of such person prepared on a consolidated basis in accordance with GAAP, (ii) all obligations issued or contracted for as payment in consideration of the purchase by such person of the Capital Stock or substantially all of the assets of another person or as a result of a merger or a consolidation (other than any earn-outs or installment payments), (iii) all Capitalized Lease Obligations of such person, (iv) all obligations of such person in respect of letters of credit or similar instruments or reimbursement of letters of credit or similar instruments (whether or not such items would appear on the balance sheet of such person), (v) all net obligations of such person in respect of interest rate protection and foreign currency hedging arrangements, (vi) all guarantees by such person of items that would constitute Debt under this definition (whether or not such items would appear on such balance sheet), and (vii) the amount of all obligations of such person with respect to the redemption, repayment or other repurchase of any Disqualified Stock, but only to the extent such obligations arise on or prior to January 1, 2004; provided, however, that Debt issued at a discount from par shall be treated as if issued at par. The amount of Debt of any person at any date shall be the outstanding balance on such date of all unconditional obligations as described above and the maximum determinable liability, upon the occurrence of the liability giving rise to the obligation, of any contingent obligations referred to in clauses (i), (iv), (vi) and (vii) above at such date. "Debt to Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (i) (a) the aggregate principal amount of all outstanding Debt of the Company and its Subsidiaries as of such date on a consolidated basis plus (b) the aggregate par or stated value of all outstanding Preferred Stock of the Company and its Subsidiaries as reflected on the Company's most recent consolidated balance sheet prepared in accordance with GAAP (excluding any such Preferred Stock held by the Company or a wholly owned Subsidiary of the Company) or, if greater with respect to any class of Capital Stock which is Disqualified Stock, the aggregate redemption amount thereof as reflected on the Company's most recent consolidated balance sheet (excluding any such Disqualified Stock held by the Company or a wholly owned Subsidiary of the Company) to (ii) Operating Cash Flow of the Company and its Subsidiaries on a consolidated basis for the four most recent full fiscal quarters ending immediately prior to such date, determined on a pro forma basis as set forth in the covenant "Limitation on Debt and Senior Indebtedness." "Disqualified Stock" means any Capital Stock which, by its terms or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof or mandatorily (except to the extent that such exchange or conversion right cannot be exercised or such mandatory conversion cannot occur prior to January 1, 2004), is, or upon the happening of an event or the passage of time would be, (a) required to be redeemed or repurchased by the Company or any of its Subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due prior to January 1, 2004 or (b) exchangeable or convertible into debt securities of the Company or any of its Subsidiaries at the option of the holder thereof or mandatorily, except to the extent that such exchange or conversion right cannot be exercised or such mandatory conversion cannot occur on or prior to January 1, 2004. "GAAP" means, as of any date, generally accepted accounting principles in the United States and does not include any interpretations or regulations that have been proposed but that have not become effective. "Independent Directors" means directors that (i) are not 20% or greater stockholders of the Company or the designee of any such stockholder, (ii) are not officers or employees of the Company, any of its Subsidiaries or of a stockholder referred to above in clause (i), (iii) are not Related Persons and (iv) do not have relationships that, in the opinion of the Board of Directors, would interfere with their exercise of independent judgment in carrying out the responsibilities of the directors. "Investment" means any loan or advance to any person, any acquisition of any interest in any other person (including (i) with respect to a corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock and any securities convertible or exchangeable for any of the foregoing, bonds, notes, debentures, loans or other securities or Debt of such other person and (ii) with respect to a partnership or similar person, any and all units, interests, rights to purchase, warrants, options, participations or other equivalents of or other partnership interests in (however designated) such person and any securities convertible or exchangeable for any of the foregoing), any capital contribution to any other person, or any other investment in any other person, other than (a) advances to officers and employees in the ordinary course of business, (b) creation of receivables in the ordinary course of business and (c) negotiable instruments endorsed for collection in the ordinary course of business. "Lien" means any mortgage, lien, pledge, charge, security interest or other encumbrance of any nature whatsoever (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Net Income" of any person means the net income (or loss) of such person, determined in accordance with GAAP, excluding, however, from the determination of Net Income any extraordinary gain (but not loss) and any gain (but not loss) realized upon the sale or other disposition (including, without limitation, dispositions pursuant to sale-leaseback transactions) of any real property or equipment of such person, which is not sold or otherwise disposed of in the ordinary course of business, or of any Capital Stock of a Subsidiary of such person. "Operating Cash Flow" means, with respect to the Company and its Subsidiaries for any period, the Consolidated Net Income of the Company and its Subsidiaries for such period, plus (i) extraordinary net losses and net losses on sales of assets other than in the ordinary course of business during such period, to the extent such losses were deducted in computing Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) to the extent deducted in calculating Consolidated Net Income, Total Interest Expense of the Company and its Subsidiaries for such period, plus (iv) depreciation, amortization and all other non-cash charges, to the extent such depreciation, amortization and other non-cash charges (excluding any such non-cash charges to the extent that they require an accrual of or reserve for cash charges for any future periods) were deducted in calculating such Consolidated Net Income (including amortization of goodwill and other intangibles). "Permitted Investments" means (i) Investments in the Company or in a Subsidiary of the Company; (ii) Investments by the Company or any Subsidiary of the Company in a person, if as a result of such Investment (a) such person becomes or is a wholly owned Subsidiary of the Company or the Subsidiary making such Investment or (b) such person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company, the Subsidiary making such Investment or a wholly owned Subsidiary of either the Company or such Subsidiary making such Investment (provided that any subsequent issuance or transfer of any interests or other transaction which results in any such wholly owned Subsidiary ceasing to be a wholly owned Subsidiary of the Company, the Subsidiary making such Investment or another wholly owned Subsidiary of either the Company or such Subsidiary making such Investment, or any subsequent transfer of such Permitted Investment (other than to the Company, the Subsidiary making such Investment or another wholly owned Subsidiary of either the Company or such Subsidiary making such Investment) shall be deemed for the purposes hereof to constitute the making of a new Investment by the maker thereof and therefore subject to a new determination of whether such Investment qualifies as a Permitted Investment); (iii) U.S. Government Obligations maturing within one year of the date of acquisition thereof; (iv) certificates of deposit maturing within one year of the date of acquisition thereof issued by a bank or trust company that is organized under the laws of the United States or any state thereof having capital, surplus and undivided profits aggregating in excess of $100,000,000; (v) repurchase agreements with respect to U.S. Government Obligations; and (vi) Investments in commercial paper rated at least A1 or the equivalent thereof by Standard & Poor's Corporation or P1 or the equivalent thereof by Moody's Investor Services, Inc. and maturing not more than 90 days from the date of the acquisition thereof. "Permitted Liens" means (i) Liens for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law and arising in the ordinary course of business and with respect to amounts that, to the extent applicable, either (a) are not yet delinquent by more than 30 days or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP; (iii) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) judgment or other similar Liens arising in connection with court proceedings, provided that (a) the execution or enforcement of each such Lien is effectively stayed within 30 days after entry of such judgment (or such judgment has been discharged within such 30 day period), the claims secured thereby are being contested in good faith by appropriate proceedings timely commenced and diligently prosecuted and the aggregate amount of the claims secured thereby does not exceed $1,000,000 at any time or (b) the payment of which is covered in full by insurance and the insurance company has not denied or contested coverage thereof; (v) Liens existing on property or assets of any entity at the time it becomes a Subsidiary or existing on property or assets at the time of the acquisition thereof by the Company or any of its Subsidiaries, which Liens were not created or assumed in contemplation of, or in connection with, such entity becoming a Subsidiary or such acquisition, as the case may be, and which attach only to such property or assets, provided that the Debt secured by such Liens is not thereafter increased; (vi) Liens incurred in connection with Capitalized Lease Obligations otherwise permitted under the Indenture; (vii) Liens securing Refinancing Debt, provided that such Liens only extend to the property or assets securing the Debt being refinanced, such Refinanced Debt was previously secured by similar Liens on such property or assets and the Debt or other obligations secured by such Liens is not increased; (viii) Liens securing the advance of progress payments or deposits made by the United States or any foreign government or any instrumentality thereof or any prime contractor for any such government or instrumentality and received by the Company in the ordinary course of its business; (ix) the Lien created by the Master Security Agreement between General Electric Capital Corporation and OMI Acquisition Corporation dated as of August 28, 1995; and (x) any other Liens existing on the date of the Indenture. "Preferred Stock" means, with respect to any person, Capital Stock of such person of any class or classes (however designated) which is preferred as to the payments of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such person, over any other class of the Capital Stock of such person. "Property" of any person means all types of real, personal, tangible, intangible or mixed property owned by such person whether or not included on the most recent consolidated balance sheet of such person in accordance with GAAP. "Qualified Stock" means Capital Stock of the Company that is not Disqualified Stock. "Refinancing Debt" means Debt that refunds, refinances or extends any Debentures, or other Debt existing on the date of the Indenture or thereafter incurred by the Company or its Subsidiaries pursuant to the terms of the Indenture, but only to the extent that (i) the Refinancing Debt is subordinated to the Debentures to the same extent as the Debt being refunded, refinanced or extended, if at all, (ii) the Refinancing Debt is scheduled to mature either (a) no earlier than the Debt being refunded, refinanced or extended, or (b) after the maturity date of the Debentures, (iii) the portion, if any, of the Refinancing Debt that is scheduled to mature on or prior to the maturity date of the Debentures has a Weighted Average Life to Maturity at the time such Refinancing Debt is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Debt being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Debentures, (iv) such Refinancing Debt is in an aggregate principal amount that is equal to or less than the aggregate principal amount then outstanding under the Debt being refunded, refinanced or extended, plus customary fees and expenses associated with refinancing and (v) such Refinancing Debt is incurred by the same person that initially incurred the Debt being refunded, refinanced or extended, except that (a) the Company may incur Refinancing Debt to refund, refinance or extend Debt of any Subsidiary of the Company, and (b) any Subsidiary of the Company may incur Refinancing Debt to refund, refinance or extend Debt of any other wholly owned Subsidiary of the Company. "Related Person" means an individual related to an officer, director or employee of the Company or any of its Affiliates which relation is by blood, marriage or adoption and not more remote than first cousin. "Subsidiary" of any person means a corporation or other entity a majority of whose Capital Stock with voting power, under ordinary circumstances, entitling holders of such Capital Stock to elect the board of directors or other governing body, is at the time, directly or indirectly, owned by such person and/or a Subsidiary or Subsidiaries of such person. "Total Interest Expense" means, for any period, the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, whether paid or accrued (including amortization of original issue discount, non-cash interest payments and the interest component of capital leases, but excluding amortization of debt and Preferred Stock issuance costs). "U.S. Government Obligations" means non-callable (i) direct obligations (or certificates representing an ownership interest in such obligations) of the United States for which its full faith and credit are pledged and (ii) obligations of a person controlled or supervised by, and acting as an agency or instrumentality of, the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States. "Weighted Average Life to Maturity" means, when applied to any Debt or Preferred Stock or portions thereof (if applicable) at any date, the number of years obtained by dividing (i) the then outstanding principal amount or liquidation amount of such Debt or Preferred Stock or portions thereof (if applicable) into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. BOOK-ENTRY; DELIVERY AND FORM Except as set forth below, the Debentures were initially issued in the form of registered debentures in global form without coupons (each, a "Global Debenture"). The Global Debentures were deposited on the date of the closing of the sale of the Debentures (the "Closing Date") with, or on behalf of, the Depository Trust Company (the "Depository") and registered in the name of Cede & Co., as nominee of the Depository. Interests in the Global Debentures were available for purchase pursuant to the Debenture Offering only by "qualified institutional buyers," as defined in Rule 144A under the Securities Act ("QIBs"). The Debentures to be resold as set forth herein will be initially issued in global form (the "New Global Debentures"). Debentures that were (i) originally issued to or transferred to institutional "accredited investors," as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional Accredited Investor"), who are not QIBs or to any other persons who are not QIBs or (ii) issued as described below under "-- Certificated Debentures," were issued in registered form without coupons (the "Certificated Debentures"). The Depository has advised the Company that it is (i) a limited purpose trust company organized under the laws of the State of New York, (ii) a member of the Federal Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to Section 17A of the Exchange Act. The Depository was created to hold securities for its participants (collectively, the "Participants") and facilitates the clearance and settlement of securities transactions between Participants through electronic book-entry changes to the accounts of its Participants, thereby eliminating the need for physical transfer and delivery of certificates. The Depository's Participants include securities brokers and dealers (including the Initial Purchaser), banks and trust companies, clearing corporations and certain other organizations. Access to the Depository's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. The Company expects that pursuant to procedures established by the Depository (i) upon deposit of the Global Debentures or New Global Debentures, the Depository will credit the accounts of Participants with an interest in the Global Debenture or New Global Debentures, as applicable, and (ii) ownership of the Debentures will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depository (with respect to the interest of Participants), the Participants and the Indirect Participants. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own and that security interest in negotiable instruments can only be perfected by delivery of certificates representing the instruments. Consequently, the ability to transfer Debentures or to pledge the Debentures as collateral will be limited to such extent. So long as the Depository or its nominee is the registered owner of the Global Debentures or the New Global Debentures, as the case may be, the Depository or such nominee, as the case may be, will be considered the sole owner or Holder of the Debentures represented by the Global Debentures or the New Global Debentures, as the case may be, for all purposes under the Indenture. Except as provided below, owners of beneficial interests in the Global Debentures or the New Global Debentures, as the case may be, will not be entitled to have Debentures represented by such Global Debentures or New Global Debentures, registered in their names, will not receive or be entitled to receive physical delivery of Certificated Debentures, and will not be considered the owners or Holders thereof under the Indenture for any purpose, including with respect to giving of any directions, instruction or approval to the Trustee thereunder. As a result, the ability of a person having a beneficial interest in Debentures represented by a Global Debenture or a New Global Debenture, as the case may be, to pledge such interest to persons or entities that do not participate in the Depository's system or to otherwise take action with respect to such interest, may be affected by the lack of a physical certificate evidencing such interest. Accordingly, each holder owning a beneficial interest in a Global Debenture or a New Global Debenture, as the case may be, must rely on the procedures of the Depository and, if such holder is not a Participant or an Indirect Participant, on the procedures of the Participant through which such holder owns its interest, to exercise any rights of a Holder under the Indenture or such Global Debenture or New Global Debenture. The Company understands that under existing industry practice, in the event the Company requests any action of Holders that is an owner of a beneficial interest in a Global Debenture or a New Global Debenture, as the case may be, desires to take any action that the Depository, as the Holder of such Global Debenture or New Global Debenture, is entitled to take, the Depository would authorize the Participants to take such action and the Participant would authorize holders owning through such Participants to take such action or would otherwise act upon the instruction of such holders. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of Debentures by the Depository, or for maintaining, supervising or reviewing any records of the Depository relating to such Debentures. Payments with respect to the principal of, premium, if any, and interest on any Debentures represented by a Global Debenture or a New Global Debenture, as the case may be, registered in the name of the Depository or its nominee on the applicable record date will be payable by the Trustee to or at the direction of the Depository or its nominee in its capacity as the registered Holder of the Global Debenture or a New Global Debenture, as the case may be, representing such Debentures under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names the Debentures, including the Global Debentures or the New Global Debentures, as the case may be, are registered as the owners thereof for the purpose of receiving such payment and for any and all other purposes whatsoever. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Debentures (including principal, premium, if any, and interest), or to immediately credit the accounts of the relevant Participants with such payment, in amounts proportionate to their respective holdings in principal amount of beneficial interest in the Global Debentures or the New Global Debentures, as the case may be, as shown on the records of the Depository. Payments by the Participants and the Indirect Participants to the beneficial owners of Debentures will be governed by standing instructions and customary practice and will be the responsibility of the Participants or the Indirect Participants. CERTIFICATED DEBENTURES If (i) the Company notifies the Trustee in writing that the Depository is no longer willing or able to act as a depository and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Debentures in definitive form under the Indenture, then, upon surrender by the Depository of its Global Debentures or the New Global Debentures, as the case may be, Certificated Debentures will be issued to each person that the Depository identifies as the beneficial owner of the Debentures represented by the Global Debentures or the New Global Debentures, as the case may be. In addition, subject to certain conditions, any person having a beneficial interest in a Global Debenture or a New Global Debenture, as the case may be, may, upon request to the Trustee, exchange such beneficial interest for Certificated Debentures. Upon any such issuance, the Trustee is required to register such Certificated Debentures in the name of such person or persons (or the nominee of any thereof), and cause the same to be delivered thereto. Neither the Company nor the Trustee shall be liable for any delay by the Depository or any Participant or Indirect Participant in identifying the beneficial owners of the related Debentures and each such person may conclusively rely on, and shall be protected in relying on, instructions from the Depository for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Debentures to be issued). REGISTRATION RIGHTS; LIQUIDATED DAMAGES The Company and the Initial Purchaser entered into the Registration Rights Agreement dated as of September 22, 1995. Pursuant to the Registration Rights Agreement, the Company has agreed to file with the Securities and Exchange Commission (the "Commission") a registration statement under the Securities Act (the "Shelf Registration Statement") to cover public resales of the Debentures by Holders and of the Class A Common Stock issuable upon conversion of the Debentures by holders thereof, in each case who satisfy certain conditions relating to the providing of information in connection with the Shelf Registration Statement. The Company has agreed to use its reasonable best efforts to (a) cause the Shelf Registration Statement to be filed with the Commission within 90 days after September 29, 1995 (the "Closing Date"); (b) cause the Shelf Registration Statement to be declared effective by the Commission within 150 days after the Closing Date; and (c) keep the Shelf Registration Statement effective until at least the third anniversary of the Closing Date or such shorter period that will terminate when all the shares of the Class A Common Stock and the Debentures covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company has filed a Registration Statement on Form S-2 of which this Prospectus is a part in compliance with its obligation under the Registration Rights Agreement to file a Shelf Registration Statement. Notwithstanding the foregoing, the Company will be permitted to suspend the use of the Shelf Registration Statement during certain periods under certain conditions. The Registration Rights Agreement provides that, if (i) the Shelf Registration Statement is not filed with the Commission or is not declared effective by the Commission within the time periods set forth above or (ii) at any time during which the Shelf Registration Statement is required to kept effective, it shall cease to be effective (other than as a result of the effectiveness of a successor registration statement) and such effectiveness is not restored within 45 days thereafter (each such event referred to in clause (i) or (ii), a "Registration Default"), the Company will pay liquidated damages (the "Liquidated Damages") to each Holder of Debentures or holder of Class A Common Stock which are "restricted" securities under the Securities Act intended to be eligible for resale under the Shelf Registration Statement and who has complied with its obligations under the Registration Rights Agreement. During the first 90-day period immediately following the occurrence of a Registration Default, such Liquidated Damages shall be in an amount equal to $.05 per week per $1,000 principal amount of Debentures and $.01 per week per share (subject to adjustment in the event of stock splits or consolidations, stock dividends and the like) of Class A Common Stock constituting restricted securities held by such person. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount and $.01 per week per share (subject to adjustment as set forth above) of Class A Common Stock constituting restricted securities for each subsequent 90-day period until the applicable Registration Default is cured, up to a maximum amount of liquidated damages of $.20 per week per $1,000 principal amount of Debentures and $.04 per week per share (subject to adjustment as set forth above) of Class A Common Stock constituting restricted securities. All accrued Liquidated Damages shall be paid by wire transfer of immediately available funds or by federal funds check by the Company on each Damages Payment Date (as defined in the Registration Rights Agreement). Following the cure of all Registration Defaults, the payment of Liquidated Damages will cease. In addition, for so long as the Debentures are outstanding and during any period in which the Company is not subject to the Exchange Act, the Company will provide to holders of Debentures and to prospective purchasers of the Debentures the information required by Rule 144A(d)(4) under the Securities Act. The Company will provide a copy of the Registration Rights Agreement to prospective investors upon request. DESCRIPTION OF 1998 DEBENTURES The following summary describes certain provisions of the indenture governing the 1998 Debentures (the "1998 Indenture") and the 1998 Debentures. The following summary does not purport to be complete and is subject to and is qualified in its entirety by reference to the 1998 Indenture and the form of the 1998 Debentures. The Company's 1998 Debentures were issued on August 1, 1983 in an aggregate principal amount of $25,000,000. The 1998 Debentures are unsecured obligations of the Company which are subordinated in right of payment to all existing and future Senior Indebtedness (as defined below) of the Company. The 1998 Indenture does not contain any restrictions upon the incurrence of Senior Indebtedness or any other indebtedness by the Company or by any of its subsidiaries. The 1998 Debentures bear interest at a rate of 8 1/2% per annum payable semiannually on February 1 and August 1 of each year and mature on August 1, 1998. Mandatory sinking fund payments sufficient to retire $2.5 million principal amount of the 1998 Debentures annually, which commenced on August 1, 1990, are calculated to retire 80% of the issue prior to maturity. See "Capitalization." The 1998 Debentures are redeemable on not less than 30 days' notice at the option of the Company, in whole or in part, at a redemption price of 100% of the principal amount, plus accrued interest to the date of redemption. The 1998 Debentures are convertible at any time prior to maturity, unless previously redeemed, into shares of Class B Common Stock of the Company at a conversion price of $15.00 per share, subject to adjustment under certain conditions. The 1998 Indenture contains certain limitations on the Company's right to distribute dividends or purchase, redeem or otherwise acquire or retire any of its capital stock and to merge or consolidate unless it meets the criteria set forth therein. Senior Indebtedness is defined in the 1998 Indenture to include the principal of (and premium, if any) and interest on (a) all indebtedness of the Company, whether outstanding on the date of the 1998 Indenture or thereafter created, incurred, assumed or guaranteed, for borrowed money (other than the 1998 Debentures), whether short-term or long-term and whether secured or unsecured (including all indebtedness evidenced by notes, bonds, debentures or other securities sold by the Company for money), (b) indebtedness incurred by the Company in the acquisition (whether by way of purchase, merger, consolidation or otherwise and whether by the Company or another person) of any business, real property or other assets (except assets acquired in the ordinary course of the conduct of the acquirer's usual business), (c) guarantees by the Company of indebtedness for borrowed money, whether short-term or long-term and whether secured or unsecured, of any corporation in which the Company owns, directly or indirectly, 50% or more of the stock having general voting power and (d) renewals, extensions, refundings, deferrals, restructurings, amendments and modifications of any such indebtedness, obligation or guarantee, unless in each case by the terms of the instrument creating or evidencing such indebtedness, obligation or guarantee or such renewal, extension, refunding, deferral, restructuring, amendment or modification it is provided that such indebtedness, obligation or guarantee is not superior in right of payment of the 1998 Debentures. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company currently consists of 2,000,000 shares of Preferred Stock, 10,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock. As of November 24, 1995, there were 3,307,324 shares of Class A Common Stock and 2,194,734 shares of Class B Common Stock issued and outstanding (exclusive of 432,639 shares of Class A Common Stock and 21,619 shares of Class B Common Stock held in treasury). No shares of Preferred Stock have been issued. All outstanding shares of Class A Common Stock and Class B Common Stock are fully paid and nonassessable. The Class A Common Stock together with the Class B Common Stock is referred to herein as the "Common Stock". The Company is considering setting forth a proposal to its stockholders to amend the Company's Certificate of Incorporation to convert the Class A Common Stock and Class B Common Stock into a single class of common stock, as well as to include certain other charter amendments. PREFERRED STOCK The terms of the Preferred Stock have not been determined and are not designated in the Restated Certificate of Incorporation of the Company, as amended. Instead, the Board of Directors is authorized to issue the Preferred Stock in series, each of which may vary as to the designation and number of shares in such series, the voting power of the holders thereof, and the dividend rate, the redemption terms and prices, the voluntary and involuntary liquidation preferences, the conversion rights and the sinking fund requirements, if any, of such series. The Board of Directors, however, may not create any series of Preferred Stock with more than one vote per share or with voting rights which would limit, reduce or otherwise abridge the right of the holders of Class B Common Stock to elect a number of Class B Directors equal to one-fourth of the number of directors constituting the whole Board of Directors. The foregoing restriction may be changed only by the affirmative vote of holders of 60% of the outstanding shares of Class A Common Stock and Class B Common Stock, voting as separate classes. CLASS A COMMON STOCK AND CLASS B COMMON STOCK Voting Rights. The Board of Directors of the Company is divided into two classes of directors, Class A Directors and Class B Directors. So long as the number of shares of Class B Common Stock outstanding is not less than 10% of the total number of outstanding shares of Class A Common Stock and Class B Common Stock, the holders of Class B Common Stock, voting as a class, will be entitled to one vote for each such share held to elect a number of Class B Directors equal to one-fourth of the number of directors constituting the whole Board of Directors (rounded up to the nearest whole number). The holders of Class A Common Stock, voting as a class, are entitled to one vote for each such share held to elect the remaining directors, who will be designated Class A Directors. Neither the Class A Common Stock nor the Class B Common Stock has cumulative voting rights, and thus holders of 50% or more of the outstanding shares of each class are able to elect all of the directors to be elected by that class. On all matters other than the election or removal of directors, and matters as to which class voting is required by Delaware law, holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to one-tenth vote per share, voting together as a single class. However, if the number of shares of Class B Common Stock outstanding should be less than 10% of the total number of shares of Class A Common Stock and Class B Common Stock outstanding at some future record date for a meeting of stockholders of the Company at which directors are to be elected, then the holders of Class B Common Stock would not be entitled to elect any Class B Directors and the holders of Class A Common Stock and Class B Common Stock would vote together as a single class on all matters coming before such meeting, including the election of the Class A Directors to be elected at such meeting, with the holders of Class A Common Stock entitled to one vote per share and the holders of Class B Common Stock entitled to one-tenth vote per share. Alternatively, if at any record date for such a meeting the number of outstanding shares of Class A Common Stock should be less than 875,000, then the holders of Class B Common Stock would continue to elect a number of Class B Directors equal to one-fourth of the total number of directors constituting the whole Board and, in addition, would vote together with the holders of Class A Common Stock to elect the Class A Directors to be elected at such meeting, with the holders of Class A Common Stock entitled to cast one vote per share and the holders of Class B Common Stock entitled to cast one-tenth vote per share. The Class A Directors are divided into three subclasses, with each subclass consisting of as nearly an equal number of directors as possible. The members of one such subclass are elected each year to hold office for a three-year term and until their successors have been elected and qualified. The term of office of each Class B Director is one year. The classification and subclassification of the Board of Directors may be changed only by the affirmative vote of holders of 60% of the outstanding shares of both the Class A Common Stock and the Class B Common Stock, voting as separate classes. Stockholders of a particular class may effect the removal of a director of that class during his term by a like vote, but only for cause. Dividends and Distributions. Holders of Class A Common Stock and Class B Common Stock each are entitled to dividends only if, as and when declared payable by the Board of Directors out of funds legally available for such payment. For so long as any shares of the Class B Common Stock are outstanding, the Board of Directors may not (i) declare any dividends in cash or property with respect to the Class A Common Stock unless an equal dividend per share, payable in the same consideration, shall have been declared with respect to the outstanding Class B Common Stock and set aside for payment, or (ii) declare any dividend payable in securities of the Company with respect to the Class A Common Stock, or distribute any rights or warrants to purchase securities of the Company with respect to the Class A Common Stock, unless at the same time it declares an equivalent dividend or makes an equivalent distribution with respect to the Class B Common Stock so as to maintain, as nearly as may be practicable, the relative voting and other rights of the holders of each class immediately before such action. In addition, the Company may not combine, subdivide or reclassify the Class A Common Stock or Class B Common Stock unless at the same time it takes such action as may be necessary with respect to the other class so as to maintain, as nearly as may be practicable, the relative voting and other rights of the holders of each class immediately before such action. The foregoing provisions may be changed only by the affirmative vote of holders of 60% of the outstanding shares of both the Class A Common Stock and Class B Common Stock, voting as separate classes. The Board of Directors is permitted to declare a dividend in cash, property or securities with respect to the Class B Common Stock without declaring a dividend with respect to the Class A Common Stock, although at this time it does not foresee any circumstances under which it would consider taking such action. Conversion Rights. Holders of Class A Common Stock have the right at any time, and from time to time, to convert each share of Class A Common Stock into one share of Class B Common Stock. Holders of Class B Common Stock do not have the right to convert their shares into Class A Common Stock nor do they have any other conversion rights. In General. Holders of Class A Common Stock and Class B Common Stock have no redemption or preemptive rights and are not liable for further calls or assessments. Upon liquidation of the Company, neither the holders of Class A Common Stock nor the holders of Class B Common Stock will have any preferences over each other. Holders of both classes of stock will be entitled, after satisfaction of the Company's liabilities and payment of the liquidation preferences, if any, of any outstanding shares of Preferred Stock, to share the remaining assets of the Company, if any, equally in proportion to the number of shares of each class held. Transfer Agent and Registrar. The Trust Company of New Jersey, 35 Journal Square, Jersey City, New Jersey, 07306, is the transfer agent and the registrar of both the Class A Common Stock and the Class B Common Stock. PLAN OF DISTRIBUTION The Company will not receive any of the proceeds from this offering. The Selling Security Holders may sell all or a portion of the Debentures and shares of Class A Common Stock offered hereby from time to time on terms to be determined at the times of such sales. The Debentures and shares of Class A Common Stock may be sold from time to time to purchasers directly by any of the Selling Security Holders. Alternatively, any of the Selling Security Holders may from time to time offer the Debentures or shares of Class A Common Stock through underwriters, including the Initial Purchaser, dealers or agents, who may receive compensation in the form of underwriting discounts, commissions or concessions from the Selling Security Holders and the purchasers of the Debentures or shares of Class A Common Stock for whom they may act as agent. To the extent required, the aggregate principal amount of Debentures and number of shares of Class A Common Stock to be sold, the names of the Selling Security Holders, the purchase price, the name of any such agent, dealer or underwriter and any applicable commissions with respect to a particular offer will be set forth in an accompanying Prospectus Supplement or, if appropriate, a post-effective amendment to the Registration Statement of which this Prospectus is a part. There is no assurance that the Selling Security Holders will sell any or all of the Debentures or shares of Class A Common Stock offered hereby. The Selling Security Holders and any broker-dealers, agents or underwriters that participate with the Selling Security Holders in the distribution of the Debentures or shares of Class A Common Stock may be deemed to be "underwriters" within the meaning of the Securities Act, in which event any discounts, commissions or concessions received by such broker-dealers, agents or underwriter and any profit on the resale of the Debentures or shares of Class A Common Stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Debentures and the shares of Class A Common Stock issued upon conversion of the Debentures may be sold from time to time in one or more transactions at fixed offering prices, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the holders of such securities or by agreement between such holders and underwriters or dealers who may receive fees or commissions in connection therewith. To comply with the securities laws of certain states, if applicable , the Debentures and shares of Class A Common Stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition in certain states the Debentures and shares of Class A Common Stock may not be offered or sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. The Debentures were originally sold to the Initial Purchaser on September 29, 1995 in a private placement (including the over- allotment option for $5,000,000 aggregate principal amount of the Debentures which was exercised on November 3, 1995) at a purchase price of 95% of their principal amount. The Company agreed to indemnify the Initial Purchaser against certain liabilities in connection with the offer and sale of the Debentures, including liabilities under the Securities Act, and to contribute to payments that the Initial Purchaser may be required to make in respect thereof. The Company will pay substantially all expenses incident to the offering and sale of the Debentures and Class A Common Stock to the public other than underwriting discounts and selling commissions and fees. The Company and the Selling Security Holders have agreed to indemnify each other against certain liabilities arising under the Securities Act. In addition, any underwriter utilized by the Selling Security Holders may be indemnified against certain liabilities, including liabilities under the Securities Act. See "Selling Security Holders." Prior to this offering there has not been any public market for the Debentures and there can be no assurance regarding the future development of a market for the Debentures. The Company intends to list the Debentures on the AMEX. The Debentures are eligible for trading in the PORTAL Market; however, no assurance can be given as to the liquidity of, or trading market for, the Debentures. The Company has been advised by the Initial Purchaser that it intends to make a market in the Debentures. However, it is not obligated to do so and any market-making activities with respect to the Debentures may be discontinued at any time without notice. See "Description of the Debentures -- Registration Rights; Liquidated Damages." Accordingly, no assurance can be given as to the liquidity of or the trading market for the Debentures. See "Risk Factors -- Lack of Public Market for the Debentures; Restrictions on Resale." SELLING SECURITY HOLDERS The following table sets forth information concerning the principal amount of Debentures beneficially owned by each Selling Security Holder which may be offered from time to time pursuant to this Prospectus. Other than as a result of the ownership or placement of Debentures or Class A Common Stock, none of the Selling Security Holders has had any material relationship with the Company within the past three years, except as noted herein. The table has been prepared based upon information furnished to the Company by or on behalf of the Selling Security Holders. Principal Principal Amount of Amount of Debentures Debentures Percent of Beneficially Being Outstanding Name Owned Registered Debentures _________________________________ ____________ ______________ ____________ BT Holdings . . . . . . . . . . . $1,950,000 $1,950,000 7.8% Castle Convertible Fund Inc. . . 500,000 500,000 2.0 Catholic Mutual Relief Society of America . . . . . . . . . . . . 250,000 250,000 1.0 Cincinnati Financial Corp. . . . 2,000,000 2,000,000 8.0 CNA Income Shares, Inc. . . . . . 1,000,000 1,000,000 4.0 First Pacific Advisers, Inc.(1) . 4,500,000 4,500,000 18.0 Forest Fulcrum Ltd. . . . . . . . 520,000 520,000 2.1 Forest Fulcrum Fund . . . . . . . 980,000 980,000 3.9 Franklin Investors Securities Trust Convertible Securities Fund . . . . . . . . . . . . . . 500,000 500,000 2.0 ICI American Holdings . . . . . . 250,000 250,000 1.0 IDS Bond Fund, Inc.(2) . . . . . 3,000,000 3,000,000 12.0 Laterman Strategies 90's L.P. . . 300,000 300,000 1.2 Laterman & Co. . . . . . . . . . 200,000 200,000 * Merrill Lynch Convertible Securities Holdings, Inc. . . . 1,000,000 1,000,000 4.0 Nalco Chemical Retirement . . . . 100,000 100,000 * Nesbitt Burns . . . . . . . . . . 400,000 400,000 1.6 Offshore Strategies Ltd. . . . . 500,000 500,000 2.0 Oregon Equity Fund . . . . . . . 1,000,000 1,000,000 4.0 The Putnam Advisory Company, Inc. on behalf of Boston College Endowment . . . . . . . . . . . 200,000 200,000 * The Putnam Advisory Company, Inc. on behalf of New Hampshire Retirement System . . . . . . . 525,000 525,000 2.1 The Putnam Advisory Company, Inc. on behalf of The Museum of Fine Art, Boston . . . . . . . 90,000 90,000 * Putnam Convertible Income-Growth Trust . . . . . . . . . . . . 1,850,000 1,850,000 7.4 Putnam Convertible Opportunities and Income Trust . . . . . . . 485,000 485,000 1.9 Putnam High Income Convertible and Bond Fund . . . . . . . . . 600,000 600,000 2.4 State of Delaware . . . . . . . . 400,000 400,000 1.6 United National Insurance Company 150,000 150,000 * Winchester Convertible Plus Limited . . . . . . . . . . . . . 1,000,000 1,000,000 4.0 Zazove Convertible Fund, L.P. . . 500,000 500,000 2.0 Zeneca Holdings . . . . . . . . . 250,000 250,000 1.0 ____________ ______________ ____________ Total . . . . . . . . . . . . $25,000,000 $25,000,000 100% _________________________________________ * Less than 1%. 1 First Pacific Advisers, Inc. may be deemed to be the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than ten percent of each of the Class A Common Stock and Class B Common Stock of the Company. Such information has been derived from statements on Schedule 13D and 13G filed with the SEC by First Pacific Advisers, Inc. 2 IDS Bond Fund, Inc. is an investment company registered under the Investment Company Act of 1940, as amended, and is a fund in the IDS Mutual Fund Group ("IDS Funds"). American Express Financial Corporation (formerly known as IDS Financial Corporation) ("AEFC"), an investment adviser registered under the Investment Advisers Act of 1940, as amended, provides investment advisory services to each of the IDS Funds and to certain other registered investment companies. AEFC is a wholly owned subsidiary of American Express Company. The information set forth in the table with respect to IDS Bond Fund, Inc. and the information set forth in this footnote was provided by AEFC. __________________________________________________________________ Because the Selling Security Holders may sell all or some of the Debentures which they hold and shares of Class A Common Stock issued upon conversion thereof pursuant to the offering contemplated by this Prospectus, no estimate can be given as to the aggregate amount of Debentures or shares of Class A Common Stock that are to be offered hereby or that will be owned by the Selling Security Holders upon completion of this offering to which this Prospectus relates. Accordingly, the aggregate principal amount of Debentures offered hereby may increase or decrease. As of the date of this Prospectus, the aggregate principal amount of Debentures outstanding is $25,000,000. See "Plan of Distribution." LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022. Mark N. Kaplan, a director and owner of 1,000 shares of the Class A Common Stock of the Company, is a partner in the firm of Skadden, Arps, Slate, Meagher & Flom. EXPERTS The consolidated financial statements and consolidated financial statement schedule of the Company as of March 31, 1995 and 1994, and for each of the years in the three-year period ended March 31, 1995, included elsewhere herein and/or incorporated by reference in the Registration Statement, as applicable, have been included elsewhere herein and incorporated by reference in the Registration Statement, as applicable, in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and incorporated by reference in the Registration Statement, as applicable, and upon the authority of said firm as experts in accounting and auditing. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Diagnostic/Retrieval Systems, Inc. and Subsidiaries Page Independent Auditors' Report . . . . . . . . F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 1995 and 1994 and September 30, 1995 (unaudited) . . . F-3 Consolidated Statements of Earnings for the fiscal years ended March 31, 1995, 1994 and 1993 and for the six months ended September 30, 1995 and 1994 (unaudited) . . F-4 Consolidated Statements of Stockholders' Equity for the fiscal years ended March 31, 1995, 1994 and 1993 and for the six months ended September 30, 1995 (unaudited) . . . . . . . F-5 Consolidated Statements of Cash Flows for the fiscal years ended March 31, 1995, 1994 and 1993 and for the six months ended September 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders, Diagnostic/Retrieval Systems, Inc.: We have audited the accompanying consolidated balance sheets of Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1995. These consolidated financial statements are the responsi- bility 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 state- ments are free of material misstatement. An audit in- cludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting princi- ples 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 Diagnos- tic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three- year period ended March 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey May 18, 1995 CONSOLIDATED BALANCE SHEETS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES September March 31, 30, 1995 1995 1994 (unaudited) Assets Current Assets: Cash and Cash Equivalents . . . . . . $11,197,000 $15,465,000 $20,997,000 Accounts Receivable (Notes 2 and 6) . . 17,432,000 15,538,000 18,923,000 Inventories, Net of Progress Payments (Note 3) . . . . . . . . . . . . . . . 11,724,000 5,042,000 15,494,000 Other Current Assets . . . . . . . . . .2,445,000 2,563,000 2,536,000 Total Current Assets . . . . . . . . . 42,798,000 38,608,000 57,950,000 Property, Plant and Equipment, at Cost (Notes 4 and 6) . . . . . . . . . . . . 33,661,000 32,182,000 37,953,000 Less Accumulated Depreciation and Amortization . . . . . . . . 23,812,000 23,289,000 24,661,000 Net Property, Plant and Equipment . . . 9,849,000 8,893,000 13,292,000 Intangible Assets, Less Accumulated Amor- tization of $3,457,000, $3,008,000 and $3,740,000 at March 31, 1995 and 1994 and September 30, 1995, respectively. . 8,920,000 8,414,000 8,637,000 Other Assets . . . . . . . . . . . . . .3,023,000 2,921,000 3,961,000 Total Assets . . . . . . . . . . . . $64,590,000 $58,836,000 $83,840,000 Liabilities and Stockholders' Equity Current Liabilities: Current Installments of Long-Term Debt (Note 6) . . . . . . . . . . . . . $ 2,492,000 $ 2,664,000 $ 3,254,000 Accounts Payable and Accrued Expenses (Note 5) . . . . . . . . . . . . . . . 19,989,000 16,141,000 17,495,000 Total Current Liabilities . . . . . . . 22,481,000 18,805,000 20,749,000 Long-Term Debt, Excluding Current In- stallments (Note 6) . . . . . . . . . . 11,732,000 14,515,000 30,690,000 Deferred Income Taxes (Note 8) . . . . .4,605,000 4,624,000 4,605,000 Other Liabilities (Notes 10 and 11) . . .3,263,000 1,133,000 3,544,000 Total Liabilities . . . . . . . . . . . 42,081,000 39,077,000 59,588,000 Stockholders' Equity (Notes 6 and 9): Class A Common Stock, $.01 par Value per Share. Authorized 10,000,000 Shares; Issued 3,699,963 Shares, 3,674,963 Shares and 3,739,963 Shares at March 31, 1995 and 1994 and September 30, 1995, Respec- tively . . . . . . . . . . . . . . . 37,000 37,000 37,000 Class B Common Stock, $.01 par Value per Share. Authorized 20,000,000 Shares; Issued 2,163,253, 2,105,528 and 2,216,353 Shares at March 31, 1995 and 1994, and September 30, 1995, Respectively . . . . 22,000 21,000 22,000 Additional Paid-in Capital . . . . . . 13,435,000 12,970,000 13,579,000 Retained Earnings . . . . . . . . . . 10,919,000 8,315,000 12,490,000 24,413,000 21,343,000 26,128,000 Treasury Stock, at Cost: 432,639 Shares of Class A Common Stock and 21,619 Shares of Class B Common Stock at March 31, 1995 and September 30, 1995 and 423,419 Shares of Class A Common Stock and 21,440 Shares of Class B Common Stock at March 31, 1994 (Note 10) . . . . . . . . . . . . . (1,617,000) (1,579,000) (1,617,000) Unamortized Restricted Stock Compensation (287,000) (5,000) (259,000) Net Stockholders' Equity . . . . . . . 22,509,000 19,759,000 24,252,000 Commitments and Contingencies (Note 10) Total Liabilities and Stockholders' Equity . . . . . .. . . . . . . . . . $64,590,000 $58,836,000 $83,840,000 __________________ See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF EARNINGS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Six Months Ended Years Ended March 31, September 30, 1995 1994 1993 1995 1994 (unaudited) Revenues . . . . $69,930,000 $57,820,000 $47,772,000 $40,065,000 $31,662,000 Costs and Expenses (Note 3) . . . . 64,836,000 54,372,000 45,461,000 36,907,000 29,406,000 Operating Income . . 5,094,000 3,448,000 2,311,000 3,158,000 2,256,000 Interest and Related Expenses . . . . . (1,372,000) (1,574,000) (1,735,000) (697,000) (677,000) Other Income, Net (Notes 7 and 11) 534,000 834,000 1,224,000 114,000 216,000 Earnings before Income Taxes . . . . . . 4,256,000 2,708,000 1,800,000 2,575,000 1,795,000 Income Taxes (Note 8). . . . . 1,652,000 1,093,000 715,000 1,004,000 717,000 Net Earnings . . .$ 2,604,000 $ 1,615,000 $ 1,085,000 $ 1,571,000 $ 1,078,000 Earnings per Share of Class A and Class B Common Stock: Primary . . . . $ .50 $ .30 $ .20 $ .28 $ .21 Fully diluted. . $ .50 $ .30 $ .20 $ .28 $ .21 Weighted Average Number of Shares of Class A and Class B Common Stock Outstanding: Primary . . . . 5,231,000 5,334,000 5,324,000 5,632,000 5,094,000 Fully diluted . . 5,231,000 5,334,000 5,324,000 5,672,000 5,094,000 _________________ See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES Common Stock Years Ended March 31, 1995, 1994 and 1993, and Six Months End- ed Septeber 30, 1995 Unamortized (unaudited) Class A Class B Additional Restricted Net Paid In Retained Treasury Stock Stockholders' ------------------- Shares Amount Shares Amount Capital Earnings Stock Compensation Equuity Balances at March 31, 1992 . . . . 3,674,963 $37,000 2,089,528 $21,000 $12,984,000 $5,615,000 $(1,579,000) $(31,000) $17,047,000 Net Earnings . . -- -- -- -- -- 1,085,000 -- -- 1,085,000 Stock Options Exercised . . . . -- -- 5,000 -- -- -- -- -- -- Compensation Re- lating to Stock Options, Net . . -- -- -- -- (39,000) -- -- 22,000 (17,000) Balances at March 31, 1993 . . . . 3,674,963 37,000 2,094,528 21,000 12,945,000 6,700,000 (1,579,000) (9,000) 18,115,000 Net Earnings . . -- -- -- -- -- 1,615,000 -- -- 1,615,000 Stock Options Exercised . . . . -- -- 11,000 -- 2,000 -- -- -- 2,000 Compensation Re- lating to Stock Options, Net . . -- -- -- -- 23,000 -- -- 4,000 27,000 Balances at March 31, 1994 . . . . 3,674,963 37,000 2,105,528 21,000 12,970,000 8,315,000 (1,579,000) (5,000) 19,759,000 Net Earnings . . -- -- -- -- -- 2,604,000 -- -- 2,604,000 Stock Options Exercised . . . . 25,000 -- 57,725 1,000 188,000 -- -- -- 189,000 Compensation Re- lating to Stock Options, Net . . -- -- -- -- 388,000 -- -- (282,000) 106,000 Purchase of Trea- sury Stock . . . -- -- -- -- -- -- (2,900,000) -- (2,900,000) Sale of Treasury -- -- -- -- (111,000) -- 2,862,000 -- 2,751,000 Stock . . . . . . Balances at March 31, 1995 . . . . 3,699,963 37,000 2,163,253 22,000 13,435,000 10,919,000 (1,617,000) (287,000) 22,509,000 Net Earnings (un- audited) . . . . -- -- -- -- -- 1,571,000 -- -- 1,571,000 Stock Options Exercised (unau- dited) . . . . . 40,000 -- 53,100 -- 220,000 -- -- -- 220,000 Expenses relating to the Sale of Treasury Stock (unaudited) . . . -- -- -- -- (76,000) -- -- -- (76,000) Compensation Re- lating to Stock Options Net (un- audited) . . . . -- -- -- -- -- -- -- 28,000 28,000 Balances at Sep- tember 30, 1995 (unaudited) . . . 3,739,963 $ 37,000 2,216,353 $22,000 $13,579,000 $12,490,000 $(1,617,000) $(259,000) $24,252,000 ____________________ See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES Six Months Ended Years Ended March 31, September 30, 1995 1994 1993 1995 1994 (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings . . . . . . $ 2,604,000 $ 1,615,000 $ 1,085,000 $ 1,571,000 $ 1,078,000 Adjustments to Reconcile Net Earnings to Cash Flows from Operating Activities: Depreciation and Amortization . . . 2,480,000 2,558,000 3,202,000 1,289,000 1,252,000 Deferred Income Taxes . . . 26,000 (15,000) (31,000) -- -- Other, Net . . . . . . . . (77,000) (233,000) (446,000) 171,000 37,000 Changes in Assets and Liabil- ities, Net of Effects from Business Combinations: (Increase) Decrease in Accounts Receivable . . (1,415,000) 1,443,000 (880,000) (1,184,000) 3,516,000 (Increase) Decrease in Inventories . . . . . . (6,408,000) 2,069,000 2,186,000 (992,000) (2,414,000) (Increase) Decrease in Other Current Assets . . . . (7,000) (133,000) 1,400,000 (17,000) (95,000) Increase (Decrease) in Ac- counts Payable and Accrued Expenses . . . . . 3,640,000 2,928,000 (400,000) (4,356,000) (3,462,000) Other, Net . . . . . . . 1,643,000 (62,000) (357,000) 268,000 168,000 Net Cash Provided by (Used in) Operating Activities: . . . . . 2,486,000 10,170,000 5,759,000 (3,250,000) 80,000 CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures . . . (2,543,000) (988,000) (922,000) (1,959,000) (823,000) Sales of Fixed Assets . . . -- -- -- 2,380,000 -- Payments Pursuant to Business Combinations, Net of Cash Acquired . . . . . . . . . (1,514,000) (696,000) -- (4,095,000) -- Cash Advanced to Company Ac- quired for Repayment of Debt Prior to Acquisition . . . . -- (1,800,000) -- -- -- Other, Net . . . . . . . . . 263,000 11,000 2,000 -- (6,000) Net Cash Used in Investing Activities . . . . . . . . (3,794,000) (3,473,000) (920,000) (3,674,000) (829,000) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on Long-Term Debt . (275,000) (168,000) (262,000) (114,000) (37,000) Repurchases of Convertible Subordinated Debentures . . . . . . . (2,667,000) (2,354,000) (1,880,000) (2,225,000) (2,527,000) Net Proceeds From Issuance of Senior Subordinated Convert- ible Debentures . . . . . . . -- -- -- 18,900,000 -- Other Borrowings . . . . . . 20,000 325,000 -- 123,000 65,000 Purchase of Treasury Stock . (2,900,000) -- -- -- (2,900,000) Sale of Treasury Stock. . . 2,862,000 -- -- -- -- Other, Net . . . . . . . . . -- -- -- 40,000 -- Net Cash Used in Financing Activities . . . . (2,960,000) (2,197,000) (2,142,000) 16,724,000 (5,399,000) Net Increase (Decrease) in Cash and Cash Equivalents . (4,268,000) 4,500,000 2,697,000 9,800,000 (6,148,000) Cash and Cash Equivalents, Beginning of Period . . . . 15,465,000 10,965,000 8,268,000 11,197,000 15,465,000 Cash and Cash Equivalents, End of Period . . . . . . $11,197,000 $15,465,000 $10,965,000 $20,997,000 $9,317,000 ____________________ See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Diagnostic/Retrieval Systems, Inc., its subsidiaries, all of which are wholly owned, and a joint venture consisting of an 80% controlling partnership interest (the "Company"). All significant intercompany transactions and balances have been eliminated in consol- idation. The Consolidated Financial Statements include information as of September 30, 1995 and for the six months ended September 30, 1995 and 1994, which is unau- dited. In the opinion of Management, the accompanying unaudited consolidated financial statements of the Compa- ny contain all adjustments (consisting of only normal and recurring adjustments) necessary for the fair presenta- tion of the Company's consolidated financial position as of September 30, 1995, the statements of earnings for the six months ended September 30, 1995 and 1994, cash flows for the six months ended September 30, 1995 and 1994 and the statement of stockholders' equity for six months ended September 30, 1995. The results of operations for the six months ended September 30, 1995 are not necessar- ily indicative of the results to be expected for the full year. B. CASH AND CASH EQUIVALENTS The Company considers all highly liquid invest- ments purchased with a maturity of three months or less to be cash equivalents. C. REVENUE RECOGNITION Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as ship- ments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues on contracts with significant engi- neering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total con- tract costs at completion (cost-to-cost) with consider- ation 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 1995, 1994 and 1993 approximated 16%, 26% and 37% of total revenues, respectively, with remaining revenues recognized as delivery of finished units is made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1995, 1994 and 1993 are $18,771,000, $27,496,000 and $19,155,000 respectively, of customer- sponsored research and development. Revisions in profit estimates are reflected in the year in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 84%, 94% and 83% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government (principally the U.S. Navy). In addition, approximately 7%, 3% and 17% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from sales to foreign governments. Sales to commercial customers comprised 9% and 3% of revenues in fiscal 1995 and 1994, respectively. D. INVENTORIES Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expens- es, which include research and development costs, where such costs are recoverable under customer contracts. In accordance with industry practice, invento- ries include amounts relating to contracts having produc- tion cycles longer than one year, and a portion thereof will not be realized within one year. E. DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been provid- ed on the straight-line method. The ranges of estimated useful lives are: office furnishings, motor vehicles and equipment, 3-10 years; building and building improve- ments, 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 opera- tions as incurred; renewals and betterments are capital- ized. The cost of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in operations. F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED Intangibles resulting from acquisitions repre- sent the excess of cost of the investments over the fair- market values of the underlying net assets at the dates of investment. All intangibles are being amortized on the straight-line method, over five to thirty years. The carrying value of intangible assets periodically is reviewed by the Company, and impairments are recognized when the expected undiscounted future operating cash flows derived from such intangible assets are less than their carrying value. G. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recog- nized in income in the period that includes the enactment date. SFAS 109 supersedes Statement of Financial Ac- counting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"). Effective April 1, 1993, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 was not material to the Company's consolidated results of operations or financial position. Prior-year financial statements have not been restated to apply the provisions of SFAS 109. Until March 31, 1993, the Company used the asset and liability method of accounting for income taxes, as set forth in SFAS 96. Under SFAS 96, deferred income taxes are recog- nized by applying statutory tax rates to the difference between the financial statement carrying amounts and tax bases of assets and liabilities. The statutory tax rates applied are those applicable to the years in which the differences are expected to reverse. Deferred tax ex- pense represents the change in the liability for deferred taxes from year to year. H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). The Company adopted SFAS 106 during the first quarter of fiscal 1994, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. I. POSTEMPLOYMENT BENEFITS In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). The Company adopted SFAS 112 during the first quarter of fiscal 1995, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. J. EARNINGS PER SHARE Earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of Class A and Class B Common Stock outstanding during each period. For the six month period ended September 30, 1995 and in fiscal 1995, the computation of earnings per share included approximately 171,000 and 123,000 shares, respectively, from the assumed exercise of dilutive stock options computed using the treasury stock method. Options outstanding to purchase shares of common stock are not included in the computation of earnings per share for fiscal 1994 and 1993 or for the six month period ended September 30, 1994, because their effect was not material. For the six month period ended September 30, 1995, the computation of fully diluted earnings per share included approximately 25,000 shares from the assumed conversion of the Company's 9% Senior Subordinated Convertible Debentures due 2003. Additional shares assumed to be outstanding applicable to the Company's Convertible Subordinated Debentures due 1998 (the "1998 Debentures") were excluded from these computa- tions for all periods presented, as their effect on earnings per share was antidilutive. NOTE 2. ACCOUNTS RECEIVABLE The component elements of accounts receivable are as follows: March 31, 1995 1994 U.S. Government: Amounts Billed . . . . . $ 5,885,000 $ 5,746,000 Recoverable Costs and Ac- crued Profit on Progress Completed, Not Billed . . . . . . . . . 7,264,000 5,374,000 13,149,000 11,120,000 Other U.S. Defense Contracts: Amounts Billed . . . . . 1,418,000 2,981,000 Recoverable Costs and Ac- crued Profit on Progress Completed, Not Billed . . . 639,000 537,000 2,057,000 3,518,000 Other Amounts Billed . . 2,226,000 900,000 Total . . . . . . . . . . $ 17,432,000 $ 15,538,000 Generally, no accounts receivable arise from retainage provisions in contracts. The Company receives progress payments on certain contracts from the U.S. Government of between 80-100% of allowable costs in- curred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final accep- tance of the product. In addition, the Company may bill based upon units delivered. NOTE 3. INVENTORIES Inventories are summarized as follows: March 31, September 30, 1995 1994 1995 (unaudited) Work-in-Process . . . $ 23,017,000 $ 14,639,000 $34,831,000 Raw Material . . . . 2,573,000 2,917,000 3,301,000 25,590,000 17,556,000 38,132,000 Less Progress Payments. . 13,866,000 12,514,000 22,638,000 Total . . . . . . . . $ 11,724,000 $ 5,042,000 $15,494,000 General and administrative costs included in work- in-process were $6,584,000 and $3,753,000 at March 31, 1995 and 1994 and $9,385,000 at September 30, 1995 (unaudited), respectively. General and administrative costs included in costs and expenses amounted to $17,681,000, $16,896,000 and $14,028,000 in fiscal 1995, 1994 and 1993, respectively. Included in those amounts are expenditures for Company- sponsored independent research and development, amounting to approximately $795,000, $537,000 and $470,000 in fiscal 1995, 1994 and 1993, respectively. NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1995 and 1994 are summarized as follows: March 31, 1995 1994 Land . . . . . . . . . . $ 1,350,000 $ 1,350,000 Building and Building Improvements . . . . . . 2,384,000 2,289,000 Office Furnishings and Equipment . . . . . . . . 3,621,000 3,754,000 Laboratory and Production Equipment . . . . . . . . 15,639,000 14,457,000 Motor Vehicles . . . . . 235,000 389,000 Computer Equipment . . . 7,246,000 7,323,000 Leasehold Improvements . 3,186,000 2,620,000 Total . . . . . . . . . . $33,661,000 $32,182,000 Depreciation and amortization of plant and equipment amounted to $1,833,000, $2,061,000 and $2,748,000 in fiscal 1995, 1994 and 1993, respectively. NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The component elements of accounts payable and accrued expenses are as follows: March 31, 1995 1994 Payrolls, Including Payroll Taxes .. $ 648,000 $ 1,753,000 Holiday and Vacation Pay . . . . . . 1,102,000 849,000 Income Taxes Payable . . 1,821,000 1,917,000 Losses and Future Costs Accrued on Uncompleted Contracts . . 4,555,000 3,214,000 Other . . . . . . . . . . 3,897,000 4,101,000 12,023,000 11,834,000 Accounts Payable . . . . 7,966,000 4,307,000 Total . . . . . . . . . . $19,989,000 $16,141,000 NOTE 6. LONG-TERM DEBT A summary of long-term debt is as follows: March 31, 1995 1994 Convertible Subordinated Debentures, Due 1998 . . $ 12,209,000 $ 14,889,000 Industrial Revenue Bonds, Due 1998 . . . . . . . . 1,895,000 2,095,000 Other Obligations . . . . 120,000 195,000 14,224,000 17,179,000 Less Current Installments of Long-Term Debt . . . . 2,492,000 2,664,000 Total . . . . . . . . . . $ 11,732,000 $ 14,515,000 The 1998 Debentures bear interest at a rate of 81/2% per annum and are convertible at their face amount any time prior to maturity into shares of Class B Common Stock, unless previously redeemed, at a conversion price of $15.00 per share, subject to adjustment under certain conditions. The 1998 Debentures are redeemable at the option of the Company, in whole or in part, at face value, together with interest accrued to the redemption date. As of August 1, 1990 and on August 1 of each year thereafter, to and including August 1, 1997, the Company is required to provide for the retirement of the 1998 Debentures by mandatory redemption (the "sinking fund") in the aggregate annual principal amount of $2,500,000. As of March 31, 1995, the Company had repurchased $12,791,000 of the 1998 Debentures and has satisfied all sinking fund requirements to date. The Consolidated Statements of Earnings for fiscal years 1995, 1994 and 1993 reflect gains resulting from these repurchases of $13,000, $257,000 and $500,000, respectively. The 1998 Debentures are subordinate to the prior payment in full of the principal and interest on all senior indebtedness of the Company, which amounted to $2,015,000 at March 31, 1995. The indenture pursuant to which the 1998 Debentures were issued contains certain dividend and other restrictions. Under such provisions, the Company may not distribute dividends or purchase, redeem or otherwise acquire or retire any of its capital stock in excess of an aggregate amount which, at March 31, 1995, was approximately $4,400,000. On December 19, 1991, the Suffolk County Industrial Development Agency (the "Agency") issued variable rate demand industrial development revenue refunding bonds (the "Bonds") in the amount of $2,395,000 to refinance a prior bond issue which provided funds for the construction of the manufacturing facilities of Photronics Corp. ("Photronics"), a wholly-owned subsidiary of the Company. All property, plant and equipment acquired or constructed from the proceeds of the original bonds collateralizes the obligation, and payment of the principal and interest and premium (if any) on the Bonds is further secured by the unconditional guaranty of the Company. The Bonds are supported by an irrevocable, direct-pay letter of credit in an amount equal to the principal balance plus interest thereon for 45 days. At March 31, 1995, the contingent liability of the Company as guarantor under the letter of credit was approximately $1,930,000. The Company has collateralized the letter of credit with accounts receivable and also has agreed to certain financial covenants, including the maintenance of: (i) a certain minimum ratio of consolidated tangible net worth to total debt (the "Debt Ratio"), (ii) a certain minimum quarterly ratio of earnings before interest and taxes to interest (the "Interest Ratio"), and (iii) a certain minimum balance of billed and unbilled accounts receivable (the "Eligible Receivables"), all as defined in the related agreements. At March 31, 1995, the covenants, all of which the Company was in compliance with, required (i) a Debt Ratio of 0.6:1, (ii) an Interest Ratio of 1.5:1, and (iii) Eligible Receivables of $2,500,000. The financial covenants also require that the Company realize a certain level of profits during each quarter of fiscal 1996 in order to be in compliance. A default under the Bonds constitutes a default on the Debentures. Commencing February 1, 1992 and on the first business day of each month thereafter, interest on the Bonds is payable at that daily rate determined to be necessary under prevailing market conditions to enable the Bonds to be sold at a price equal to 100% of the principal amount thereof plus accrued interest. Such rate was 4.5% at March 31, 1995. At the option of the Company, the interest rate payable on the Bonds may be changed to a weekly or fixed rate. Commencing February 1, 1992 and until such time as the Bonds may be converted to fixed-rate obligations, the Bonds are subject to redemption, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued interest. On or after the second anniversary of a conversion, Bonds bearing interest at a fixed rate are subject to the redemption, in whole on any date or in part on any interest payment date, at the option of the Company at an annual redemption rate of 102% at the second anniversary of such conversion and diminishing by one percent each year to 100% on or after the fourth anniversary of such conversion. Commencing January 1, 1993 and on each January 1 thereafter, to and including January 1, 1998, the Bonds are subject to a schedule of mandatory sinking fund redemptions at a price equal to 100% of the principal amount of the Bonds redeemed plus accrued interest. The principal amount of the Bonds redeemed at January 1, 1995 was $200,000. Cash payments for interest during fiscal 1995, 1994 and 1993 were $1,237,000, $1,448,000 and $1,687,000, respectively. The aggregate maturities of long-term debt for the five years ending March 31, 2000 are as follows: 1996, $2,492,000; 1997, $2,637,000; 1998, $4,095,000; 1999, $5,000,000; and 2000, $0. NOTE 7. OTHER INCOME, NET Other income, net includes: Years Ended March 31, 1995 1994 1993 Interest Income $439,000 $370,000 $585,000 Royalty Income 63,000 157,000 221,000 Gain on Repurchase of Subordinated Debentures . . 13,000 257,000 500,000 Other . . . . . 19,000 50,000 (82,000) Total . . . . . $534,000 $834,000 $1,224,000 NOTE 8. INCOME TAXES Income tax expense consists of: Years Ended March 31, 1995 1994 1993 Current: Federal $ 1,498,000 $ 884,000 $ 688,000 State . 128,000 224,000 58,000 1,626,000 1,108,000 746,000 Deferred: Federal 172,000 33,000 (103,000) State . (146,000) (48,000) 72,000 26,000 (15,000) (31,000) Total . $ 1,652,000 $1,093,000 $ 715,000 Deferred income taxes at March 31, 1995 and 1994 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, 1995 and 1994 are as follows: March 31, DEFERRED TAX ASSETS: 1995 1994 State Net Operating Loss Carryforwards . . . . . . . . . . $3,977,000 $ 5,849,000 Inventory Capitalization . . . . 1,687,000 1,888,000 Costs Accrued on Uncompleted Contracts . . . . . . . . . . . . 2,627,000 2,163,000 Other . . . . . . . . . . . . . . 2,287,000 1,846,000 Total Gross Deferred Tax Assets . 10,578,000 11,746,000 Less Valuation Allowance . . . . (2,279,000) (3,575,000) Net Deferred Tax Assets . . . . . 8,299,000 8,171,000 DEFERRED TAX LIABILITIES: Depreciation and Amortization . . (5,048,000) (5,540,000) General and Administrative Costs (4,325,000) (2,740,000) Federal Impact of the State Benefits . . . . . . . . . . . . (1,136,000) (1,986,000) Other . . . . . . . . . . . . . (828,000) (917,000) Total Gross Deferred Tax Liabilities . . . . . . . . . . . (11,337,000) (11,183,000) Net Deferred Tax Liabilities . . $ (3,038,000) $ (3,012,000) 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 the deferred tax asset attributable to state net operating loss carryforwards, due to the uncertainty of future Company earnings attributable to various states and the status of applicable statutory regulations that could limit or preclude utilization of these benefits in future periods. A deferred tax asset of $1,567,000 and $1,612,000 is included in Other Current Assets in the Consolidated Balance Sheets at March 31, 1995 and 1994, respectively. Approximately $47,647,000 of state net operating loss carryforwards were available in various tax jurisdictions at March 31, 1995. Of that amount, $29,655,000 will expire between fiscal years 1997 and 2002; the remaining $17,992,000 will expire between fiscal years 2005 and 2010. A reconciliation of the statutory federal income tax rate to the effective tax rate follows: Years Ended March 31, 1995 1994 1993 Statutory Tax Rate 34% 34% 34% State Income Tax, Net of Federal Income Tax Benefit 3 4 5 Amortization of Intangible Assets . 1 2 3 Other . . . . . . . 1 -- (2) Total . . . . . . . 39% 40% 40% The provision for income taxes includes all estimated income taxes payable to federal and state governments, as applicable. Cash payments for income taxes during fiscal 1995, 1994 and 1993 amounted to $1,723,000, $311,000 and $303,000, respectively. NOTE 9. COMMON STOCK, STOCK OPTION PLANS AND EMPLOYEE BENEFIT PLANS The Company has three authorized classes of stock: A class consisting of 10,000,000 shares of Class A Common Stock, a class consisting of 20,000,000 shares of Class B Common Stock, and a class consisting of 2,000,000 shares of Preferred Stock (none of which has been issued). The holders of Class A and Class B Common Stock are entitled to one vote per share and one-tenth vote per share, respectively. On February 7, 1991, the Board of Directors (the "Board") adopted the 1991 Stock Option Plan (the "Stock Option Plan"), which authorizes the issuance of up to 600,000 shares of Class B Common Stock. The Stock Option Plan was approved by the Company's stockholders on August 8, 1991. The Stock Option Plan is the successor to the Company's 1981 Non-Qualified Stock Option Plan (the "Non- Qualified Plan") that expired on May 12, 1991 and to the 1981 Incentive Stock Option Plan (the "Incentive Plan") that expired on October 31, 1991. Under the terms of the Stock Option Plan, options to purchase shares of Class B Common Stock may be granted to key employees, directors and consultants of the Company. Options granted under the Stock Option Plan are at the discretion of the Stock Option Committee of the Board (the "Stock Option Committee") and may be incentive stock options or non- qualified stock options, except that incentive stock options may be granted only to employees. The option price is determined by the Stock Option Committee and must be a price per share which is not less than the par value per share of the Class B Common Stock, and in the case of an incentive stock option, may not be less than the fair-market value of the Class B Common Stock on the date of the grant. Options may be exercised during the exercise period, as determined by the Stock Option Committee, except that no option may be exercised within six months of its grant date, and in the case of an incentive stock option, generally, the exercise period may not exceed ten years from the date of the grant. At March 31, 1995, 286,250 shares of Class B Common Stock were reserved for future grants under the Stock Option Plan. The Non-Qualified Plan, as amended, provided for the grant of options to purchase a total of 100,000 shares of Class A Common Stock and 50,000 shares of Class B Common Stock through May 12, 1991. Under the Non-Qualified Plan, the Stock Option Committee had discretion to grant options to employees, consultants and directors of the Company. The exercise price of an option granted under the Non-Qualified Plan was the price, as determined by the Stock Option Committee, but was not less than the aggregate par value of the shares subject to the option. Options granted under the Non-Qualified Plan are exercisable in accordance with the terms of the grant during a specified period, which did not exceed five years. Upon the expiration of the Non-Qualified Plan, a total of 87,600 shares of Class A Common Stock and a total of 10,300 shares of Class B Common Stock remained ungranted. The Incentive Plan, as amended, provided for the grant of options to purchase a total of 150,000 shares of Class A Common Stock and 475,000 shares of Class B Common Stock through October 31, 1991. Under the Incentive Plan, options were granted at the discretion of the Stock Option Committee only to employees of the Company. Options are exercisable in accordance with the terms of the grant within a specified period, which may not exceed ten years. Each option granted provided for the purchase of a specified number of shares of Class A Common Stock or Class B Common Stock, or both, at an exercise price not less than the fair-market value of the shares subject to the option on the date of grant. Upon the expiration of the Incentive Plan, options representing a total of 23,665 shares of Class A Common Stock and a total of 269,832 shares of Class B Common Stock remained ungranted. Under the Stock Option Plan, pursuant to the terms of exercise under the grant, the excess of the fair- market value of shares under option at the date of grant over the option price may be charged to unamortized restricted stock compensation or to earnings as compensation expense and credited to additional paid-in capital. The unamortized restricted stock compensation, if any, is charged to expense as the options become exercisable, in accordance with the terms of the grant. Under the Non-Qualified Plan, pursuant to the restriction periods on the exercise of options as stated in the stock option agreements, the excess of the fair-market value of shares under option at the date of grant over the option price was charged to unamortized restricted stock compensation and credited to additional paid-in capital. The unamortized restricted stock compensation is charged to expense as services are performed during the periods of restriction. As restricted options expire, the amount of unamortized restricted stock compensation relating to the options is credited and eliminated through a charge to additional paid-in capital. In addition, the total amount of compensation previously charged to expense is credited. The amount of compensation charged (credited) to earnings for all plans in fiscal 1995, 1994 and 1993 was $106,000, $27,000 and ($17,000), respectively. When stock is issued on exercise of options, the par value of each share ($.01) is credited to common stock and the remainder of the option price is credited to paid-in capital. No charge is made to operations. A summary of all transactions under the Stock Option, Incentive and Non-Qualified Plans follows: Number of Shares of Option Number of Class A Price Shares of Option Common per Class B Price per Stock Share Common Stock Share OUTSTANDING AT MARCH 31, 1992 (of Which 16,250 Shares and 77,238 Shares of Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 205,450 $ .01-4.75 Granted . . -- -- 10,000 $ .01 Exercised . -- -- (5,000) $ .01 Expired . . -- -- (35,600) $ .01-4.75 OUTSTANDING AT MARCH 31, 1993 (of Which 32,500 Shares and 111,925 Shares of Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 174,850 $ .01-4.75 Granted . . -- -- 142,750 $ .01-3.63 Exercised . -- -- (11,000) $ .01-2.25 Expired . . -- -- (32,250) $2.13-2.25 OUTSTANDING AT MARCH 31, 1994 (of Which 48,750 Shares and 111,163 Shares of Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 274,350 $ .01-4.75 Granted . . -- -- 150,000 $ .01-4.95 Exercised . (25,000) $2.61 (57,725) $ .01-3.63 Expired . . -- -- (17,000) $ .01-3.63 OUTSTANDING AT MARCH 31, 1995 (of Which 40,000 Shares and 145,425 Shares of Class A and Class B, Respectively, Were Exercisable) 40,000 $2.61 349,625 $ .01-4.95 The Company also maintains defined contribution plans covering substantially all full-time eligible employees. The Company's contributions to these plans, which are discretionary, for fiscal 1995 and 1994 amounted to $365,000 and $203,000, respectively. The Company did not make any contributions to these plans during fiscal 1993. NOTE 10. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS At March 31, 1995, the Company was party to various noncancellable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: 1996 $1,909,000 1997 1,555,000 1998 1,133,000 1999 811,000 2000 695,000 Thereafter 72,000 Total $6,175,000 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 $2,490,000, $1,703,000 and $1,492,000 in fiscal 1995, 1994 and 1993, respectively. In April 1984, the Board of Directors approved a lease agreement with LDR Realty Co. (wholly owned by the Chairman of the Board of Directors and former President) for additional office and manufacturing space for the Company. The LDR lease, which expired on May 31, 1988, was renegotiated for a ten-year term commencing June 1, 1988 at a net annual rental of $233,000. The Company is required to pay all real-estate taxes, maintenance and repairs to the facility. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the "Gross Agreement") and a Stock Purchase Agreement (the "Stock Purchase Agreement") with David E. Gross, who retired as President and Chief Technical Officer of the Company on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross will receive a total of $600,000 as compensation for his services under a five- year consulting agreement with the Company and a total of $750,000 as consideration for a five-year non-compete arrangement. The payments will be charged to expense over the term of the Gross Agreement as services are performed and obligations are fulfilled by Mr. Gross. He will also receive, at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period as deferred compensation. The net present value of the payments to be made to Mr. Gross, pursuant to the deferred compensation portion of the Gross Agreement, approximated the amount of the Company's previous deferred compensation arrangement with Mr. Gross. On July 28, 1994, pursuant to the Stock Purchase Agreement, the Company purchased 659,220 shares of Class A Common Stock and 45,179 shares of Class B Common Stock owned by Mr. Gross for $4.125 and $4.00 per share, respectively, totaling approximately $2.9 million in cash (the "Buy- back"). The Stock Purchase Agreement also includes certain provisions regarding the sale and voting of Mr. Gross' remaining shares of stock in the Company, as well as the adjustment which would have been made in the purchase price paid to Mr. Gross pursuant to the Buy-back should a change in control of the Company occur within three years from the date of the Stock Purchase Agreement. On October 18, 1994, the Company filed a Registration Statement on Form S-2, and on November 10, 1994, the Company filed Amendment No. 1 to such Registration Statement (the "Registration Statement") with the Securities and Exchange Commission for the purpose of selling shares of its common stock purchased by the Company in the Buy-back. Pursuant to the Registration Statement, the Company offered to sell 650,000 shares of its Class A Common Stock at a purchase price of between $3.92 per share and $4.33 per share and 45,000 shares of its Class B Common Stock at a purchase price of between $3.80 per share and $4.20 per share. As of March 31, 1995, all shares of Class A and Class B Common Stock offered for sale under the Registration Statement had been sold at a price of $4.125 per share and $4.00 per share, respectively, totaling approximately $2.9 million. As of March 31, 1995, the Company was in the process of finalizing an Employment, Non-Competition and Termination Agreement (the "Newman Agreement") between the Company and Leonard Newman, the Chairman of the Board and Secretary of the Company. Pursuant to the Newman Agreement, it is expected that Mr. Newman will receive certain compensation from the Company over a five-year period for consulting services and a non-compete arrangement. In addition, Mr. Newman will receive certain retirement benefits payable over a ten-year period at the conclusion of such initial five-year period. Results of operations for fiscal 1995 reflect a charge of $1.5 million representing the estimated net present value of the Company's obligation under the Newman Agreement. The corresponding amount was included in Other Liabilities in the Consolidated Balance Sheet at March 31, 1995 as an addition to the accrual which had been established to cover the Company's liability to Mr. Newman under a previous deferred compensation arrangement. The Company is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Since substantially all of the Company's revenues are derived from contracts or subcontracts with the U.S. Government, future revenues and profits will be dependent upon continued contract awards, Company performance and volume of Government business. The books and records of the Company are subject to audit and post- award review by the Defense Contract Audit Agency. NOTE 11. BUSINESS COMBINATIONS On October 1, 1993, the Company acquired (through TAS Acquisition Corp., a wholly-owned subsidiary) a 95.7% equity interest in Technology Applications and Service Company ("TAS"), a Maryland corporation, pursuant to a Stock Purchase Agreement (the "Agreement") dated as of August 6, 1993. Under the terms of the Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and outstanding shares of common stock, par value $.01 per share, of TAS. TAS, headquartered in Gaithersburg, Maryland, was a privately held company incorporated in 1991. It applies state-of- the-art technology to produce emulators that can replace display consoles and computer peripherals used by the military. TAS also produces simulators, stimulators and training products used primarily for testing and training at military land-based sites, as well as provides technical services to both Department of Defense and commercial customers. On September 30, 1993, the Company, in anticipation of the acquisition, advanced $1,800,000 to TAS pursuant to a demand promissory note. Such advance was converted to an intercompany liability on the date of the acquisition and is eliminated in consolidation. On November 1, 1993, Articles of Merger were filed in order to merge TAS into TAS Acquisition Corp. The name TAS Acquisition Corp. was changed to Technology Applications & Service Company ("TAS"). The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $405,000 and is being amortized on a straight-line basis over 30 years, or $14,000 annually. The Consolidated Statements of Earnings include the operations of TAS from October 1, 1993. The following unaudited pro forma financial information shows the results of operations for the years ended March 31, 1994 and 1993 as though the acquisition of TAS had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma calculations include: the amortization of the excess of cost over the estimated fair value of net assets acquired; the effect of a reduction in interest expense arising from the assumed repayment by TAS prior to the acquisition date of its outstanding borrowings under a bank line of credit; the effect of a reduction in interest income from the assumed decrease in cash associated with the $1,800,000 advanced to TAS prior to the acquisition and the funding of the TAS operating loss for the periods presented; and the adjustment to income taxes (benefit) to reflect the effective income tax (benefit) rate assumed for the Company and TAS on a combined basis for each pro forma period presented: Years Ended March 31, 1994 1993 Revenues . . . . . . . . . . . $ 65,944,000 $ 56,652,000 Net Earnings (Loss) before Extraordinary Item . . . . . . $ 1,291,000 $ (2,364,000) Net Earnings (Loss) per Share before Extraordinary Item . . . $ .24 $ (.44) The unaudited pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisition been made at the beginning of the period, or of the future results of operations of the combined companies. On December 13, 1993, pursuant to a Joint Venture Agreement dated November 3, 1993 and a Partnership Agreement dated December 13, 1993, by and between DRS Systems Management Corporation, a wholly- owned subsidiary of the Company, and Laurel Technologies, Inc. ("Laurel") of Johnstown, Pennsylvania, the Company entered into a partnership with Laurel (the "Partnership") for the purposes of electronic cable and harness manufacturing, military-quality circuit card assembly and other related activities. The Company's contribution to the Partnership consisted of cash, notes and equipment valued at approximately $600,000, representing an 80% controlling interest in the Partnership. As a result, the financial position of the Partnership has been consolidated with that of the Company's, and the Consolidated Statements of Earnings include the operations of Laurel from December 13, 1993. The related minority interest in the Partnership has been included in Other Liabilities and Other Income, Net, respectively, in the Company's consolidated financial statements for the periods ended March 31, 1995 and 1994. The Company also made one other asset acquisition in December 1993 which was not significant to the Company's consolidated financial statements. On November 17, 1994, Precision Echo, Inc., a wholly-owned subsidiary of the Company, acquired, through its wholly-owned subsidiary ("Precision Echo"), the net assets of Ahead Technology Corporation ("Ahead"), pursuant to an Asset Purchase Agreement dated October 28, 1994. Under the terms of the Asset Purchase Agreement, Precision Echo paid, on the date of acquisition, approximately $1,100,000 for the net assets of Ahead. In addition, Precision Echo entered into a Covenant and Agreement Not to Compete ("Covenant"), dated October 28, 1994, with the chairman of the board of Ahead. Under the terms of the Covenant, the total cash consideration to be paid by Precision Echo consisted of approximately $400,000 payable at the acquisition date, and an additional $540,000 payable in equal monthly installments over a period of five years from the acquisition date. Ahead, located in Los Gatos, California, designs and manufactures a variety of consumable magnetic head products used in the production of computer disk drives. It products include burnish heads, glide heads and specialty test heads. The acquisition has been accounted for using the purchase method of accounting and, therefore, Ahead's financial statements are included in the consolidated financial statements of the Company from the date of acquisition. The excess of cost over the estimated fair value of net assets acquired was approximately $940,000 and will be amortized on a straight-line basis over five years, or approximately $188,000 annually. The financial position and results of operations of Ahead were not significant to those of the Company's at the date of acquisition. NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables set forth unaudited quarterly financial information for the third and fourth quarters of fiscal 1994, each quarter of fiscal 1995 and the first and second quarters of fiscal 1996: First Quarter Second Quarter 1996 1995 1996 1995 Revenues . $ 17,279,000 $ 16,012,000 $ 22,786,000 $15,650,000 Operating Income . . $ 1,314,000 $ 1,076,000 $ 1,844,000 $ 1,180,000 Income Taxes . . . $ 420,000 $ 382,000 $ 584,000 $ 335,000 Net Earnings $ 656,000 $ 508,000 $ 915,000 $ 570,000 Net Earnings per Share . $ .12 $ .10 $ .16 $ .12 Third Quarter Fourth Quarter 1995 1994 1995 1994 Revenues . . $ 15,742,000 $ 15,101,000 $ 22,526,000 $22,451,000 Operating Income . . . $ 1,005,000 $ 728,000 $ 1,833,000 $ 1,275,000 Income Taxes . . . . $ 425,000 $ 192,000 $ 510,000 $ 413,000 Net Earnings $ 634,000 $ 266,000 $ 892,000 $ 617,000 Net Earnings per Share . . $ .13 $ .05 $ .16 $ .12 Primary and fully diluted net earnings per share amounts shown above are the same for each of the periods presented. NOTE 13. SUBSEQUENT EVENTS (UNAUDITED) In July 1995, the Company, through its subsidiary OMI Acquisition Corp. ("OMI"), acquired substantially all of the assets of Opto Mechanik, Inc., located in Melbourne, Florida. OMI designs and manufactures electro-optical sighting and targeting systems used primarily in military fire-control devices and in various weapons systems. On September 29, 1995 (the "Debenture Closing Date"), the Company issued $20,000,000 in aggregate principal amount of the Company's 9% Senior Subordinated Convertible Debentures due 2003 (the "Senior Subordinated Convertible Debentures") pursuant to a private placement. Net proceeds from the private placement of these Senior Subordinated Convertible Debentures were approximately $19,000,000. On November 3, 1995, the Company issued an additional $5,000,000 in aggregate principal amount of the Senior Subordinated Convertible Debentures, upon exercise of the over-allotment option pursuant to the Purchase Agreement between the Company and Forum Capital Markets L.P. ("Forum") , dated September 22, 1995. Net proceeds from the exercise of the over-allotment option were approximately $4,750,000. Pursuant to the related Registration Rights Agreement dated September 22, 1995 between the Company and Forum, acting on behalf of holders of the Senior Subordinated Convertible Debentures (the "Registration Rights Agreement"), the Company has agreed to file, within ninety (90) days after the Debenture Closing Date, a shelf registration statement relating to the Senior Subordinated Convertible Debentures and the shares of Class A Common Stock which are issuable from time to time upon conversion of the Senior Subordinated Convertible Debentures, and to cause the shelf registration statement to become effective within one hundred fifty (150) days after the Debenture Closing Date. In addition, the Company has agreed to use its reasonable best efforts to keep the shelf registration statement effective until at least the third anniversary of the issuance of the Senior Subordinated Convertible Debentures. In connection with these transactions, the Company expects to incur approximately $500,000 of professional fees and other costs. These costs, together with Forum's commissions in connection with the private placement of the Senior Subordinated Convertible Debentures, will be amortized ratably through the maturity date of the Senior Subordinated Convertible Debentures. The Company's Bonds (see Note 6) are supported by an irrevocable, direct-pay letter of credit in an amount equal to the principal balance plus interest thereon for 45 days. At September 30, 1995, the contingent liability of the Company as guarantor under the letter of credit was approximately $1,930,000. The Company has collateralized the letter of credit with accounts receivable and has also agreed to certain financial covenants, including the maintenance of: (i) a certain minimum ratio of consolidated tangible net worth to total debt (the "Debt Ratio"), (ii) a certain minimum quarterly ratio of earnings before interest and taxes to interest (the "Interest Ratio"), and (iii) a certain minimum balance of billed and unbilled accounts receivable ("Eligible Receivables"). At September 30, 1995, the covenants required: (i) a Debt Ratio of 0.6:1, (ii) an Interest Ratio of 1.5:1 and (iii) Eligible Receivables of $2,500,000. As a result of the issuance of $20,000,000 aggregate principal amount of the Senior Subordinated Convertible Debentures on September 29, 1995, the Debt Ratio at September 30, 1995 was 0.4:1. The Company has obtained a waiver, renewable annually, from the bank of the required debt ratio and is in compliance with all covenants under the letter of credit. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR $25,000,000 REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DIAGNOSTIC/RETRIEVAL THE COMPANY OR ANY UNDERWRITER. SYSTEMS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH 9% SENIOR SUBORDINATED IT RELATES OR AN OFFER TO ANY CONVERTIBLE PERSON IN ANY JURISDICTION DEBENTURES DUE 2003 WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY _______________ IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE PROSPECTUS COMPANY SINCE THE DATE HEREOF. ______________ _____________ TABLE OF CONTENTS Page Available Information . . . . 2 Incorporation of Certain Documents by Reference . . . . . . . 2 Prospectus Summary . . . . . 3 Risk Factors . . . . . . . . 7 The Company . . . . . . . . 11 Use of Proceeds . . . . . . 13 Capitalization . . . . . . 13 Market Prices of Capital Stock . . . . . . . . . 14 Dividend Policy . . . . . . 14 Selected Consolidated Financial Data . . . . . . . . . . . 15 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Business . . . . . . . . . 26 Management . . . . . . . . 38 Description of the Debentures . . . . . . . 40 Description of 1998 Debentures . . . . . . . 61 Description of Capital Stock . . . . . . . . . . 62 Plan of Distribution . . . 64 Selling Security Holders . 66 Legal Matters . . . . . . . 68 Experts . . . . . . . . . . 68 , 1995 Index to Financial Statements F-1 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. Other Expenses of Issuance and Distribution. The following table sets forth all expenses (other than underwriting discounts and commissions) payable by the Company in connection with the sale of the Debentures and the Class A Common Stock being registered. All amounts (other than the registration fee) are estimated. Item Amount Securities and Exchange Commission registration fee $ 8,620.69 AMEX listing fee . . . . . . . . . . . * Blue Sky fees and expenses . . . . . . * Accountants' fees and expenses . . . . * Legal fees and expenses . . . . . . . * Trustee's fees . . . . . . . . . . . . * Transfer agent and registrar fees and expenses * Miscellaneous . . . . . . . . . . . . * ___________ Total . . . . . . . . . . . . . . $ * _____________________________________ * To be filed by amendment ITEM 15. Indemnification of Directors and Officers. Set forth below is a description of certain provisions of the Company's Restated Certificate of Incorporation, as amended (the "Restated Certificate of Incorporation"), the Bylaws (the "Bylaws") of the Company and the General Corporation Law of the State of Delaware, as such provisions relate to the indemnification of the directors and officers of the Company. This description is intended only as a summary and is qualified in its entirety by reference to the Restated Certificate of Incorporation, Bylaws, and the General Corporation Law of the State of Delaware. The Company's Restated Certificate of Incorporation provides that the Company shall, to the full extent permitted by Sections 102 and 145 of the General Corporation Law of the State of Delaware, as amended from time to time, indemnify all persons whom it may indemnify pursuant thereto and eliminates the personal liability of its directors to the full extent permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as amended from time to time. Section 145 of the General Corporation Law of the State of Delaware permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties, if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable for negligence or misconduct in the performance of his respective duties to the corporation, although the court in which the action or suit was brought may determine upon application that the defendant officers or directors are reasonably entitled to indemnity for such expenses despite such adjudication of liability. Section 102(b)(7) of the General Corporation Law of the State of Delaware provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the ability of a director for any act or omission occurring prior to the date when such provision becomes effective. ITEM 16. Exhibits and Financial Statement Schedules. (a) Certain of the following exhibits, designated with an asterisk (*), are filed herewith and certain of the following exhibits, designated with two asterisks (**), are to be filed by amendment. 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 Description No. *1.1 - Purchase Agreement, dated September 22, 1995 between the Company and Forum Capital Markets L.P. 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 - 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] 3.5 - 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] *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 *4.2 - Form of 9% Senior Subordinated Convertible Debenture Due 2003 (included as part of Exhibit 4.1) *4.3 - Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P. 4.4 - Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Company, as Trustee [Form 10-Q, quarter ended September 30, 1983, File No. 1-8533, Exhibit 4.2] 4.5 - Indenture of Trust, dated December 1, 1991, among Suffolk County Industrial Development Agency, Manufacturers and Traders Trust Company, as Trustee and certain bondholders [Form 10-K, fiscal year ended March 31, 1992, File No. 1- 8533, Exhibit 4.2] 4.6 - Reimbursement Agreement, dated December 1, 1991, among Photronics Corp., the Company and Morgan Guaranty Trust Company of New York [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.3] **5.1 - Opinion of Skadden, Arps, Slate, Meagher & Flom 10.1 - Stock Purchase Agreement, dated as of August 6, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(1)] 10.2 - Waiver Letter, dated as of September 30, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(2)] 10.3 - Joint Venture Agreement, dated as of November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] 10.4 - Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10- Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 - Partnership Agreement, dated December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 10.6 - Lease, dated June 28, 1979, between the Company and J.L. Williams & Co., Inc. ("Williams") [Registration Statement No. 2- 70062-NY, Exhibit 9(b)(4)(i)] 10.7 - Lease, dated as of June 1, 1983, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1984, File No. 1- 8533, Exhibit 10.7] 10.8 - Renegotiated Lease, dated June 1, 1988, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1989, File No. 1- 8533, Exhibit 10.8] 10.9 - Lease, dated July 20, 1988, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1991, File No. 1- 8533, Exhibit 10.9] 10.10 - Amendment to Lease, dated July 1, 1993, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.12] **10.11 - Second Amendment to Lease, dated October 17, 1995 between Precision Echo, Inc. and Bay 511 Corporation 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.-8533, Exhibit 10.18] 10.20 - Memorandum of Understanding, dated March 23, 1995, between Laurel Technologies and West Virginia Air Center [Form 10-K, fiscal year ended March 31, 1995, File No. 1- 8533, Exhibit 10.19] 10.21 - 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.22 - Contract No. N00024-92-C-6102, dated September 28, 1992, between the Company and the Navy [Form 10- K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.45] 10.23 - Modification No. P00005, dated August 24, 1994, to Contract No. N00024-92-C-6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.22] 10.24 - Modification No. P00006, dated September 7, 1994, to Contract No. N00024-92-C6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.23] 10.25 - Contract No. N00024-92-C-6308, dated April 1, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.46] 10.26 - Modification No. P00001, dated July 30, 1992, to Contract No. N00024- 92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1- 8533, Exhibit 10.47] 10.27 - Modification No. P00002, dated September 25, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.48] 10.28 - Modification No. P00003, dated October 22, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.49] 10.29 - Modification No. P00004, dated February 24, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.50] 10.30 - Modification No. P00005, dated June 11, 1993, to Contract No. N00024- 92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.26] 10.31 - Modification No. P00006, dated March 26, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.51] 10.32 - Modification No. P00007, dated May 3, 1993, to Contract No. N00024-92- C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.28] 10.33 - Modification No. PZ0008, dated June 11, 1993, to Contract No. N00024- 92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.29] 10.34 - Contract No. N39998-94-C-2228, dated November 30, 1993, between the Company and the Navy [Form 10- K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.30] 10.35 - Order No. 87KA-SG-51484, dated December 10, 1993, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.31] 10.36 - Purchase Order Change Notice Order No. 87KA-SX-51484-P, dated April 21, 1994, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.35] 10.37 - Letter Subcontract No. 483901(L), dated February 18, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Government Systems Group [Form 10- K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.32] 10.38 - Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10- K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.37] 10.39 - Contract No. N00019-90-G-0051, dated March 1, 1990, between Precision Echo, Inc. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.35] 10.40 - Amendment 1A, dated February 26, 1992, to Contract No. N00019-90-G- 0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.36] 10.41 - Amendment 1B, dated April 23, 1993, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.37] 10.42 - Contract No. N00019-93-C-0041, dated January 29, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.54] 10.43 - Modification No. P00001, dated March 29, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.39] 10.44 - Modification No. PZ0002, dated November 12, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.40] 10.45 - Modification No. P00003, dated February 1, 1994, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.41] **10.46 - Modification No. P00004, dated January 29, 1993, to Contract No. N00019-93-C-0041 [P] **10.47 - Modification No. P00005, dated January 29, 1993, to Contract No. N00019-93-C-0041 [P] 10.48 - Contract No. N00019-93-C-0202, dated August 30, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.42] 10.49 - Modification No. P00001, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.43] 10.50 - Modification No. P00002, dated April 29, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.44] 10.51 - Modification No. P00003, dated August 9, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.55] 10.52 - Modification No. P00004, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.56] **10.53 - Modification No. P00005, dated August 30, 1993, to Contract No. N00019-93-C-0202 [P] **10.54 - Modification No. P00006, dated August 30, 1993, to Contract No. N00019-93-C-0202 [P] 10.55 - Contract No. N00024-93-C-5204, dated November 18, 1992, between Technology Applications and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.53] 10.56 - Modification No. P00001, dated May 6, 1993, to Contract No. N00024-93- C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.54] 10.57 - Modification No. P00002, dated August 24, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.55] 10.58 - Modification No. PZ0003, dated September 30, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.56] 10.59 - Contract No. N00174-94-D-0006, dated February 17, 1994, between Technology Applications & Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.57] 10.60 - Modification No. P00001, dated March 7, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.58] 10.61 - Modification No. P00003, dated May 19, 1994, to Contract No. N00174- 94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.59] 10.62 - Purchase Order No. N538010, dated March 28, 1994, between Laurel Technologies, Inc. and Short Brothers PLC [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.60] 10.63 - Purchase Order No. 2285, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.73] 10.64 - Amendment No. 1, dated December 1, 1994, to Purchase Order No. 2285 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.74] 10.65 - Purchase Order No. 2286, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.75] 10.66 - Purchase Order No. CN74325, dated December 14, 1994, between Precision Echo and Lockheed Aeronautical Systems Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.76] **10.67 - Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [P] **10.68 - Amendment, dated November 7, 1995, to Purchase Order No. CN74325 between Precision Echo and Lockheed Aeronautical Systems Company [P] 10.69 - Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.70 - Contract No. N00019-95-C-0057, dated December 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.71 - 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] 10.72 - 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] 10.73 - 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] 10.74 - Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] **10.75 - Contract No. N00421-95-D-1067, dated September 30, 1995, between the Company and the Navy [P] **10.76 - Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests **10.77 - Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army [P] **10.78 - Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. **10.79 - Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [P] **10.80 - Amendment to Contract No. 2025, dated August 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [P] **10.81 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties **10.82 - Lease, dated August, 1995, by and between OMI Acquisition Corp and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties **10.83 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties **10.84 - 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 **10.85 - Master Lease, dated August 31, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. **10.86 - Schedule No. 001 to Lease, dated September 1, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. **10.87 - Schedule No. 002 to Lease, dated October 20, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. 11.1 - Computation of earnings (loss) per share [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 11] 13.1 - 1994 Annual Report to Stockholders (for the fiscal year ended March 31, 1994). Except for the portions of the Annual Report which are incorporated expressly by reference in the Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, this Annual Report was furnished for the information of the Commission and is not to be deemed "filed" as part of the report [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 13] 22.1 - List of subsidiaries of the Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 21] *23.1 - Accountants' Consent and Report on Schedules **23.2 - Consent of Skadden, Arps, Slate, Meagher & Flom, contained in their opinion filed as Exhibit 5.1 *24.1 - Power of Attorney (included in signature page to Registration Statement) *25.1 - Form T-1 Statement of Eligibility and Qualification of the Trustee under the Trust Indenture Act of 1939 ________________________ * Filed herewith. ** To be filed by amendment. (b) Financial Statements: Financial Statements filed as part of this Registration Statement are listed in the Index to Financial Statements on page F-1. (c) Financial Statement Schedules: Consolidated Financial Statement Schedules as part of this Registration Statement are listed in the Index to the Consolidated Financial Schedules on page S-1. ITEM 17. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post- effective amendment any of the securities being registered which remain unsold as of the termination of the offering. The undersigned Registrant hereby undertakes that: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES AND POWER OF ATTORNEY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON, NOVEMBER 30, 1995. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: /s/Mark S. Newman _________________________________ Mark S. Newman Chairman of the Board, President, and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark S. Newman and Nancy R. Pitek his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents each acting alone, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. Signature Title Date /s/Mark S. Newman President, Chief Executive November 30, 1995 Mark S. Newman Officer, Chairman of the Board and Director (Principal Executive Officer) /s/Nancy R. Pitek Controller, Treasurer November 30, 1995 Nancy R. Pitek and Secretary (Principal Financial Officer and Principal Accounting Officer) /s/Stuart F. Platt Vice President, President of November 30, 1995 Stuart F. Platt Precision Echo and Director /s/Leonard Newman Director and Chairman November 30, 1995 Leonard Newman Emeritus /s/Theodore Cohn Director November 30, 1995 Theodore Cohn /s/Donald C. Fraser Director November 30, 1995 Donald C. Fraser /s/Mark N. Kaplan Director November 30, 1995 Mark N. Kaplan /s/Jack Rachleff Director November 30, 1995 Jack Rachleff DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Years ended March 31, 1995, 1994 and 1993 Page Schedule II. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . S-2 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Schedule II. Valuation and Qualifying Accounts Years Ended March 31, 1995, 1994 and 1993 - ------------------------------------------------------------------------------------------------------------------------------- Col. A. Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------------------------- Description Balance at Additions (a) Deductions (b) Balance Beginning of ----------------------------- ---------------------------------- at End of Period Period (1) (2) (1) (2) Charged to Charged to Credited to Credited to Costs and Other Cost and Other Expenses Accounts - Expenses Accounts - Describe Describe Inventory Reserve Year ended March 31, 1995 $ 2,409,000 $ 439,000 $ - $ 83,000(d) $1,365,000(c) $1,400,000 Year ended March 31, 1994 $ 2,620,000 $ 674,000 $ - $ 885,000(e) $ - $2,409,000 Year ended March 31, 1993 $ 8,200,000 $2,277,000 $ 33,000(c) $7,648,000(d) $ 242,000(c) $2,620,000 Losses & Future Costs Accrued on Uncompleted Contracts Year ended March 31, 1995 $ 3,214,000 $2,168,000 $ - $ 291,000 $ 536,000(c) $4,555,000 Year ended March 31, 1994 $ 3,722,000 $1,735,000 $ 254,000(g) $2,497,000(f) $ - $3,214,000 Year ended March 31, 1993 $ 3,835,000 $2,665,000 $ 242,000(c) $2,987,000 $ 33,000(c) $3,722,000 OTHER Year ended March 31, 1995 $ 290,000 $ - $ - $ - $ - $ 290,000 Year ended March 31, 1994 $ 290,000 $ - $ - $ - $ - $ 290,000 Year ended March 31, 1993 $ 290,000 $ - $ - $ - $ - $ 290,000 (a) Represents, on a full-year basis, net credits to reserve accounts. (b) Represents, on a full-year basis, net charges to reserve accounts. (c) Represents amounts reclassified. (d) Represents amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (e) Includes $801,000 representing amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (f) Includes $2,302,000 representing amounts credited to costs and expenses associated with the corresponding write-off of related inventory costs. (g) Includes an increase to reserves of $111,000 as a result of business combinations and a charge of $143,000 to revenues.
EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*), are filed herewith and certain of the following exhibits, designated with two asterisks (**), are to be filed by amendment. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits. Page No. Exhibit Description in This No. Filing *1.1 - Purchase Agreement, dated September 22, 1995 between the Company and Forum Capital Markets L.P. . . . . 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 - 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] 3.5 - 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] *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 . *4.2 - Form of 9% Senior Subordinated Convertible Debenture Due 2003 (included as part of Exhibit 4.1) *4.3 - Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P. . . . . . . . 4.4 - Indenture, dated as of August 1, 1983, between the Company and Bankers Trust Company, as Trustee [Form 10-Q, quarter ended September 30, 1983, File No. 1-8533, Exhibit 4.2] 4.5 - Indenture of Trust, dated December 1, 1991, among Suffolk County Industrial Development Agency, Manufacturers and Traders Trust Company, as Trustee and certain bondholders [Form 10-K, fiscal year ended March 31, 1992, File No. 1- 8533, Exhibit 4.2] 4.6 - Reimbursement Agreement, dated December 1, 1991, among Photronics Corp., the Company and Morgan Guaranty Trust Company of New York [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.3] **5.1 - Opinion of Skadden, Arps, Slate, Meagher & Flom . . . . . . . . . . 10.1 - Stock Purchase Agreement, dated as of August 6, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(1)] 10.2 - Waiver Letter, dated as of September 30, 1993, among TAS Acquisition Corp., Technology Applications and Service Company, Paul G. Casner, Jr. and Terrence L. DeRosa [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(2)] 10.3 - Joint Venture Agreement, dated as of November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] 10.4 - Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10- Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 - Partnership Agreement, dated December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 10.6 - Lease, dated June 28, 1979, between the Company and J.L. Williams & Co., Inc. ("Williams") [Registration Statement No. 2- 70062-NY, Exhibit 9(b)(4)(i)] 10.7 - Lease, dated as of June 1, 1983, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1984, File No. 1- 8533, Exhibit 10.7] 10.8 - Renegotiated Lease, dated June 1, 1988, between LDR Realty Co. and the Company [Form 10-K, fiscal year ended March 31, 1989, File No. 1- 8533, Exhibit 10.8] 10.9 - Lease, dated July 20, 1988, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1991, File No. 1- 8533, Exhibit 10.9] 10.10 - Amendment to Lease, dated July 1, 1993, between Precision Echo, Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.12] **10.11 - Second Amendment to Lease, dated October 17, 1995 between Precision Echo, Inc. and Bay 511 Corporation 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.-8533, Exhibit 10.18] 10.20 - Memorandum of Understanding, dated March 23, 1995, between Laurel Technologies and West Virginia Air Center [Form 10-K, fiscal year ended March 31, 1995, File No. 1- 8533, Exhibit 10.19] 10.21 - 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.22 - Contract No. N00024-92-C-6102, dated September 28, 1992, between the Company and the Navy [Form 10- K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.45] 10.23 - Modification No. P00005, dated August 24, 1994, to Contract No. N00024-92-C-6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.22] 10.24 - Modification No. P00006, dated September 7, 1994, to Contract No. N00024-92-C6102 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.23] 10.25 - Contract No. N00024-92-C-6308, dated April 1, 1992, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.46] 10.26 - Modification No. P00001, dated July 30, 1992, to Contract No. N00024- 92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1- 8533, Exhibit 10.47] 10.27 - Modification No. P00002, dated September 25, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.48] 10.28 - Modification No. P00003, dated October 22, 1992, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.49] 10.29 - Modification No. P00004, dated February 24, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.50] 10.30 - Modification No. P00005, dated June 11, 1993, to Contract No. N00024- 92-C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.26] 10.31 - Modification No. P00006, dated March 26, 1993, to Contract No. N00024-92-C-6308 [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.51] 10.32 - Modification No. P00007, dated May 3, 1993, to Contract No. N00024-92- C-6308 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.28] 10.33 - Modification No. PZ0008, dated June 11, 1993, to Contract No. N00024- 92-C-6302 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.29] 10.34 - Contract No. N39998-94-C-2228, dated November 30, 1993, between the Company and the Navy [Form 10- K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.30] 10.35 - Order No. 87KA-SG-51484, dated December 10, 1993, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.31] 10.36 - Purchase Order Change Notice Order No. 87KA-SX-51484-P, dated April 21, 1994, under Contract No. N00024-93-G-6336, between the Company and Westinghouse Electric Corporation Oceanic Division [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.35] 10.37 - Letter Subcontract No. 483901(L), dated February 18, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Government Systems Group [Form 10- K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.32] 10.38 - Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10- K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.37] 10.39 - Contract No. N00019-90-G-0051, dated March 1, 1990, between Precision Echo, Inc. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.35] 10.40 - Amendment 1A, dated February 26, 1992, to Contract No. N00019-90-G- 0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.36] 10.41 - Amendment 1B, dated April 23, 1993, to Contract No. N00019-90-G-0051 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.37] 10.42 - Contract No. N00019-93-C-0041, dated January 29, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1993, File No. 1-8533, Exhibit 10.54] 10.43 - Modification No. P00001, dated March 29, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.39] 10.44 - Modification No. PZ0002, dated November 12, 1993, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.40] 10.45 - Modification No. P00003, dated February 1, 1994, to Contract No. N00019-93-C-0041 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.41] **10.46 - Modification No. P00004, dated January 29, 1993, to Contract No. P N00019-93-C-0041 . . **10.47 - Modification No. P00005, dated January 29, 1993, to Contract No. P N00019-93-C-0041 . . . . . . . . . 10.48 - Contract No. N00019-93-C-0202, dated August 30, 1993, between Photronics Corp. and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.42] 10.49 - Modification No. P00001, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.43] 10.50 - Modification No. P00002, dated April 29, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.44] 10.51 - Modification No. P00003, dated August 9, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.55] 10.52 - Modification No. P00004, dated March 30, 1994, to Contract No. N00019-93-C-0202 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.56] **10.53 - Modification No. P00005, dated August 30, 1993, to Contract No. N00019-93-C-0202 . . . . . . . . . P **10.54 - Modification No. P00006, dated August 30, 1993, to Contract No. N00019-93-C-0202 . . . . . . . . . P 10.55 - Contract No. N00024-93-C-5204, dated November 18, 1992, between Technology Applications and Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.53] 10.56 - Modification No. P00001, dated May 6, 1993, to Contract No. N00024-93- C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.54] 10.57 - Modification No. P00002, dated August 24, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.55] 10.58 - Modification No. PZ0003, dated September 30, 1993, to Contract No. N00024-93-C-5204 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.56] 10.59 - Contract No. N00174-94-D-0006, dated February 17, 1994, between Technology Applications & Service Company and the Navy [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.57] 10.60 - Modification No. P00001, dated March 7, 1994, to Contract No. N00174-94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.58] 10.61 - Modification No. P00003, dated May 19, 1994, to Contract No. N00174- 94-D-0006 [Form 10-K, fiscal year ended March 31, 1994, File No. 1- 8533, Exhibit 10.59] 10.62 - Purchase Order No. N538010, dated March 28, 1994, between Laurel Technologies, Inc. and Short Brothers PLC [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 10.60] 10.63 - Purchase Order No. 2285, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.73] 10.64 - Amendment No. 1, dated December 1, 1994, to Purchase Order No. 2285 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.74] 10.65 - Purchase Order No. 2286, dated June 6, 1994, between Photronics Corp. and International Precision Products N.V. [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.75] 10.66 - Purchaser Order No. CN74325, dated December 14, 1994, between Precision Echo and Lockheed Aeronautical Systems Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.76] **10.67 - Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . . . . . . . . . . . P **10.68 - Amendment, dated November 7, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . P 10.69 - Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.70 - Contract No. N00019-95-C-0057, dated December 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.71 - 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] 10.72 - 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] 10.73 - 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] 10.74 - Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] **10.75 - Contract No. N00421-95-D-1067, dated September 30, 1995, between the Company and the Navy . . . . . P **10.76 - Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests . . . . . **10.77 - Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army . . P **10.78 - Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. . . . . . . . . . . . . **10.79 - Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense . . . . . . . P **10.80 - Amendment to Contract No. 2025, dated August 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense . . P **10.81 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties . . . . . **10.82 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties . . . . . **10.83 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties . . . . . **10.84 - 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 . . . . . . . . **10.85 - Master Lease, dated August 31, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. **10.86 - Schedule No. 001 to Lease, dated September 1, 1995, between OMI Acquisition Corp. and General Electric Capital Corp . . . . . . **10.87 - Schedule No. 002 to Lease, dated October 20, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. . . . . . . 11.1 - Computation of earnings per share [Form 10-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 11] 13.1 - 1994 Annual Report to Stockholders (for the fiscal year ended March 31, 1994). Except for the portions of the Annual Report which are incorporated expressly by reference in the Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, this Annual Report was furnished for the information of the Commission and is not to be deemed "filed" as part of the report [Form 10-K, fiscal year ended March 31, 1994, File No. 1-8533, Exhibit 13] 22.1 - List of subsidiaries of the Company [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 21] *23.1 - Accountants' Consent and Report on Schedules . . . . . . . . . . . . **23.2 - Consent of Skadden, Arps, Slate, Meagher & Flom, contained in their opinion filed as Exhibit 5.1 . . . *24.1 - Power of Attorney (included in signature page to Registration Statement) . . . . . . . . . . . . *25.1 - Form T-1 Statement of Eligibility and Qualification of the Trustee under the Trust Indenture Act of 1939 . . . . . . . . . . . . . . . ___________________ * Filed herewith ** To be filed by Amendment EX-99 2 PURCHASE AGREEMENT $20,000,000 9% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES DUE 2003 DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. PURCHASE AGREEMENT EXECUTION COPY New York, New York September 22, 1995 FORUM CAPITAL MARKETS L.P. 53 Forest Avenue Old Greenwich, Connecticut 06870 Ladies and Gentlemen: Diagnostic/Retrieval Systems, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Forum Capital Markets L.P. (the "Initial Purchaser") $20,000,000 principal amount of its 9% Senior Subordinated Convertible Debentures due 2003 (the "Debentures") to be issued pursuant to the provisions of an indenture dated as of the date hereof (the "Indenture") between the Company and The Trust Company of New Jersey, as trustee (the "Trustee"). Such $20,000,000 aggregate principal amount of Debentures are hereafter referred to as the "Firm Debentures." Upon the request of the Initial Purchaser, as provided in Section 2(b) of this Agreement, the Company shall also issue and sell to the Initial Purchaser up to an additional $5,000,000 aggregate principal amount of Debentures for the purpose of covering over-allotments, if any. Such $5,000,000 aggregate principal amount of Debentures are hereinafter referred to as the "Option Debentures." The Firm Debentures and Option Debentures collectively constitute all of the Debentures. The Company hereby confirms its agreement with the Initial Purchaser with respect to the sale by the Company and the purchase by the Initial Purchaser of the Debentures. The shares of the Company's Class A common stock, par value $.01 per share (the "Common Stock"), issuable upon conversion of the Debentures are hereinafter referred to as the "Underlying Stock." The Debentures will be offered and sold to the Initial Purchaser without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on an exemption therefrom. The Company has prepared a preliminary offering circular dated September 11, 1995 as amended by a Supplement to the Preliminary Offering Circular dated September 14, 1995 (such preliminary offering circular , as amended, being hereinafter referred to as the "Preliminary Offering Circular"), and a final offering circular dated September 22, 1995 (such offering circular being hereinafter referred to as the "Offering Circular"), setting forth information regarding the Company, the Debentures and the Underlying Stock. Unless stated to the contrary, all references herein to the Offering Circular are to the Offering Circular at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time") and are not meant to include any amendment or supplement, or any information incorporated by reference therein, subsequent to the Execution Time. The Company hereby confirms that it has authorized the use of the Preliminary Offering Circular and the Offering Circular in connection with the offering and sale of the Debentures. Holders (including subsequent transferees) of the Debentures will have the registration rights set forth in the Registration Rights Agreement (the "Registration Rights Agreement"), dated concurrently herewith. Pursuant to the Registration Rights Agreement, the Company has agreed to file with the Securities and Exchange Commission (the "Commission") a shelf registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement") to cover public resales of the Debentures and the Underlying Stock by the Holders thereof. Capitalized terms used herein without definition have the respective meanings specified therefor in the Offering Circular. For purposes hereof, "Rules and Regulations" means the rules and regulations adopted by the Commission under the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), as applicable. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Initial Purchaser of the date hereof, and as of the Closing Date and each Option Closing Date (as defined in Section 2(b) hereof), if any, as follows: (a) The Offering Circular, as of its date, together with each amendment or supplement thereto, as of its date, contains all the information that, if requested by a prospective purchaser, would be required to be provided pursuant to Rule 144A(d)(4) under the Securities Act. The Offering Circular does not, and at the Closing Date and any Option Closing Date will not, and any amendment or supplement thereto, if any, as of its date, will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to information contained in or omitted from the Preliminary Offering Circular or the Offering Circular (or any supplement or amendment thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Initial Purchaser specifically for use therein (the "Initial Purchaser's Information"). The parties acknowledge and agree that the Initial Purchaser's Information consists solely of the last paragraph at the bottom of the front cover page concerning the terms of the offering by the Initial Purchaser, the legend concerning over-allotment and trading activities of affiliates on the inside front cover page and the paragraphs under the caption "Plan of Distribution" in the Offering Circular. The Company is subject to Section 13 or 15(d) of the Exchange Act. (b) The Company and each of its direct and indirect corporate subsidiaries wherein are listed on Schedule I hereto (collectively, the "Corporate Subsidiaries"), has been duly organized and is validly existing as a corporation in good standing under the laws of the state of its incorporation. Laurel Technologies (the "Partnership," and together with the Corporate Subsidiaries, the "Subsidiaries") is a partnership which has been duly organized under the laws of the State of Pennsylvania. Each of the Company and the Subsidiaries is duly qualified and licensed and in good standing as a foreign corporation (or with respect to the Partnership, as a foreign partnership) in each jurisdiction in which its ownership or leasing of any properties or the character of its operations require such qualification or licensing, except where the failure to be so qualified or licensed would not have a material adverse effect on the condition, financial or otherwise, results of operations, business or prospects of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company owns, either directly or through other Subsidiaries, one hundred percent (100%) of the outstanding capital stock of each Corporate Subsidiary, and the Company owns an eighty percent (80%) general partnership interest in the Partnership, in each case free and clear of all liens, charges, claims, encumbrances, pledges, security interests defects or other restrictions or equities of any kind whatsoever; and all outstanding capital stock of the Corporate Subsidiaries has been validly issued and is fully paid and non-assessable and not issued in violation of any preemptive rights or applicable securities laws. Each of the Company and the Subsidiaries has all requisite power and authority (corporate, partnership and other), and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies, to own or lease its properties and conduct its business as described in the Offering Circular except for such authorizations, approvals, orders, licenses, certificates, franchises and permits the failure to obtain which would not have a Material Adverse Effect; each of the Company and the Subsidiaries is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, foreign, state and local laws, rules and regulations except where failure to so comply would not have a Material Adverse Effect; and neither the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (c) The Company had an authorized capitalization as of the period indicated therein as set forth in the Offering Circular and will have the adjusted capitalization as of the period indicated therein, based upon the assumptions set forth therein. Neither the Company nor any of the Subsidiaries is a party to or bound by any instrument, agreement or other arrangement, including, but not limited to, any voting trust agreement, stockholders' agreement or other agreement or instrument, affecting the securities or rights or obligations of securityholders of the Company or any of the Subsidiaries or providing for any of them to issue, sell, transfer or acquire any capital stock, rights, warrants, options or other securities of the Company or any of the Subsidiaries, except for this Agreement, the Indenture, as set forth in the Offering Circular and, with respect to the Partnership, its partnership agreement. The Debentures and the Company's Capital Stock conform in all material respects to all statements with respect thereto contained in the Offering Circular. All issued and outstanding shares of capital stock or other securities evidencing equity ownership of each of the Company or any of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, as applicable; the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any securityholder of the Company or any of the Subsidiaries or similar contractual rights granted by the Company or any of the Subsidiaries. The Debentures will be issued pursuant to the terms and conditions of the Indenture, and the Indenture and the Registration Rights Agreement will each conform to the description thereof contained in the Offering Circular. At the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act and the Rules and Regulations applicable to an indenture which is qualified thereunder. The Debentures have been duly authorized and, when validly authenticated, issued, delivered and paid for in the manner contemplated by the Indenture, will be duly authorized, validly issued and outstanding obligations of the Company entitled to the benefits of the Indenture. The shares of Common Stock issuable upon conversion of the Debentures will, upon such issuance, be duly authorized, validly issued, fully paid and non- assessable, and the Company has duly authorized and reserved for issuance upon conversion of the Debentures the shares of Common Stock issuable upon such conversion. The Debentures and the Underlying Stock are not and will not be subject to any preemptive or other similar rights of any securityholder of the Company or any of the Subsidiaries; all corporate action required to be taken for the authorization, issue and sale of the Debentures and the Underlying Stock has been duly and validly taken; and the certificates representing the Debentures and the Underlying Stock will be in due and proper form. Upon the issuance and delivery pursuant to the terms of this Agreement and the Indenture of the Debentures to be sold by the Company hereunder and thereunder, the Initial Purchaser will acquire good and marketable title thereto free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever. (d) The consolidated historical financial statements of the Company and the Subsidiaries together with the related notes thereto included in the Preliminary Offering Circular and the Offering Circular fairly present the financial position, income, changes in stockholders' equity, cash flow and results of operations of the Company and the Subsidiaries at the respective dates and for the respective periods to which they apply and such historical financial statements have been prepared in conformity with generally accepted accounting principles and the Rules and Regulations, consistently applied throughout the periods involved; the pro forma financial information included in each Preliminary Offering Circular and the Offering Circular presents fairly the information shown therein in accordance with Article 11 of Regulation S-X. Except as described in the Offering Circular, there has been no material adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the earnings, business prospects, or results of operations of the Company or any of the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, since the date of the financial statements included in the Offering Circular and the outstanding debt, the property, both tangible and intangible, and the businesses of each of the Company and the Subsidiaries conform in all material respects to the descriptions thereof contained in the Offering Circular. Financial information set forth in the Offering Circular under the headings "SUMMARY CONSOLIDATED FINANCIAL DATA," "SELECTED CONSOLIDATED FINANCIAL DATA," "CAPITALIZATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" fairly present, on the basis stated in the Offering Circular, the information set forth therein and have been derived from or compiled on a basis consistent with that of the audited financial statements included in the Offering Circular. (e) Each of the Company and the Subsidiaries has filed all material tax returns required to be filed by it in any jurisdiction, other than those filings being contested in good faith, and has paid all material federal, state, local and foreign taxes shown to be due on such returns or claimed to be due from such entities, other than those (i) currently payable without penalty or interest or (ii) being contested in good faith, in either case, for which the Company is liable, and has established adequate reserves in the Company's financial statements (in accordance with generally accepted accounting principles) for such taxes which are not due and payable and (iii) does not have any material tax deficiency or claims outstanding, proposed or assessed against it. (f) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Initial Purchaser in connection with (i) the issuance by the Company of the Debentures or the Underlying Stock, (ii) the purchase by the Initial Purchaser of the Debentures from the Company or (iii) the consummation by the Company of any of its obligations under this Agreement or the Indenture. (g) Each of the Company and the Subsidiaries maintain liability, casualty and other insurance (subject to customary deductions and retentions) with responsible insurance companies against such risk companies engaged in similar businesses as the Company and the Subsidiaries operate (which may include self- insurance in comparable form to that maintained by such responsible companies). (h) There is no action, suit, proceeding, litigation or governmental proceeding pending or, to the knowledge of the Company, threatened against, or involving the properties or businesses of, the Company or any of the Subsidiaries which (i) questions the validity of the capital stock of the Company or any of the Subsidiaries, this Agreement, the Indenture, the Registration Rights Agreement or of any action taken or to be taken by the Company or any of the Subsidiaries pursuant to or in connection with this Agreement, the Indenture or the Registration Rights Agreement or (ii) would have a Material Adverse Effect. (i) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Debentures and the Underlying Stock upon conversion of the Debentures, to enter into this Agreement, the Indenture and the Registration Rights Agreement and to consummate the transactions provided for in such agreements; and this Agreement has been duly and properly authorized, executed and delivered by the Company and when the Company has duly executed and delivered the Registration Rights Agreement and the Indenture and (assuming the due execution and delivery therein by the Initial Purchasers) will constitute a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) and except to the extent that rights to indemnification and contribution contained in this Agreement may be limited by federal or state securities laws on public policy relating thereto. None of the Company's issue and sale of the Debentures and the Underlying Stock upon the conversion of the Debentures, the execution or delivery of this Agreement, the Indenture and the Registration Rights Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein or the conduct by it and the Subsidiaries of their businesses as described in the Offering Circular or any amendments or supplements thereto conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or results or will result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of, (i) the certificate of incorporation, by-laws or partnership agreement of the Company or any of the Subsidiaries, (ii) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which it is or may be bound or to which its properties or assets is or may be subject, or any indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company or any of the Subsidiaries of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body, having jurisdiction over the Company or any of the Subsidiaries or any of their respective activities or properties except, in the case of clauses (ii) and (iii), such defaults, impositions and violations that would not have a Material Adverse Effect. (j) No consent, approval, authorization or order of, and no filing with, any court, arbitrator, regulatory body, government agency or other body, domestic or foreign, is required for the execution, delivery or performance of this Agreement, the Indenture, the Registration Rights Agreement or the transactions contemplated hereby or thereby, except such as have been or may be obtained under the Securities Act or may be required under state securities or Blue Sky laws. (k) Subsequent to the respective dates as of which information is set forth in the Offering Circular, and except as may otherwise be indicated or contemplated herein or therein, unless the Company has notified the Initial Purchaser in writing otherwise, neither the Company nor any of the Subsidiaries has (i) issued any securities (other than upon exercise of options outstanding on the date hereof pursuant to the Company's 1981 Incentive Stock Option Plan, 1981 Non-Qualified Stock Option Plan and 1991 Stock Option Plan or upon conversion of the 8 1/2% Convertible Subordinated Debentures due August, 1998 (the "1998 Debentures")), or incurred any material liability or obligation, direct or contingent, for borrowed money not in the ordinary course of business, (ii) entered into any material transaction other than in the ordinary course of business or (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock of any class and there has not been any material change in the capital stock (excluding changes contemplated by clause (i) hereof) or any Material Adverse Change in or affecting the general affairs, management, financial operations, stockholders' equity or results of operation of the Company or any of the Subsidiaries. (l) Neither the Company nor any of its Subsidiaries (i) is in violation of its certificate of incorporation, by-laws or partnership agreement, as applicable, (ii) is in default in the performance of any obligation, agreement or condition contained in any license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement, purchase order, agreement or instrument evidencing an obligation for borrowed money or other material agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound or to which the property or assets of the Company or any of the Subsidiaries is subject or affected or (iii) is in violation in any respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject, except any violation or default under the foregoing clauses (ii) or (iii) as would not have a Material Adverse Effect. (m) The Company believes that each of the Company and the Subsidiaries is in compliance with all federal, state, local and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company or any of the Subsidiaries by the U.S. Department of Labor or any other governmental agency responsible for the enforcement of such federal, state, local or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company or any of the Subsidiaries pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or any of the Subsidiaries. No representation question exists respecting the employees of the Company or any of the Subsidiaries, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company or any of the Subsidiaries. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or any of the Subsidiaries. No material labor dispute with the employees of the Company or any of the Subsidiaries exists or, to the knowledge of the Company, is imminent. (n) Except as identified on Schedule II attached hereto, neither the Company nor any of the Subsidiaries maintains, sponsors or contributes to any program or arrangement that is an "employee pension benefit plan" an "employee welfare benefit plan" or a "multi-employer plan" ("ERISA Plans") as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Except as identified on Schedule I attached hereto, neither the Company nor any of the Subsidiaries maintains or contributes to, now or at any time previously, a defined benefit plan as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code which could subject the Company or any of the Subsidiaries to any material tax penalty on prohibited transactions and which has not adequately been corrected. No "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan which might reasonably be expected to have a Material Adverse Effect. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a) stating that such ERISA Plan and the attendant trust are qualified thereunder. Neither the Company nor any of the Subsidiaries has ever completely or partially withdrawn from a "multi-employer plan" as so defined. (o) Neither the Company or any of the Subsidiaries, nor any of its affiliates has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Debentures or otherwise. (p) Each of the Company and the Subsidiaries (i) owns or has the right to use, free and clear of all liens, claims, encumbrances, pledges, security interests, and other adverse interests of any kind whatsoever, all patents, trademarks, service marks, trade names, copyrights, technology, and all licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without, to the best knowledge of the Company and the Subsidiaries, infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity, (ii) is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise and (iii) has not received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Effect. (q) Each of the Company and the Subsidiaries has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property which are material to its business, in each case, except as disclosed in the Offering Circular, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects and other restrictions that would have a Material Adverse Effect. (r) KPMG Peat Marwick LLP are independent certified public accountants of the Company as required by the Securities Act and the Rules and Regulations. (s) The Debentures satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act, and the Debentures are eligible for trading in the Private Offerings, Resale and Trading through Automated Linkages ("Portal") Market. The Common Stock is listed on the American Stock Exchange. (t) Other than payments required or allowed by applicable law of the United States, neither the Company nor any of the Subsidiaries has, nor to the knowledge of the Company, has any officer, director or employee of the Company or any of its Subsidiaries or any other person acting on behalf of the Company or any of the Subsidiaries, for the benefit of the Company or any such Subsidiaries at any time during the last five years, (i) made any unlawful gift or contribution to any candidate for federal, state, local or foreign political office, or failed to disclose fully any such gift or contribution in violation of law, or (ii) made any payment to any federal, state, local or foreign governmental officer or official, which would be reasonably likely to subject the Company or any of the Subsidiaries to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign). Each of the Company's and the Subsidiaries' internal accounting controls are sufficient to cause the Company and the Subsidiaries to comply with the Foreign Corrupt Practices Securities Act of 1977, as amended. (u) Except as set forth in the Offering Circular, no officer, director or 5% or greater stockholder of the Company or any of the Subsidiaries, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities, has or has had, either directly or indirectly, (i) a material interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company or any of the Subsidiaries or (B) purchases from or sells or furnishes to the Company or any of the Subsidiaries any goods or services or (ii) a material beneficiary interest in any contract or agreement to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound or affected. Except as set forth in the Offering Circular or under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Stockholders on August 8, 1995, which is incorporated by reference in the Offering Circular, there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company or any of the Subsidiaries and any such officer, director, 5% or greater stockholder, "affiliate" or "associate." For the purpose of this subsection (u), interests which may be excluded from disclosure pursuant to the instructions to items of Regulation S-K shall be deemed to be per se not material. (v) The minute books of each of the Company and the Subsidiaries have been made available to the Initial Purchaser, contain a complete summary of all meetings and actions of the directors and stockholders of each of the Company and the Subsidiaries since the time of their respective incorporation and reflect all transactions referred to in such minutes accurately in all respects. (w) Neither the Company nor any of the Subsidiaries has been notified or is otherwise aware that it is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any similar law ("Environmental Laws"). To the best of the Company's knowledge, the Company and the Subsidiaries are in substantial compliance with all applicable existing Environmental Laws, except for such instances of non-compliance which would not have a Material Adverse Effect. The term "Hazardous Material" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulation under or within the meaning of any other Environmental Law. To the best of the Company's knowledge, no disposal, release or discharge of "Hazardous Material" has occurred on, in, at or about any of the facilities or properties of the Company or any of the Subsidiaries. (x) The Company is not an "investment company," a company controlled by an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. (y) None of the proceeds of the sale of the Debentures will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Debentures to be considered a "purpose credit" within the meanings of Regulation G, T, U or X of the Board of Governors of the Federal Reserve Board. (z) Neither the Company nor any affiliate (as such term is defined in Rule 501(b) under the Securities Act) of the Company has, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any "security" (as defined in the Securities Act), which is or will be integrated with the sale of the Debentures in a manner that would require the registration of the Debentures under the Securities Act. (aa) None of the Company, any affiliate (as such term is defined in Rule 501(b) under the Securities Act) of the Company and any other person acting on its or their behalf has engaged, in connection with the offering of the Debentures, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act. (bb) Assuming the accuracy of the Initial Purchaser's representations in Section 2(c) hereof and its compliance with the agreements set forth therein, it is not necessary, in connection with the issuance and sale of the Debentures and the offer, resale and delivery of the Debentures in the manner contemplated by this Agreement and the Offering Circular, to register the Debentures under the Securities Act or to qualify the Indenture under the Trust Indenture Act. (cc) Liens (as defined in the Indenture) existing on the date hereof which secure Senior Indebtedness (as defined in the Indenture) do not individually or in the aggregate exceed $1,000,000. 2. Purchase by the Initial Purchaser. (a) On the basis of the representations, warranties and agreements contained herein, and subject to the terms and conditions set forth herein, the Company agrees to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company, the Firm Debentures at a purchase price equal to 95% of the principal amount thereof. (b) In addition, on the basis of the representations, warranties and agreements contained herein, and subject to the terms and conditions set forth herein, the Company hereby grants an option to the Initial Purchaser to purchase any or all of the Option Debentures at a price equal to 95% of the principal amount thereof plus accrued interest from the Closing Date to the applicable Option Closing Date. Such option will expire 45 days after the date hereof, and may be exercised in whole or in part from time to time only for the purpose of covering over- allotments which may be made in connection with the offering and distribution of the Firm Debentures upon notice by the Initial Purchaser to the Company setting forth the aggregate principal amount of Option Debentures as to which the Initial Purchaser is then exercising the option and the time and date of delivery and payment therefor. Any such time and date of delivery and payment (an "Option Closing Date") shall be determined by the Initial Purchaser, but shall not be later than five full business days after the exercise of such option unless otherwise agreed by the Company and the Initial Purchaser. (c) The Initial Purchaser has advised the Company that it is its intention, as promptly as it deems appropriate after the Company shall have furnished the Initial Purchaser with copies of the Offering Circular, to resell the Debentures pursuant to the procedures and upon the terms set forth in the Offering Circular, including not to solicit any offer to buy or offer to sell the Debentures by means of any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. The Initial Purchaser warrants and agrees with the Company that it has solicited and will solicit offers (the "Exempt Resales") for Debentures only from, and will offer Debentures only to, persons that it reasonably believes to be (i) QIBs in transactions that meet the requirements for an exemption from the registration requirements of the Securities Act under Rule 144A or (ii) to a limited number of Institutional Accredited Investors that execute and deliver a letter containing certain representations and agreements in the form attached as Annex A of the Offering Circular. The QIBs and the Institutional Accredited Investors are referred to herein as "Eligible Purchasers." The Initial Purchaser represents and warrants that it is an Institutional Accredited Investor with such knowledge and experience in financial and business matters as are necessary to evaluate the merits and risks of an investment in the Debentures, and is acquiring its interest in the Debentures not with a view to the distribution or resale thereof, except resales in compliance with the registration requirements or exemption provisions of the Securities Act and that neither it, nor anyone acting on its behalf, will offer the Debentures so as to bring the issuance and sale of the Debentures within the provisions of Section 5 of the Securities Act. The Initial Purchaser further represents and warrants that it is not a pension or welfare plan (as defined in Section 3 of ERISA) and is not acquiring the Debentures on behalf of a pension or welfare plan. The Company acknowledges and agrees that the Initial Purchaser may sell Debentures to any affiliate of the Initial Purchaser and any such affiliate may sell Debentures purchased by it to the Initial Purchaser. The Initial Purchaser agrees that, prior to or simultaneously with the confirmation of sale by it to any purchaser of any of the Debentures purchased from the Company pursuant hereto, the Initial Purchaser shall furnish to that purchaser a copy of the Offering Circular (and any amendment thereof or supplement thereto that the Company shall have furnished to the Initial Purchaser prior to the date of such confirmation of sale). In addition to the foregoing, the Initial Purchaser agrees and understands that the Company and, for purposes of the opinions to be delivered to the Initial Purchaser pursuant to Sections 5(b) and (c) hereof, counsel to the Company and to the Initial Purchaser, respectively, may rely upon the accuracy and truth of the foregoing representations, warranties and covenants in this Section 2 and the Initial Purchaser hereby consents to such reliance. (d) No form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) has been or will be used by the Initial Purchaser or any of its representatives in connection with the offer and sale of any of the Debentures including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising except pursuant to a registered public offering as provided in the Registration Rights Agreement. (e) The Initial Purchaser agrees that, in connection with the Exempt Resales, it will solicit offers to buy the Debentures only from, and will offer to sell the Debentures only to, Eligible Purchasers. 3. Delivery of and Payment for the Debentures. Delivery of, and payment for, the Firm Debentures shall be made at 10:00 A.M., New York City time, on September 29, 1995, or at such other date or time, not later than five full business days thereafter, as shall be agreed by the Initial Purchaser and the Company (such date and time being referred to herein as the "Closing Date"). Delivery of, and payment for, the Firm Debentures and the Option Debentures shall be made at the offices of Kelley Drye & Warren, New York, New York, or any such other place as shall be agreed by the Initial Purchaser and the Company. On the Closing Date, the Company shall deliver or cause to be delivered to the Initial Purchaser certificates for the Firm Debentures against payment to or upon the order of the Company of the purchase price by wire or book-entry transfer of immediately available funds. On each Option Closing Date, the Company shall deliver or cause to be delivered to the Initial Purchaser certificates for the Option Debentures purchased thereat against payment to or upon the order of the Company of the purchase price by wire or book-entry transfer of immediately available funds. Upon delivery, the Debentures shall be in global form, in such denominations and registered in such names, or otherwise, as the Initial Purchaser shall have requested in writing not less than two full business days prior to the Closing Date. The Company shall make the certificates for the Debentures available for inspection by the Initial Purchaser in New York, New York, not later than one full business day prior to the Closing Date. 4. Covenants and Agreements of the Company. The Company covenants and agrees with the Initial Purchaser as follows: (a) during the period ending 90 days after the date hereof to advise the Initial Purchaser promptly and, if requested, confirm such advice in writing, of the happening of any event which makes any statement of a material fact made in the Offering Circular untrue or that requires the making of any additions to or changes in the Offering Circular (as amended or supplemented from time to time) in order to make the statements therein, in light of the circumstances under which they were made, not misleading; to advise the Initial Purchaser promptly of any order preventing or suspending the use of the Preliminary Offering Circular or the Offering Circular, of the suspension of the qualification of the Debentures for offering or sale in any jurisdiction and of the initiation or threatening of any proceeding for any such purpose; and to use its reasonable best efforts to prevent the issuance of any such order preventing or suspending the use of the Preliminary Offering Circular or of the Offering Circular or suspending any such qualification and, if any such suspension is issued, to use its reasonable best effort to obtain the lifting thereof at the earliest possible time; (b) to furnish promptly to the Initial Purchaser and counsel for the Initial Purchaser, without charge, as many copies of the Preliminary Offering Circular and the Offering Circular (and of any amendments or supplements thereto) as may be reasonably requested; to furnish to the Initial Purchaser on the date hereof a copy of the independent accountants' report included in the Offering Circular signed by the accountants rendering such report; and the Company hereby consents to the use of the Preliminary Offering Circular and the Offering Circular, and any amendments and supplements thereto, in connection with Exempt Resales of the Debentures; (c) if the delivery of the Offering Circular is required at any time in connection with the sale of the Debentures and if at such time any events shall have occurred as a result of which the Offering Circular as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when the Offering Circular is delivered, not misleading, or if for any other reason it shall be necessary at such time to amend or supplement the Offering Circular in order to comply with any law, to notify the Initial Purchaser immediately thereof, and to promptly prepare and furnish to the Initial Purchaser an amended Offering Circular or a supplement to the Offering Circular so that statements in the Offering Circular, as so amended or supplemented, will not, in light of the circumstances under which they were made when it is so delivered, be misleading, or so that the Offering Circular will comply with applicable law. The Initial Purchaser's delivery of any such amendment or supplement shall not constitute a waiver of any of the conditions set forth in Section 5 hereof; (d) during the five-year period following the Closing Date, provided any of the Debentures remain outstanding, to furnish to the Initial Purchaser all public reports and all reports, documents, information and financial statements furnished by the Company to the Commission pursuant to the Indenture or the Exchange Act or any rule or regulation of the Commission thereunder; (e) during the three-year period following the Closing Date, for so long as and at any time that it is not subject to Section 13 or 15(d) of the Exchange Act, upon request of any holder of the Debentures, to furnish to such holder, and to any prospective purchaser or purchasers of the Debentures designated by such holder, information satisfying the requirements of subsection (d)(4) of Rule 144(A) under the Securities Act. This covenant is intended to be for the benefit of the holders from time to time of the Debentures, and prospective purchasers of the Debentures designated by such holders; (f) to use the proceeds from the sale of the Debentures in the manner described in the Offering Circular under the caption "Use of Proceeds"; (g) in connection with the offering of the Debentures, to make its officers, employees, independent accountants and legal counsel reasonably available upon request by the Initial Purchaser; (h) to use its reasonable best efforts to do and perform all things required to be done and performed under this Agreement by it that are within its control prior to or after the Closing Date and to use reasonable efforts to satisfy all conditions precedent on its part to the delivery of the Debentures; (i) except following the effectiveness of the Shelf Registration Statement, to not authorize or knowingly permit any person acting on its or their behalf to, solicit any offer to buy or offer to sell the Debentures by means of any form of general solicitation or general advertising (as such terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; (j) to not, and to use its reasonable best efforts to ensure that no affiliate (as such term is defined in Rule 501(b) under the Securities Act) of the Company will, offer, sell or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Securities Act) which could be integrated with the sale of the Debentures in a manner that would require the registration of the Debentures under the Securities Act; (k) to not, so long as the Debentures are outstanding, be or become, or be or become owned by, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act, and will not be or become, or be or become owned by, a closed-end investment company required to be registered, but not registered thereunder; (l) to cooperate with the Initial Purchaser and counsel for the Initial Purchaser to qualify the Debentures for offering and sale under the securities laws of such jurisdictions as the Initial Purchaser may reasonably request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Debentures; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process or to subject it to taxation in any jurisdiction where it is not so qualified or so subject; (m) to use its reasonable best efforts to comply with the Registration Rights Agreement and all agreements set forth in the representation letters of the Company to The Depository Trust Company relating to the approval of the Debentures for "book- entry" transfers; (n) in connection with the offering, until the Initial Purchaser shall have notified the Company of the completion of the resale of the Debentures, to not and use its reasonable best efforts to not permit any affiliated purchasers (as defined in Rule 10b-6 under the Exchange Act), either alone or with one or more other persons, to bid for or purchase, for any account in which it or any of its affiliated purchasers has a beneficial interest, any Debentures, or attempt to induce any person to purchase any Debentures; and to not and use its reasonable best efforts to not permit any of its affiliated purchasers to make bids or purchases for the purpose of creating actual, or apparent, active trading in or of raising the price of the Debentures; (o) prior to the Closing Date, to not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects, without the prior consent of the Initial Purchaser, unless in the judgment of the Company and its counsel, and after notification to the Initial Purchaser, such press release or communication is required by law; (p) to not take any action prior to the execution and delivery of the Indenture which, if taken after such execution and delivery, would have violated any of the covenants contained in the Indenture; and (q) to not take any action prior to the Closing Date which in the Company's reasonable judgment would require the Offering Circular to be amended or supplemented pursuant to Section 4(c) hereof. (r) to maintain a transfer agent and, if necessary under the laws of the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for the Common Stock. (s) for a period of five (5) years from the date hereof, to use its best efforts to maintain the PORTAL (or after the Shelf Registration Statement, Nasdaq Stock Market listing) listing of the Debentures), to the extent outstanding, and the American Stock Exchange (or New York Stock Exchange or Nasdaq Stock Market) listing of the Common Stock. 5. Payment of Expenses. (a) The Company hereby agrees to pay all of the following expenses and fees incident to the performance of the obligations of the Company under this Agreement, the Indenture and the Registration Rights Agreement, including, regardless of whether any sale of the Debentures to the Initial Purchaser is consummated (subject to paragraph (b) below): (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing (including mailing and handling charges), delivery and mailing (including the payment of postage with respect thereto) of each Preliminary Offering Circular and the Offering Circular and any amendments and supplements thereto, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the Debentures, (iv) costs and expenses of travel, food and lodging of Company personnel in connection with the "road show," information meetings and presentations, (v) fees and expenses of the transfer agent and registrar, (vi) fees and expenses of the Trustee, including the Trustee's counsel, in connection with the Indenture and the Debentures and (vii) the fees payable to the NASD and, if any, the American Stock Exchange incurred in connection with the listing of the Debentures and the Underlying Stock for trading in the PORTAL Market and the American Stock Exchange, respectively and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not specifically otherwise provided for in this Section. In addition, at the Closing the Company will pay or reimburse up to $100,000 of the Initial Purchaser's reasonable and accountable out-of-pocket expenses, including but not limited to legal (including all Blue Sky counsel fees and expenses), travel, printing, roadshow (excluding lodging and travel expenses of the Initial Purchaser's personnel in connection with the roadshow which shall be the obligation of the Initial Purchaser) expenses, in connection with the offering, purchase and sale of the Debenture. The Company shall not be responsible for any promotional or tombstone expenses, if any, related to the Offering, purchase and sale of the Debentures. It is understood, however, that except as provided in this Section, Section 7 and Section 9 hereof or as otherwise agreed, the Initial Purchaser will pay all of its own costs and expenses, incurred by it in the performance of this Agreement. (b) If this Agreement is terminated for any reason, the Company shall reimburse and indemnify the Initial Purchaser for its actual accountable out-of-pocket expenses, up to $50,000, less any amounts already paid pursuant to Section 5(a) hereof. Such expenses shall be paid by credit against the advance provided above in Section 5(a). 6. Conditions of the Initial Purchaser's Obligations. The obligations of the Initial Purchaser hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date and each Option Closing Date, if any, as if they had been made on and as of the Closing Date or each Option Closing Date, as the case may be; and the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of its covenants and obligations hereunder and to the following further conditions: (a) The Initial Purchaser shall not have advised the Company that the Offering Circular, or any supplement or amendment thereto, contains an untrue statement of fact which is material, or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements, in light of the circumstances under which they were made, not misleading. No order suspending the sale of the Securities in any jurisdiction shall have been issued on either the Closing Date or the relevant Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. (b) On or prior to the Closing Date, the Initial Purchaser shall have received from Kelley Drye & Warren such opinion or opinions with respect to the organization of the Company, the validity of the Debentures, the Underlying Stock, the Offering Circular and other related matters as the Initial Purchaser may request and Kelley Drye & Warren shall have received such papers and information as they request to enable it to pass upon such matters. (c) At Closing Date, the Initial Purchaser shall have received the favorable opinion of Skadden, Arps, Slate, Meagher & Flom, counsel to the Company, dated the Closing Date, addressed to the Initial Purchaser and in form and substance reasonably satisfactory to Kelley Drye & Warren, with respect to matters customarily covered in opinions of counsel in like transactions. (d) Skadden, Arps, Slate, Meagher & Flom shall state in the opinion letter contemplated by Section 6(c) that such counsel has participated in conferences with officers and other representatives of each of the Company and the Subsidiaries and representatives of the independent public accountants for the Company and the Subsidiaries and the Initial Purchaser, at which conferences the contents of the Offering Circular and related matters were discussed, and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Offering Circular and have made no independent check or verification thereof, on the basis of the foregoing, no facts have come to the attention of such counsel which has lead them to believe that the Offering Circular, as of its date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that such counsel express no opinion or belief with respect to the financial statements and related notes, the pro forma financial information and other financial, statistical or accounting data included the Offering Circular or excluded therefrom); (e) On or prior to the Closing Date, Kelley Drye & Warren shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6 or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company herein contained. (f) Prior to the Closing Date: (i) there shall have been no material adverse change involving a prospective change in the condition, financial or otherwise, prospects, stockholders' equity or the business activities of the Company and the Subsidiaries taken as a whole, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Offering Circular; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company or any of the Subsidiaries, from the latest date as of which the financial condition of the Company and the Subsidiaries is set forth in the Offering Circular which is materially adverse to the Company and the Subsidiaries taken as a whole; (iii) neither the Company nor any of the Subsidiaries shall be in default under any provision of any instrument relating to any material outstanding indebtedness; (iv) no material amount of the assets of the Company or any of the Subsidiaries shall have been pledged or mortgaged, except as set forth in the Offering Circular; (v) no action, suit or proceeding, at law or in equity, shall have been pending or. to the knowledge of the Company, threatened against the Company or any of the Subsidiaries, or affecting any of their respective properties or businesses, before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may have a Material Adverse Effect, except as set forth in the Offering Circular; and (vi) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission or any state regulatory authority. (g) At the Closing Date, the Initial Purchaser shall have received a certificate of the Company signed by the principal executive officer and by the chief financial or chief accounting officer of the Company, in their capacities as such, dated the Closing Date, to the effect that each of such persons has carefully examined the Offering Circular, this Agreement and the Indenture, and that: i) the representations and warranties of the Company in this Agreement, the Indenture and the Registration Rights Agreement are true and correct, as if made on and as of the Closing Date or such Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement, the Indenture and the Registration Rights Agreement on its part to be performed or satisfied at or prior to the Closing Date; ii) no stop order suspending the qualification or exemption from qualification of the Debentures shall have been issued and no proceedings for that purpose shall have been commenced or, to the knowledge of the Company, be contemplated; iii) since the date of the most recent financial statements included in the Offering Circular, there has been no material adverse change in the condition, financial or otherwise business, prospects or results of operation of the Company and the Subsidiaries, taken as a whole, except as set forth in the Offering Circular; iv) none of the Offering Circular or any such amendment or supplement includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and v) subsequent to the respective dates as of which information is given in the Offering Circular: (a) neither the Company nor any of the Subsidiaries has incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent, except as disclosed in the Offering Circular; (b) neither the Company nor any of the Subsidiaries has paid or declared any dividends or other distributions on its capital stock; (c) neither the Company nor any of the Subsidiaries has entered into any material transactions not in the ordinary course of business, except as disclosed in the Offering Circular; (d) there has not been any material change in the capital stock (other than pursuant to the Company's 1981 Incentive Stock Option Plan, 1981 Non-Qualified Stock Option Plan or 1991 Stock Option Plan or upon conversion of the 1998 Debentures); (e) neither the Company nor any of the Subsidiaries has sustained any material loss or damage to its property or assets, whether or not insured; and (f) there is no litigation which is pending or to the best of the Company's knowledge threatened against the Company, any of the Subsidiaries or any affiliated party of any of the foregoing which would have a Material Adverse Effect and which is required to be set forth in an amended or supplemented Offering Circular which has not been set forth. (h) On or before the date hereof the Initial Purchaser shall have received a letter, dated such date, addressed to the Initial Purchaser in form and substance satisfactory in all respects to the Initial Purchaser and Kelley Drye & Warren, from KPMG Peat Marwick LLP: i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the Exchange Act and the applicable Rules and Regulations; ii) stating that it is their opinion that the consolidated financial statements and supporting schedules of the Company and the Subsidiaries included in the Offering Circular or incorporated by reference therein comply as to form in all material respects with the applicable accounting requirements of the Securities Act; and iii) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and/or other financial information pertaining to the Company and the Subsidiaries set forth in the Offering Circular in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and/or the Subsidiaries and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures need not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement. (i) At the Closing Date and each Option Closing Date, if any, the Initial Purchaser shall have received from KPMG Peat Marwick LLP a letter, dated as of the Closing Date or such Option Closing Date, as the case may be, to the effect that they reaffirm that statements made in the letter furnished pursuant to subsection (h) of this Section 6, except that the specified date referred to shall be a date not more than five (5) days prior to the Closing Date or such Option Closing Date, as the case may be, to the further effect that they have carried out procedures as specified in clause (iii) of subsection (h) of this Section 6 with respect to certain amounts, percentages and financial information as specified by the Initial Purchaser and deemed to be a part of the Offering Circular and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iii). (j) On each of the Closing Date and each Option Closing Date, if any, there shall have been duly tendered to the Initial Purchaser the appropriate principal amount of Debentures. (k) The Securities shall have been approved by the National Association of Securities Dealers, Inc. for trading in the PORTAL market. (l) Trading in the Common Stock shall not have been suspended by the American Stock Exchange at any time after September 1, 1995. (m) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the over-the-counter market shall have been suspended or limited, or minimum prices shall have been established on either of such exchanges or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, or trading in securities of the Company on any exchange or in the over-the- counter market shall have been suspended or (ii) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities or (iii) an outbreak or escalation of hostilities or a declaration by the United States of a national emergency or war or such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of the Initial Purchaser, impracticable or inadvisable to proceed with the offering or the delivery of the Debentures on the terms and in the manner contemplated in the Offering Circular. (n) The Company and the Initial Purchaser shall have executed and delivered the Registration Rights Agreement on the date of this Agreement. (o) The Indenture shall have been duly executed and delivered by the Company and the Trustee and the Debentures shall have been duly executed and delivered by the Company and duly authenticated by the Trustee. (p) If any event shall have occurred that requires the Company under Section 4(c) hereof to prepare an amendment or supplement to the Offering Circular, such amendment or supplement shall have been prepared, the Initial Purchaser shall have been given a reasonable opportunity to comment thereon, and copies thereof delivered to the Initial Purchaser. (q) There shall not have occurred any invalidation of Rule 144A under the Securities Act by any court or any withdrawal or proposed withdrawal of any rule or regulation under the Securities Act or the Exchange Securities Act by the Commission or any amendment or proposed amendment thereof by the Commission which in the judgment of the Initial Purchaser would materially impair the ability of the Initial Purchaser to purchase, hold or effect resales of the Debentures as contemplated hereby. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to the Initial Purchaser. If any condition to the Initial Purchaser's obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Initial Purchaser may terminate this Agreement or, if the Initial Purchaser so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless the Initial Purchaser (for purposes of this Section 7, "Initial Purchaser" shall include the officers, directors, partners, employees and agents, and each person, if any, who controls the Initial Purchaser ("controlling person") within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions, proceedings, suits and litigation in respect thereof), whatsoever, as the same are incurred, to which the Initial Purchaser or any such controlling person may become subject, under the Securities Act, the Exchange Act or any other statute or at common law or otherwise insofar as such losses, claims, damages, expenses or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Circular or the Offering Circular (as from time to time amended and supplemented) or arise out of or are based upon the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made, not misleading; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Circular or the Offering Circular or any such amendment or supplement in reliance upon and in conformity with Initial Purchaser Information and provided, further, that the Company shall not be liable to the Initial Purchaser under the indemnity agreement in this subsection (a) (i) with respect to any Preliminary Offering Circular to the extent that any such loss, liability, claim, damage or expense of the Initial Purchaser arises out of a sale of the Debentures by such Purchaser to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Offering Circular (or of the Offering Circular as then amended or supplemented) if the Company has previously furnished sufficient copies thereof to the Initial Purchaser a reasonable time in advance and the loss, liability, claim, damage or expense of Purchaser results from an untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in the Preliminary Offering Circular which was corrected in the Offering Circular (or the Offering Circular as amended or supplemented) or (ii) to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon any action or failure to act by the Initial Purchaser, that is found in a final judicial determination (or a settlement tantamount thereto) to constitute bad faith, willful misconduct or gross negligence on the part of the Initial Purchaser. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) The Initial Purchaser agrees to indemnify and hold harmless the Company, each of its directors, each of its officers, and each other person, if any, who controls the Company within the meaning of the Securities Act, to the same extent as the foregoing indemnity from the Company to the Initial Purchaser but only with respect to statements or omissions, if any, made in any Preliminary Offering Circular or the Offering Circular or any amendment thereof or supplement thereto, with written information furnished to the Company with respect to the Initial Purchaser by the Initial Purchaser expressly for use in such Preliminary Offering Circular or the Offering Circular or any amendment thereof or supplement thereto. The Company acknowledges that the Initial Purchaser Information constitutes the only information furnished in writing by or on behalf of the Initial Purchaser expressly for use in any Preliminary Offering Circular or the Offering Circular. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure to notify an indemnifying party shall not relieve it from any liability which it may have under this paragraph (a) or (b) of Section 7 unless and to the extent that it has been prejudiced in a material respect by such failure or from the forfeiture of substantial rights and defenses). In case any such action, suit or proceeding is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, which may be the same counsel as counsel to the indemnifying party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Securities Act may be required, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions, suits, proceedings or litigation in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Initial Purchaser, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Debentures (before deducting expenses) bear to the total discounts received by the Initial Purchaser hereunder, in each case as set forth in the table on the Cover Page of the Offering Circular. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchaser, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions, suits, proceedings or litigation in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing or defending any such action, claim, suit, proceeding or litigation. Notwithstanding the provisions of this subsection (d), the Initial Purchaser shall not be required to contribute any amount in excess of the discount applicable to the Debentures purchased by the Initial Purchaser hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Company within the meaning of the Securities Act, each executive officer of the Company and each director of the Company shall have the same rights to contribution as the Company, subject in each case to this subsection (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit, proceeding or litigation against such party in respect to which a claim for contribution may be made against another party or parties under this subsection (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subsection (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Representations and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto shall be deemed to be representations, warranties and agreements at the Closing Date and each Option Closing Date, as the case may be, and the agreements of the Company and the provisions with respect to the payment of expenses contained in Sections 5 and 9 and the respective indemnity agreements contained in Section 7 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Initial Purchaser, the Company, any of the Subsidiaries or any controlling person, and shall survive termination of this Agreement or the issuance and delivery of the Debentures to the Initial Purchaser. 9. Termination. (a) Subject to subsection (b) of this Section 9, the Initial Purchaser shall have the right to terminate this Agreement (i) if any domestic or international event or act or occurrence has disrupted, or in the Initial Purchaser's opinion will in the immediate future disrupt the financial markets, or (ii) if any adverse change in the financial markets shall have occurred or (iii) if trading on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iv) if the United States shall have become involved in a war or major hostilities, or there shall have been an escalation in an existing war or major hostilities, or a national emergency shall have been declared in the United States; or (v) if a banking moratorium has been declared by a state or federal authority; or (vi) if a moratorium in foreign exchange trading has been declared; or (vii) if the Company or any of the Subsidiaries shall have sustained a loss material or substantial to the Company or any of the Subsidiaries by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Initial Purchaser's opinion, make it inadvisable to proceed with the delivery of the Securities; or (viii) if there shall have been such a material adverse change in the general market, political or economic conditions in the United States or elsewhere, as in the Initial Purchaser's judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Debentures. (b) If this Agreement is terminated by the Initial Purchaser in accordance with the provisions of Section 9(a) or if this Agreement shall not be carried out within the time specified herein, or any extension thereof granted to the Initial Purchaser, by reason of any failure on the part of the Company to perform any undertaking or satisfy any condition of this Agreement by it to be performed or satisfied (including, without limitation, pursuant to Section 6, 9 or 10 hereof), then the Company shall promptly reimburse and indemnify the Initial Purchaser for all of its out-of-pocket expenses, including the fees and disbursements of counsel for the Initial Purchaser (less amounts previously paid pursuant to Section 5). If the amount previously paid pursuant to Section 5(a) above exceeds the Initial Purchaser's out-of-pocket expenses, the Initial Purchaser shall refund such excess to the Company. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 6, 9 and 10 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 and Section 7 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 10. Default by the Company. If the Company shall fail at the Closing Date or any Option Closing Date, as applicable, to sell and deliver the number of Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Securities to be purchased on an Option Closing Date, the Initial Purchaser may, at its option, by notice from the Initial Purchaser to the Company, terminate the Initial Purchaser's obligation to purchase Option Debentures from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Sections 5, 7 and 9 hereof. No action taken pursuant to this Section 10 shall relieve the Company from liability, if any, in respect of such default. 11. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be given in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Initial Purchaser shall be directed to it at Forum Capital Markets L.P., 53 Forest Avenue, Old Greenwich, Connecticut 06870, Attention: Mr. Keith Hartley, with a copy to Kelley Drye & Warren, 2 Stamford Plaza, Stamford, Connecticut 06901, Attention: Jay R. Schifferli, Esq. Notices to the Company shall be directed to the Company at 5 Sylvan Way, Parsippany, New Jersey 07054, Attention: President, with a copy to Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, Attention: Mark Kaplan, Esq. 12. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon the Initial Purchaser, the Company and the controlling persons, directors and officers referred to in Section 7 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Debentures from the Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. 13. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to choice of law or conflict of laws principles. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 15. Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties hereto and supersedes all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing signed by the Initial Purchaser and the Company. If the foregoing correctly sets forth the understanding between the Initial Purchaser and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: /s/ Mark S. Newman ------------------------------- Name: Mark S. Newman Title: Chief Executive Officer and President Confirmed and accepted as of the date first above written. FORUM CAPITAL MARKETS L.P. By: /s/ Michael F. McNulty ---------------------------- Name: Michael F. McNulty Title: Managing Director SCHEDULE I CORPORATE SUBSIDIARIES OF DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. Subsidiary Precision Echo, Inc. Photronics Corp. Technology Applications & Service Company DRS Systems Management Corporation Ahead Technology, Inc. OMI Acquisition Corp. SCHEDULE II DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. BENEFIT PLANS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. CORPORATE HEADQUARTERS & DRS MILITARY SYSTEMS Diagnostic/Retrieval Systems, Inc. Group Medical/Dental Plan US Healthcare Patriot V. HMO Plan Diagnostic/Retrieval Systems, Inc. Group Life Insurance Plan (includes AD&D) Diagnostic/Retrieval Systems, Inc. Long Term Disability Plan DRS Retirement/Savings Plan (401K) Diagnostic/Retrieval Systems, Inc. Reimbursement Account Plan (IRC 125) Short Term Disability Insurance provided by NJ State plan PRECISION ECHO, INC. Diagnostic/Retrieval Systems, Inc. Group Medical/Dental Plan Kaiser Permanente HMO Plan Diagnostic/Retrieval Systems, Inc. Group Life Insurance Plan (includes AD&D) Precision Echo, Inc. Long Term Disability Plan DRS Retirement/Savings Plan (401K) Diagnostic/Retrieval Systems, Inc. Reimbursement Account Plan (IRC 125) Short Term Disability Insurance provided by CA State plan PHOTRONICS CORP. Diagnostic/Retrieval Systems, Inc. Group Medical/Dental Plan Diagnostic/Retrieval Systems, Inc. Group Life Insurance Plan (includes AD&D) Photronics Corp. Short Term Disability Plan Photronics Corp. Long Term Disability Plan DRS Retirement/Savings Plan (401K) Diagnostic/Retrieval Systems, Inc. Reimbursement Account Plan (IRC 125) TECHNOLOGY APPLICATIONS & SERVICE CO. Great West Life PPO Plan (Maryland Office) Optima Senters Access Health Plan (Virginia Office) Kaiser Permanente HMO Plan (California Office) Technology Applications & Service Co. Life Insurance Plan (includes AD&D) Technology Applications & Service Co. Short Term Disability Plan Technology Applications & Service Co. Long Term Disability Plan DRS Retirement/Savings Plan (401K) TAS Employee Savings Plan (Predecessor organization's 401K in termination process) Flexible Benefits Account Plan LAUREL TECHNOLOGIES Blue Cross CPE Plan (Medical) Laurel Technologies Group Life Insurance Plan Laurel Technologies Short Term Disability Plan Laurel Technologies Long Term Disability Plan DRS Retirement/Savings Plan (401K) OMI Prudential HMO Plan PruCare Plus Plan Prudential DMO Plan OMI Group Life Insurance Plan (includes AD&D) OMI Short Term Disability Plan OMI Long Term Disability Plan EX-99 3 INDENTURE DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., Company and THE TRUST COMPANY OF NEW JERSEY, Trustee INDENTURE Dated as of September 22, 1995 $25,000,000 9% Senior Subordinated Convertible Debentures Due 2003 TABLE OF CONTENTS Page ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE . . . . 1 Section 1.1.Definitions . . . . . . . . . . . . . . . . . 1 Section 1.2.Other Definitions . . . . . . . . . . . . . . 10 Section 1.3.Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . 11 Section 1.4.Rules of Construction . . . . . . . . . . . . 11 ARTICLE 2. THE DEBENTURES . . . . . . . . . . . . . . . . . 12 Section 2.1.Form and Dating . . . . . . . . . . . . . . . 12 Section 2.2.Execution and Authentication . . . . . . . . 13 Section 2.3.Registrar and Paying Agent . . . . . . . . . 14 Section 2.4.Paying Agent to Hold Money in Trust . . . . . 15 Section 2.5.Holder Lists . . . . . . . . . . . . . . . . 15 Section 2.6.Transfer and Exchange . . . . . . . . . . . . 15 Section 2.7.Replacement Debentures . . . . . . . . . . . 22 Section 2.8.Outstanding Debentures . . . . . . . . . . . 22 Section 2.9.Treasury Debentures . . . . . . . . . . . . . 23 Section 2.10.Temporary Securities . . . . . . . . . . . . 23 Section 2.11.Cancellation . . . . . . . . . . . . . . . . 24 Section 2.12.Defaulted Interest . . . . . . . . . . . . . 24 Section 2.13.Deposit of Moneys . . . . . . . . . . . . . 24 ARTICLE 3. REDEMPTION . . . . . . . . . . . . . . . . . . . . 25 Section 3.1.Notices to Trustee . . . . . . . . . . . . . 25 Section 3.2.Selection of Debentures to be Redeemed . . . 25 Section 3.3.Notice of Redemption . . . . . . . . . . . . 25 Section 3.4.Effect of Notice of Redemption . . . . . . . 26 Section 3.5.Deposit of Redemption Price . . . . . . . . . 26 Section 3.6.Debentures Redeemed in Part . . . . . . . . . 27 ARTICLE 4. COVENANTS . . . . . . . . . . . . . . . . . . . . 27 Section 4.1.Payment of Debentures . . . . . . . . . . . . 27 Section 4.2.Stay, Extension and Usury Laws . . . . . . . 27 Section 4.3.Continued Existence . . . . . . . . . . . . . 27 Section 4.4.SEC Reports . . . . . . . . . . . . . . . . . 28 Section 4.5.Maintenance of Consolidated Net Worth . . . . 28 Section 4.6.Limitation on Restricted Payments and Investments . . . . . . . . . . . . . . . . . 30 Section 4.7.Limitation on Sales of Assets and Subsidiary Stock . . . . . . . . . . . . . . . . . . . . 31 Section 4.8.Taxes . . . . . . . . . . . . . . . . . . . . 31 Section 4.9.Change of Control . . . . . . . . . . . . . . 31 Section 4.10.Limitation on Stock Splits, Consolidations and Reclassifications . . . . . . . . . . . . 33 Section 4.11.Limitation on Dividend Restrictions Affecting Subsidiaries . . . . . . . . . . . 33 Section 4.12.Limitation on Preferred Stock . . . . . . . 34 Section 4.13.Limitation on Debt and Senior Indebtedness . 34 Section 4.14.Limitation on Additional Debt After Default 35 Section 4.15.Limitation on Liens . . . . . . . . . . . . 35 Section 4.16.Transactions with Related Persons . . . . . 36 Section 4.17.Limitation of Payments to Affiliates after Default . . . . . . . . . . . . . . . . . . . 37 Section 4.18.Compliance Certificate . . . . . . . . . . . 37 Section 4.19.Further Assurance to the Trustee . . . . . . 38 ARTICLE 5. SUCCESSORS . . . . . . . . . . . . . . . . . . . 38 Section 5.1.When Company May Merge or Sell Assets . . . . 38 Section 5.2.Successor Substituted . . . . . . . . . . . . 39 ARTICLE 6. DEFAULTS AND REMEDIES . . . . . . . . . . . . . . 39 Section 6.1.Events of Default . . . . . . . . . . . . . . 39 Section 6.2. Acceleration . . . . . . . . . . . . . . . . 40 Section 6.3.Other Remedies . . . . . . . . . . . . . . . 41 Section 6.4.Waiver of Existing and Past Defaults . . . . 41 Section 6.5.Control by Majority . . . . . . . . . . . . . 41 Section 6.6.Limitation on Suits . . . . . . . . . . . . . 42 Section 6.7.Rights of Holders to Receive Payment . . . . 42 Section 6.8.Collection Suit by Trustee . . . . . . . . . 42 Section 6.9.Trustee May File Proofs of Claim . . . . . . 42 Section 6.10.Priorities . . . . . . . . . . . . . . . . . 43 Section 6.11.Undertaking for Costs . . . . . . . . . . . 43 ARTICLE 7. TRUSTEE . . . . . . . . . . . . . . . . . . . . . 44 Section 7.1.Duties of Trustee . . . . . . . . . . . . . . 44 Section 7.2.Rights of Trustee . . . . . . . . . . . . . . 45 Section 7.3.Individual Rights of Trustee . . . . . . . . 45 Section 7.4.Trustee's Disclaimer . . . . . . . . . . . . 45 Section 7.5.Notice of Defaults . . . . . . . . . . . . . 45 Section 7.6.Reports by Trustee to Holders . . . . . . . . 46 Section 7.7.Compensation and Indemnity . . . . . . . . . 46 Section 7.8.Replacement of Trustee . . . . . . . . . . . 47 Section 7.9.Successor Trustee by Merger. etc. . . . . . . 48 Section 7.10.Eligibility; Disqualification . . . . . . . 48 Section 7.11.Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . 48 ARTICLE 8. DISCHARGE OF INDENTURE . . . . . . . . . . . . . 48 Section 8.1.Termination of Company's Obligations . . . . 48 Section 8.2.Application of Trust Money . . . . . . . . . 50 Section 8.3.Repayment to Company . . . . . . . . . . . . 50 Section 8.4.Reinstatement . . . . . . . . . . . . . . . . 50 ARTICLE 9. AMENDMENTS . . . . . . . . . . . . . . . . . . . 50 Section 9.1.Without Consent of Holders . . . . . . . . . 50 Section 9.2.With Consent of Holders . . . . . . . . . . . 51 Section 9.3.Compliance with Trust Indenture Act . . . . . 52 Section 9.4.Revocation and Effect of Consents . . . . . . 52 Section 9.5.Notation on or Exchange of Debentures . . . . 53 Section 9.6.Trustee Protected . . . . . . . . . . . . . . 53 ARTICLE 10. CONVERSION . . . . . . . . . . . . . . . . . . . 53 Section 10.1.Conversion Privilege . . . . . . . . . . . . 53 Section 10.2.Conversion Procedure . . . . . . . . . . . . 53 Section 10.3.Cash Payments in Lieu of Fractional Shares . 54 Section 10.4.Adjustment of Conversion Price . . . . . . . 55 Section 10.5.Effect of Reclassification, Consolidation, Merger or Sale . . . . . . . . . . . . . . . 57 Section 10.6.Taxes on Shares Issued . . . . . . . . . . . 58 Section 10.7.Reservation of Shares; Shares to be Fully Paid; Compliance with Government Requirements; Listing of Common Stock . . . 58 Section 10.8.Responsibility of Trustee Requirements . . . 59 Section 10.9.Notice to Holders Prior to Certain Actions . 59 ARTICLE 11. SUBORDINATION . . . . . . . . . . . . . . . . . . 60 Section 11.1.Agreement to Subordinate . . . . . . . . . . 60 Section 11.2Liquidation; Dissolution; Bankruptcy . . . . 60 Section 11.3Company Not to Make Payment with Respect to Debentures in Certain Circumstances . . . . . 61 Section 11.4Acceleration of Debentures . . . . . . . . . 61 Section 11.5When Distribution Must Be Paid Over . . . . . 61 Section 11.6Notice by Company . . . . . . . . . . . . . . 62 Section 11.7Subrogation . . . . . . . . . . . . . . . . . 62 Section 11.8Relative Rights . . . . . . . . . . . . . . . 62 Section 11.9Subordination May Not be Impaired by Company 62 Section 11.10Distribution of Notice to Representative . . 62 Section 11.11Rights of Trustee and Paying Agent . . . . . 63 Section 11.12Effectuation of Subordination by Trustee . . 64 Section 11.13Trust Moneys Not Subordinated . . . . . . . 64 ARTICLE 12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . 64 Section 12.1.Trust Indenture Act Controls . . . . . . . . 64 Section 12.2.Notices . . . . . . . . . . . . . . . . . . 64 Section 12.3.Communication by Holders with Other Holders 65 Section 12.4.Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . 65 Section 12.5.Statements Required in Certificate or Opinion of Counsel . . . . . . . . . . . . . 66 Section 12.6.Rules by Trustee and Agents . . . . . . . . 66 Section 12.7.Legal Holidays . . . . . . . . . . . . . . . 66 Section 12.8.No Recourse Against Others . . . . . . . . . 66 Section 12.9.Counterparts . . . . . . . . . . . . . . . . 67 Section 12.10.Governing Law . . . . . . . . . . . . . . . 67 Section 12.11.No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . 67 Section 12.12.Successors . . . . . . . . . . . . . . . . 67 Section 12.13.Severability . . . . . . . . . . . . . . . 67 Section 12.14.Table of Contents, Headings, Etc. . . . . . 67 EXHIBITS Exhibit A - Form of Debenture . . . . . . . . . . . . . . . . A Exhibit B - Transfer/ee Letter of Representation . . . . . . . B CROSS - REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . 7.8; 7.10; 12.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (c) . . . . . . . . . . . . . . . . . . . . . . . 7.6; 12.2 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 314 (a) . . . . . . . . . . . . . . . . . . . . . . . 4.2; 12.2 (b) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 (f) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . 7.1(b) (b) . . . . . . . . . . . . . . . . . . . . . . . 7.5; 12.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . 7.1(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . 7.1(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316 (a) (last sentence) . . . . . . . . . . . . . . . . . . 2.9 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . 6.5 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . 6.4 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 317 (a) (1) . . . . . . . . . . . . . . . . . . . . . . . . 6.8 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 N.A. means not applicable. ________________ * This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture. INDENTURE dated as of September 22, 1995, between Diagnostic/Retrieval Systems, Inc., a Delaware corporation (the "Company"), and The Trust Company of New Jersey, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 9% Senior Subordinated Convertible Debentures due October 1, 2003 (the "Debentures"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Acquired Debt" of any specified Person means Debt of any other Person existing at the time such other Person merged with or into or became a Subsidiary of such specified Person, including Debt incurred in connection with, or in contemplation of, such other person becoming a Subsidiary of such specified Person. "Affiliate" of any specified Person means (i) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person or (ii) any Person who is a director or officer (a) of such specified Person, (b) of any Subsidiary of such specified Person or (c) of any Person described in clause (i) above. For purpose of this definition, control of a person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" or "controlled" have meanings correlative to the foregoing. "Agent" means any Registrar, Paying Agent, Conversion Agent or co-registrar or any successor thereto. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) of Capital Stock of a Subsidiary, property or other asset (each referred to for the purposes of this definition as a "disposition") by the Company or any of its Subsidiaries other than (i) any disposition by any Subsidiary of the Company to the Company or by the Company or any Subsidiary of the Company to a wholly owned Subsidiary of the Company, (ii) a disposition of property or assets in the ordinary course of business and (iii) any issuance or sale by the Company of its Capital Stock, including any disposition by means of a merger, consolidation or similar transaction. "Board of Directors" means the Board of Directors of the Company or any committee of the Board duly authorized to act under the Indenture. "Business Day" means any day other than a Legal Holiday. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in the common or preferred equity (however designated) of such Person, including, without limitation, partnership interests. "Capitalized Lease Obligation" means, with respect to any person for any period, an obligation of such Person to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of such obligation shall be the capitalized amount shown on the balance sheet of such Person as determined in accordance with GAAP. "Change of Control" means the occurrence of any of the following events: (i) any person (as the term "person" is used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes the direct or indirect beneficial owner of shares of the Company's Capital Stock representing greater than 50% of the total voting power of all shares of Capital Stock of the Company entitled to vote in the election of directors under ordinary circumstances, (ii) the Company sells, transfers or otherwise disposes of all or substantially all of the assets of the Company, or (iii) during any period of two consecutive years (or, in the case this event occurs within the first two years after the date of issue of the Debentures, such shorter period as shall have commenced on the date of original issue), Continuing Directors cease for any reason to constitute a majority of the Board of Directors of the Company then in office. "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company, or any successor class of common equity into which the Class A Common Stock may hereafter be converted. "Common Stock" as applied to the Capital Stock of any corporation, means the common equity (however designated) of such Person, and with respect to the Company, means the Class A Common Stock and Class B Common Stock, par value $.01 per share, or any successor class of common equity into which either such class of common stock may hereafter be converted. "Company" means Diagnostic/Retrieval Systems, Inc., a Delaware corporation, until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter "Company" shall mean such successor. "Consolidated Net Income" means, for any fiscal period, the Net Income or loss of the Company and its Subsidiaries as the same would appear on a consolidated statement of earnings of the Company for such fiscal period prepared in accordance with GAAP, provided that (i) any extraordinary gain (but not loss) and any gain (but not loss) on sales of assets outside the ordinary course of business, in each case together with any related provisions for taxes, realized during such period shall be excluded, (ii) the results of operations of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) Net Income attributable to any Person other than a Subsidiary that is at least 50% owned by the Company shall be included only to the extent of the amount of cash dividends or distributions actually paid to the Company or a Subsidiary of the Company during such period, (iv) any extraordinary charge resulting from the repurchase of the Debentures shall be excluded and (v) the cumulative effect of a change in accounting principles based upon the implementation of a change required by the Financial Accounting Standards Board shall be excluded. "Consolidated Net Worth" means, for any fiscal period, the net stockholders' equity of the Company and its Subsidiaries as the same would appear on the consolidated balance sheet of the Company as at the end of such fiscal period prepared in accordance with GAAP. "Continuing Directors" means members of the Board of Directors of the Company who (i) are members of the Board of Directors on the date hereof or (ii) were nominated for election or elected to the Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election. "Conversion Agent" means the Trustee or any successor entity thereto. "Current Market Price" means, when used with respect to any security as of any date, the last sale price, regular way, or, in case no such sale takes place on such date, the average of the closing bid and asked prices, regular way, in either case as reported for consolidated transactions on the New York Stock Exchange or, if the security is not listed or admitted to trading on the New York Stock Exchange, as reported for consolidated transactions with respect to securities listed on the principal national securities exchange on which such security is listed or admitted to trading or, if the security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or such other system then in use or, if the security is not quoted by any such organization, the average of the closing bid and asked prices furnished by a New York Stock Exchange member firm selected by the Company. "Current Market Price" means, when used with respect to any Property other than a security as of any date, the market value of such Property on such date as determined by the Board of Directors of the Company in good faith, which shall be entitled to rely for such purposes on the advice of any firm of investment bankers or appraisers having familiarity with such Property. "Debt" with respect to any Person as of any date means and includes (without duplication) (i) the principal of and premium, if any, in respect of indebtedness of such Person, contingent or otherwise, for borrowed money, including, without limitation, all interest, fees and expenses owed with respect thereto (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments, or representing the deferred and unpaid balance of the purchase price of any property or interest therein or services, if and to the extent such indebtedness would appear as a liability (other than a liability for accounts payable and accrued expenses incurred in the ordinary course of business) upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP, (ii) all obligations issued or contracted for as payment in consideration of the purchase by such Person of Capital Stock or substantially all of the assets of another Person or as a result of a merger or a consolidation (other than any earn-outs or installment payments), (iii) all Capitalized Lease Obligations of such Person, (iv) all obligations of such Person in respect of letters of credit or similar instruments or reimbursement of letters of credit or similar instruments (whether or not such items would appear on the balance sheet of such Person), (v) all net obligations of such Person in respect of interest rate protection and foreign currency hedging arrangements, (vi) all guarantees by such Person of items that would constitute Debt under this definition (whether or not such items would appear on such balance sheet), and (vii) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock, but only to the extent such obligations arise on or prior to January 1, 2004; provided, however, that Debt issued at a discount from par shall be treated as if issued at par. The amount of Debt of any person at any date shall be the outstanding balance on such date of all unconditional obligations as described above and the maximum determinable liability, upon the occurrence of the liability giving rise to the obligation, of any contingent obligations referred to in clauses (i), (iv), (vi) and (vii) above at such date. "Debt to Operating Cash Flow Ratio" means, as of any date of determination, the ratio of (i) (a) the aggregate principal amount of all outstanding Debt of the Company and its Subsidiaries as of such date on a consolidated basis plus (b) the aggregate par or stated value of all outstanding Preferred Stock of the Company and its Subsidiaries as reflected on the Company's most recent consolidated balance sheet prepared in accordance with GAAP (excluding any such Preferred Stock held by the Company or a wholly owned Subsidiary of the Company) or, if greater with respect to any class of Capital Stock which is Disqualified Stock, the aggregate redemption amount thereof as reflected on the Company's most recent consolidated balance sheet (excluding any such Disqualified Stock held by the Company or a wholly owned Subsidiary of the Company) to (ii) Operating Cash Flow of the Company and its Subsidiaries on a consolidated basis for the four most recent full fiscal quarters ending immediately prior to such date, determined on a pro forma basis as set forth in Section 4.13. "Debentures Custodian" means, with respect to the Debentures issued in global form, initially, the Trustee and any successor entity thereto or such other Person as appointed by the Company from time to time in accordance with the provisions of this Indenture. "Default" means any event which is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Depositary" means, with respect to the Debentures issued in global form, the Person specified in Section 2.3 as the Depositary with respect to the Debentures, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and, thereafter "Depositary" shall mean or include such successor. "Disqualified Stock" means any Capital Stock which, by its terms or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof or mandatorily (except to the extent that such exchange or conversion right cannot be exercised or such mandatory conversion cannot occur prior to January 1, 2004), is, or upon the happening of an event or the passage of time would be, (a) required to be redeemed or repurchased by the Company or any of its Subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due prior to January 1, 2004 or (b) exchangeable or convertible into debt securities of the Company or any of its Subsidiaries at the option of the holder thereof or mandatorily, except to the extent that such exchange or conversion right cannot be exercised or such mandatory conversion cannot occur on or prior to January 1, 2004. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "GAAP" means, as of any date, generally accepted accounting principles in the United States and does not include any interpretations or regulations that have been proposed but that have not become effective. "Gross Agreement" means the Employment, Non-Competition and Termination Agreement between the Company and David E. Gross, dated as of July 20, 1994. "Holder" means a Person in whose name a Debenture is registered on the Register. "Indenture" means this Indenture, as amended or supplemented from time to time. "Independent Directors" means directors that (i) are not 20% or greater stockholders of the Company or the designee of any such stockholder, (ii) are not officers or employees of the Company, any of its Subsidiaries or of a stockholder referred to above in clause (i), (iii) are not Related Persons and (iv) do not have relationships that, in the opinion of the Board of Directors, would interfere with their exercise of independent judgment in carrying out the responsibilities of the directors. "Interest Payment Date" means April 1 and October 1 of each year, commencing April 1, 1996. "Investment" means any loan or advance to any Person, any acquisition of any interest in any other Person (including (i) with respect to a corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock and any securities convertible or exchangeable for any of the foregoing, bonds, notes, debentures, loans or other securities or Debt of such other Person and (ii) with respect to a partnership or similar person, any and all units, interests, rights to purchase, warrants, options, participations or other equivalents of or other partnership interests in (however designated) such Person and any securities convertible or exchangeable for any of the foregoing), any capital contribution to any other person, or any other investment in any other Person, other than (a) advances to officers and employees in the ordinary course of business, (b) creation of receivables in the ordinary course of business and (c) negotiable instruments endorsed for collection in the ordinary course of business. "Legal Holiday" means a Saturday, Sunday or any day on which banking institutions in the state in which the principal corporate trust office of the Trustee are required or authorized by law or other governmental action to be closed. "Lien" means any mortgage, lien, pledge, charge, security interest or other encumbrance of any nature whatsoever (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Net Income" of any Person means the net income (or loss) of such person, determined in accordance with GAAP, excluding, however, from the determination of Net Income any extraordinary gain (but not loss) and any gain (but not loss) realized upon the sale or other disposition (including, without limitation, dispositions pursuant to sale-leaseback transactions) of any real property or equipment of such Person, which is not sold or otherwise disposed of in the ordinary course of business, or of any Capital Stock of a Subsidiary of such Person. "Newman Agreement" means the employment, non-competition and retirement agreement between the Company and Leonard Newman, pursuant to which Mr. Newman is expected to receive certain compensation from the Company for consulting services and a non- compete arrangement. In addition pursuant to such agreement, Mr. Newman will receive certain retirement benefits. "1998 Debentures" means the 8 1/2% Convertible Subordinated Debentures of the Company due August 1, 1998. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, any Assistant Secretary or any Vice President of such Person. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice-President of the Company, that meets the requirements of Sections 12.4 and 12.5 hereof. "Operating Cash Flow" means, with respect to the Company and its Subsidiaries for any period, the Consolidated Net Income of the Company and its Subsidiaries for such period, plus (i) extraordinary net losses and net losses on sales of assets other than in the ordinary course of business during such period, to the extent such losses were deducted in computing Consolidated Net Income, plus (ii) provision for taxes based on income or profits, to the extent such provision for taxes was included in computing such Consolidated Net Income, and any provision for taxes utilized in computing the net losses under clause (i) hereof, plus (iii) to the extent deducted in calculating Consolidated Net Income, Total Interest Expense of the Company and its Subsidiaries for such period, plus (iv) depreciation, amortization and all other non-cash charges, to the extent such depreciation, amortization and other non-cash charges (excluding any such non-cash charges to the extent that they require an accrual of or reserve for cash charges for any future periods) were deducted in calculating such Consolidated Net Income (including amortization of goodwill and other intangibles). "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee that meets the requirements of Sections 12.4 and 12.5 hereof. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Debt" means (i) Debt evidenced by the Debentures in an aggregate principal amount not to exceed $25 million, (ii) Debt owed by the Company to any wholly owned Subsidiary of the Company or (iii) Debt owed by any wholly owned Subsidiary of the Company to the Company or any other wholly owned Subsidiary of the Company, (iv) Debt owed to Leonard Newman pursuant to the Newman Agreement, (v) Capitalized Lease Obligations not in excess of an aggregate of $2 million at any one time outstanding, plus any Capitalized Lease Obligations from an acquisition outstanding on the date of such acquisition, (vi) performance bonds or letters of credit incurred in the ordinary course of business or in connection with government contracts, (vii) deferred income taxes as defined in accordance with GAAP, (viii) Debt constituting inter-company payables or receivables between or among the Company and its Subsidiaries incurred in the ordinary course of business or (ix) Refinancing Debt. "Permitted Investments" means (i) Investments in the Company or in a Subsidiary of the Company; (ii) Investments by the Company or any Subsidiary of the Company in a Person, if as a result of such Investment (a) such Person becomes or is a wholly owned Subsidiary of the Company or the Subsidiary making such Investment or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company, the Subsidiary making such Investment or a wholly owned Subsidiary of either the Company or such Subsidiary making such Investment (provided that any subsequent issuance or transfer of any interests or other transaction which results in any such wholly owned Subsidiary ceasing to be a wholly owned Subsidiary of the Company, the Subsidiary making such Investment or another wholly owned Subsidiary of either the Company or such Subsidiary making such Investment or any subsequent transfer of such Permitted Investment (other than to the Company, the Subsidiary making such Investment or another wholly owned Subsidiary of either the Company or such Subsidiary making such Investment) shall be deemed for the purposes hereof to constitute the making of a new Investment by the maker thereof and therefore subject to a new determination of whether such Investment qualifies as a Permitted Investment); (iii) U.S. Government Obligations maturing within one year of the date of acquisition thereof; (iv) certificates of deposit maturing within one year of the date of acquisition thereof issued by a bank or trust company that is organized under the laws of the United States or any state thereof having capital, surplus and undivided profits aggregating in excess of $100,000,000; (v) repurchase agreements with respect to U.S. Government Obligations; and (vi) Investments in commercial paper rated at least A1 or the equivalent thereof by Standard & Poor's Corporation or P1 or the equivalent thereof by Moody's Investor Services, Inc. and maturing not more than 90 days from the date of the acquisition thereof. "Permitted Liens" means (i) Liens for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law and arising in the ordinary course of business and with respect to amounts that, to the extent applicable, either (a) are not yet delinquent by more than 30 days or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP; (iii) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) judgment or other similar Liens arising in connection with court proceedings, provided that (a) the execution or enforcement of each such Lien is effectively stayed within 30 days after entry of such judgment (or such judgment has been discharged within such 30 day period), the claims secured thereby are being contested in good faith by appropriate proceedings timely commenced and diligently prosecuted and the aggregate amount of the claims secured thereby does not exceed $1,000,000 at any time or (b) the payment of which is covered in full by insurance and the insurance company has not denied or contested coverage thereof; (v) Liens existing on property or assets of any entity at the time it becomes a Subsidiary of the Company or existing on property or assets at the time of the acquisition thereof by the Company or any of its Subsidiaries, which Liens were not created or assumed in contemplation of, or in connection with, such entity becoming a Subsidiary of the Company or such acquisition, as the case may be, and which attach only to such property or assets, provided that the Debt secured by such Liens is not thereafter increased; (vi) Liens incurred in connection with Capitalized Lease Obligations otherwise permitted under this Indenture; (vii) Liens securing Refinancing Debt, provided that such Liens only extend to the property or assets securing the Debt being refinanced, such Refinanced Debt was previously secured by similar Liens on such property or assets and the Debt or other obligations secured by such Liens is not increased; (viii) Liens securing the advance of progress payments or deposits made by the United States or any foreign government or any instrumentality thereof or any prime contractor for any such government or instrumentality and received by the Company in the ordinary course of its business; (ix) the Lien created by the Master Security Agreement between General Electric Capital Corporation and OMI Acquisition Corporation dated as of August 28, 1995; and (x) any other Liens existing on the date of the Indenture. "Person" means any individual, corporation, partnership, association, trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. "Preferred Stock" means, with respect to any Person, Capital Stock of such Person of any class or classes (however designated) which is preferred as to the payments of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of the Capital Stock of such Person. "Principal" of a debt security means the principal of the security plus the premium, if any, on the security. "Property" of any Person means all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included on the most recent consolidated balance sheet of such Person in accordance with GAAP. "Qualified Stock" means Capital Stock of the Company that is not Disqualified Stock. "Quoted Price" of the Common Stock means the last reported sales price of the Common Stock as reported by NASDAQ, National Market System, or if the Common Stock is listed on a securities exchange, the last reported sales price of the Common Stock on such exchange which shall be for consolidated trading if applicable to such exchange or if neither so reported or listed, the last reported bid price of the Common Stock. "Refinancing Debt" means Debt that refunds, refinances or extends any Debentures, or other Debt existing on the date hereof or hereafter incurred by the Company or its Subsidiaries pursuant to the terms of this Indenture, but only to the extent that (i) the Refinancing Debt is subordinated to the Debentures to the same extent as the Debt being refunded, refinanced or extended, if at all, (ii) the Refinancing Debt is scheduled to mature either (a) no earlier than the Debt being refunded, refinanced or extended, or (b) after the maturity date of the Debentures, (iii) the portion, if any, of the Refinancing Debt that is scheduled to mature on or prior to the maturity date of the Debentures has a Weighted Average Life to Maturity at the time such Refinancing Debt is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Debt being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Debentures, (iv) such Refinancing Debt is in an aggregate principal amount that is equal to or less than the aggregate principal amount then outstanding under the Debt being refunded, refinanced or extended, plus customary fees and expenses associated with refinancing and (v) such Refinancing Debt is incurred by the same Person that initially incurred the Debt being refunded, refinanced or extended, except that (a) the Company may incur Refinancing Debt to refund, refinance or extend Debt of any Subsidiary of the Company, and (b) any Subsidiary of the Company may incur Refinancing Debt to refund, refinance or extend Debt of any other wholly owned Subsidiary of the Company. "Related Person" means an individual related to an officer, director or employee of the Company or any of its Affiliates which relation is by blood, marriage or adoption and not more remote than first cousin. "Representative" means the indenture trustee or other trustee, agent or representative for an issue of Senior Indebtedness. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Senior Indebtedness" means the principal of and premium, if any, and interest on (a) the Debt of the Company or any of its Subsidiaries which is outstanding on the date of this Indenture and has been provided by a bank that is not an Affiliate of the Company or by any state or local government or agency thereof, (b) any Debt hereafter incurred by the Company or any of its Subsidiaries which expressly states that it is senior in right of payment to the Debentures and is provided by a bank that is not an Affiliate of the Company, (c) any Debt, whether outstanding on the date of this Indenture or hereafter incurred, which evidences the obligation of the Company or any of its Subsidiaries to refund any progress payments or deposits to the United States or any foreign government or any instrumentality thereof or any prime contractor for any such government or instrumentality and (d) amendments, renewals, extensions, modifications and refundings of any such Debt, whether any such Debt described in clause (a), (b) or (c) is outstanding on the date of this Indenture or hereafter created, incurred or assumed, unless, in any case, the instrument creating or evidencing any such Debt pursuant to which the same is outstanding provides that such Debt is not superior in right of payment to the Debentures. "Subsidiary" of any Person means a corporation or other entity a majority of whose Capital Stock with voting power, under ordinary circumstances, entitling holders of such Capital Stock to elect the board of directors or other governing body, is at the time, directly or indirectly, owned by such Person and/or a Subsidiary or Subsidiaries of such Person. "TIA" means the Trust Indenture Act of 1939 (U.S. Code SECTION 77aaa-77bbbb) as in effect on the date of execution of this Indenture; provided, however, that in the event the TIA is amended after such date, "TIA" means, to the extent required by any such amendments, to the TIA as so amended. "Total Interest Expense" means, for any period, the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, whether paid or accrued (including amortization of original issue discount, non-cash interest payments and the interest component of capital leases, but excluding amortization of debt and Preferred Stock issuance costs). "Transfer Restricted Securities" means Debentures that bear or are required to bear the legend set forth in Section 2.6(g) hereof. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter "Trustee" shall mean such successor. "Trust Officer" means any officer or corporate trust officer or assistant corporate trust officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "U.S. Government Obligations" means non-callable (i) direct obligations (or certificates representing an ownership interest in such obligations) of the United States for which its full faith and credit are pledged and (ii) obligations of a person controlled or supervised by, and acting as an agency or instrumentality of, the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States. "Weighted Average Life to Maturity" means, when applied to any Debt or Preferred Stock or portions thereof (if applicable) at any date, the number of years obtained by dividing (i) the then outstanding principal amount or liquidation amount of such Debt or Preferred Stock or portions thereof (if applicable) into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. Section 1.2. Other Definitions. Term Defined in Section "Agent Members" . . . . . . . . . . . . . . . . . . . . 2.1 "Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . 6.1 "Change of Control Date" . . . . . . . . . . . . . . . . 4.9 "Change of Control Offer" . . . . . . . . . . . . . . . 4.9 "Change of Control Notice" . . . . . . . . . . . . . . . 4.9 "Change of Control Payment" . . . . . . . . . . . . . . 4.9 "Change of Control Payment Date" . . . . . . . . . . . . 4.9 "Conversion Price" . . . . . . . . . . . . . . . . . . 10.1 "Custodian" . . . . . . . . . . . . . . . . . . . . . . 6.1 "Deficiency Date" . . . . . . . . . . . . . . . . . . . 4.5 "Deficiency Offer" . . . . . . . . . . . . . . . . . . . 4.5 "Deficiency Notice" . . . . . . . . . . . . . . . . . . 4.5 "Deficiency Payment Date" . . . . . . . . . . . . . . . 4.5 "Deficiency Repurchase Amount" . . . . . . . . . . . . . 4.5 "Definitive Securities" . . . . . . . . . . . . . . . . 2.1 "Event of Default" . . . . . . . . . . . . . . . . . . . 6.1 "Global Security" . . . . . . . . . . . . . . . . . . . 2.1 "Incur" . . . . . . . . . . . . . . . . . . . . . . . 4.13 "Paying Agent" . . . . . . . . . . . . . . . . . . . . . 2.3 "Purchase Agreement" . . . . . . . . . . . . . . . . . . 2.1 "Reference Period" . . . . . . . . . . . . . . . . . . 4.13 "Register" . . . . . . . . . . . . . . . . . . . . . . . 2.3 "Registrar" . . . . . . . . . . . . . . . . . . . . . . 2.3 "Restricted Payment" . . . . . . . . . . . . . . . . . . 4.6 "Rule 144A" . . . . . . . . . . . . . . . . . . . . . . 2.1 Section 1.3. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA, which are incorporated by reference in and made part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Debentures; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Debentures means the Company and any successor obligor upon the Debentures. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE DEBENTURES Section 2.1. Form and Dating. The Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A which is hereby incorporated in and expressly made a part of this Indenture. The Debentures may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Debenture shall be dated the date of its authentication. The terms of the Debentures set forth in Exhibit A are part of the terms of this Indenture. The Debentures are general unsecured obligations of the Company limited to $25 million in aggregate principal amount, subject to Section 2.7. (a) Global Securities. The Debentures are being offered and sold by the Company pursuant to a Purchase Agreement, dated concurrently herewith, between the Company and Forum Capital Markets L.P. (the "Purchase Agreement"). Debentures offered and sold to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in reliance on Rule 144A under the Securities Act ("Rule 144A") as provided in the Purchase Agreement, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form without interest coupons and with the Global Securities Legend and, unless removed in accordance with Section 2.6(g) hereof, the Restricted Securities Legend set forth in Exhibit A hereto (each, a "Global Security"), which shall be deposited on behalf of the purchasers of the Debentures represented thereby with the Trustee, at its Jersey City, New Jersey office, as custodian for the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. (b) Book-Entry Provisions. This Section 2.1(b) shall apply only to any Global Security deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(b), authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of the Depositary for such Global Security or Global Securities or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as the custodian of the Depositary or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of the Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (c) Certificated Securities. Except as provided in Section 2.10, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Debentures. Debentures offered and sold to Persons who are not "qualified institutional buyers" shall be issued certificated Debentures in definitive, fully registered form without interest coupons, with the Restricted Securities Legend and, if such Person is an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), the Institutional Accredited Investor Legend, but without the Schedule of Exchanges of Global Security for Definitive Securities, set forth in Exhibit A hereto ("Definitive Securities"); provided, however, that upon transfer of such Definitive Securities to a "qualified institutional buyer," such Definitive Securities will, unless the Global Security has previously been exchanged, be exchanged for an interest in a Global Security pursuant to the provisions of Section 2.6 hereof. After a transfer of any Debentures during the period of the effectiveness of a registration statement under the Securities Act with respect to the Debentures, all requirements pertaining to legends on such Debentures will cease to apply, the requirements requiring any such Debentures issued to certain Holders be issued in global form will cease to apply, and a certificated Debenture without legends will be available to the transferee of the Holder of such Debentures upon exchange of such transferring Holder's certificated Debentures or directions to transfer such Holder's interest in the Global Security, as applicable. Section 2.2. Execution and Authentication. Two Officers shall sign the Debentures for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Debentures and may be in facsimile form. If an Officer whose signature is on a Debenture no longer holds that office at the time such Debenture is authenticated, such Debenture shall nevertheless be valid. A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The Trustee shall authenticate Debentures for original issue up to the aggregate principal amount stated in Paragraph 4 of the Debentures, upon a written order of the Company signed by an Officer to a Trust Officer directing the Trustee to authenticate the Debentures and certifying that all conditions precedent to the issuance of the Debentures contained herein have been complied with. The aggregate principal amount of Debentures outstanding at any time may not exceed such amount, except as provided in Section 2.7 hereof. The Trustee may appoint an authenticating agent reasonably acceptable to and at the expense of the Company to authenticate Debentures. Unless limited by the terms of such appointment, an authenticating agent may authenticate Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company. Section 2.3. Registrar and Paying Agent. The Company shall maintain an office or agency where Debentures may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Debentures may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Debentures (the "Register") and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. If the Company fails to appoint or maintain itself or another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company or any of its wholly owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Security. The Company initially appoints the Trustee to act as Registrar and Paying Agent with respect to the Global Security. Section 2.4. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Debentures, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and account for any money disbursed by it. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any money disbursed by it. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary of the Company) shall have no further liability for the money delivered to the Trustee. If the Company or a Subsidiary of the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Debentures. Section 2.5. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA SECTION312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least three Business Days before each Interest Payment Date and, at such other times as the Trustee may request in writing, within five Business Days after such request a list in such form and as of such date as the Trustee may reasonably require, and which the Trustee may conclusively rely upon, of the names and addresses of Holders, and the Company shall otherwise comply with TIA SECTION 312(a). Section 2.6. Transfer and Exchange. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented to the Registrar with the request: (x) to register the transfer of the Definitive Securities; or (y) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Securities presented or surrendered for register of transfer or exchange: i) shall be duly endorsed or accompanied by a written instruction of transfer in form and substance satisfactory to the Registrar duly executed by the Holder thereof or by his or her attorney, duly authorized in writing; and ii) in the case of Transfer Restricted Securities that are Definitive Securities, shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse of the Debentures); or (B) if such Transfer Restricted Security is being transferred to the Company or a "qualified institutional buyer" (as defined in Rule 144A) in accordance with Rule 144A, a certification to that effect (in the form set forth on the reverse of the Debentures); or (C) if such Transfer Restricted Securities are being transferred (w) pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act; or (x) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring the security for its own account, or for the account of such an institutional accredited investor, in each case in a minimum principal amount of Debentures of $250,000 for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act; or (y) in reliance on another exemption from the registration requirements of the Securities Act: (i) a certification to that effect (in the form set forth on the reverse of the Debentures), (ii) if the Company, Trustee or Registrar so requests, an Opinion of Counsel reasonably acceptable to the Company, Trustee and Registrar to the effect that such transfer is in compliance with the Securities Act and (iii) in the case of clause (x), a signed letter in substantially the form of Exhibit B hereto. (b) Restrictions on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: i) if such Definitive Security is a Transfer Restricted Security, certification, substantially in the form of Exhibit B hereto, that such Definitive Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A) in accordance with Rule 144A; and ii) whether or not such Definitive Security is a Transfer Restricted Security, written instructions directing the Trustee to make, or to direct the Debentures Custodian to make, an endorsement on the Global Security to reflect an increase in the aggregate principal amount of the Debentures represented by the Global Security, then the Trustee shall cancel such Definitive Security in accordance with Section 2.11 hereof and cause, or direct the Debentures Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Debentures Custodian, the aggregate principal amount of Debentures represented by the Global Security to be increased accordingly. If no Global Security is then outstanding, the Company shall issue and the Trustee shall authenticate a new Global Security in the appropriate principal amount. (c) Transfer and Exchange of Global Security. The transfer and exchange of a Global Security or beneficial interests therein shall be effected through the Depositary in accordance with this Indenture (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) Transfer of a Beneficial Interest in a Global Security for a Definitive Security. i) Any Person having a beneficial interest in a Global Security that is being exchanged or transferred pursuant to an effective registration statement under the Securities Act or pursuant to clause (A), (B) or (C) below may upon request, and if accompanied by the information specified below, exchange such beneficial interest for a Definitive Security of the same aggregate principal amount. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary, from the Depositary, or its nominee on behalf of any Person having a beneficial interest in a Global Security, and upon receipt by the Trustee of a written order or such other form of instructions, and, in the case of a Transfer Restricted Security only, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification from such Person to that effect (in the form set forth on the reverse of the Debentures) or (B) if such beneficial interest is being transferred to a "qualified institutional buyer" (as defined in Rule 144A) in accordance with Rule 144A, a certification to that effect from the transferor (in the form set forth on the reverse of the Debentures); or (C) if such beneficial interest is being transferred (w) pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act; or (x) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring the security for its own account, or for the account of such an institutional accredited investor, in each case in a minimum principal amount of Debentures of $250,000 for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Debentures; or (y) in reliance on another exemption from the registration requirements of the Securities Act: (i) a certification to that effect from the transferee or transferor (in the form set forth on the reverse of the Debentures), (ii) if the Company, Trustee or Registrar so requests, an Opinion of Counsel from the transferee or transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, and (iii) in the case of clause (x), a signed letter in substantially the form of Exhibit B hereto, then the Trustee or the Debentures Custodian, at the direction of the Trustee, will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Debentures Custodian, the aggregate principal amount of the Global Security to be reduced on its books and records and, following such reduction, the Company will execute and, upon receipt of an authentication order in the form of an Officers' Certificate in accordance with Section 2.2 hereof, the Trustee will authenticate and deliver to the transferee a Definitive Security in the appropriate principal amount. ii) Definitive Debentures issued in exchange for a beneficial interest in a Global Security pursuant to this Section 2.6(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from the Agent Members or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the Persons in whose names such Debentures are so registered. (e) Restrictions on Transfer and Exchange of Global Security. Notwithstanding any other provisions of this Indenture (other than the provisions set forth in Section 2.6(f)), a Global Security may not be transferred as a whole or in part except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Definitive Securities in Absence of Depositary. If at any time: i) the Depositary notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Securities and a successor Depositary for the Global Securities is not appointed by the Company within 90 days after delivery of such notice; or ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Securities under this Indenture, then the Company will execute, and the Trustee, upon receipt of an Officers' Certificate, in accordance with Section 2.2 hereof, requesting the authentication and delivery of Definitive Securities, will authenticate and deliver Definitive Securities, in an aggregate principal amount equal to the principal amount of the Global Securities, in exchange for such Global Securities. (g) Legends. i) Except as permitted by the following paragraph (ii), each Debenture certificate evidencing the Global Securities and the Definitive Securities (and all Debentures issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form: "THIS DEBENTURE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS DEBENTURE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. EACH PURCHASER OF THIS DEBENTURE IS HEREBY NOTIFIED THAT THE SELLER OF THIS DEBENTURE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. "THE HOLDER OF THIS DEBENTURE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS DEBENTURE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (IV) TO THE COMPANY OR (V) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (V) IN ACCORDANCE WITH ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS DEBENTURE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 under the Securities Act or an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legends set forth above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) any such Transfer Restricted Security represented by a Global Security shall not be subject to the provisions set forth in (i) above (such sales or transfers being subject only to the provisions of Section 2.6(e)); provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Security for a Definitive Security that does not bear a legend, which request is made in reliance upon Rule 144 under the Securities Act, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 under the Securities Act (such certification to be in the form set forth on the reverse of the Debentures). (h) Cancellation and/or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for Definitive Securities, redeemed, repurchased or cancelled, such Global Security shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, redeemed, repurchased or cancelled, the principal amount of Debentures represented by such Global Security shall be reduced accordingly and an endorsement shall be made on such Global Security, by the Trustee or the Debentures Custodian, at the direction of the Trustee, to reflect such reduction. (i) Obligations with respect to Transfers and Exchanges of Definitive Securities. i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Definitive Securities and a Global Security at the Registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments or similar governmental charge payable in connection therewith. (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of (a) any Definitive Security selected for redemption in whole or in part pursuant to Article 3, except the unredeemed portion of any Definitive Security being redeemed in part, or (b) any Debenture during the 15 day period preceding the mailing of a notice of redemption or an offer to repurchase or redeem Debentures or the 15 day period preceding an Interest Payment Date. (iv) Prior to the due presentation for registration of transfer of any Debenture, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the Person in whose name a Debenture is registered as the absolute owner of such Debenture for the purpose of receiving payment of principal of and interest on such Debenture and for all other purposes whatsoever, whether or not such Debenture is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Debentures issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Debentures surrendered upon such transfer or exchange. (j) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in the Depositary or other Person with respect to the accuracy of the records of the Depositary or its nominee or of any participant or member thereof, with respect to any ownership interest in the Debentures or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depositary) or any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Debentures. All notices and communications to be given to the Holders and all payments to be made to Holders under the Debentures shall be given or made only to or upon the order of the registered Holders (which shall be the Depositary or its nominee in the case of a Global Security). The rights of beneficial owners in any Global Security shall be exercised only through the Depositary subject to the applicable rules and procedures of the Depositary. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depositary with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Debenture (including any transfers between or among the Agent Members or beneficial owners in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Section 2.7. Replacement Debentures. If any mutilated Debenture is surrendered to the Trustee, the Registrar or Debentures Custodian, or if the Holder of a Debenture claims that such Debenture has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee, upon the written order of the Company signed by an Officer, shall authenticate a replacement Debenture if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond shall be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss which any of them may suffer if a Debenture is replaced. The Company may charge the Holder for its expenses in replacing a Debenture. Every replacement Debenture is an additional obligation of the Company and shall be entitled to all benefits of this Indenture equally and proportionately with all other Debentures duly issued hereunder. Section 2.8. Outstanding Debentures. The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the interest in a Global Security effected by the Trustee hereunder, and those described in this Section 2.8 as not outstanding. Except as set forth in Section 2.9 hereof, a Debenture does not cease to be outstanding because the Company or an Affiliate holds the Debenture. If a Debenture is replaced pursuant to Section 2.7 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If the principal amount of any Debenture is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary of the Company or an Affiliate of any thereof) segregates and holds interest, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay Debentures payable on that date, and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Debentures shall be deemed to be no longer outstanding and shall cease to accrue interest. Section 2.9. Treasury Debentures. In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by the Company, or by any Affiliate of the Company shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Debentures as to which a Trust Officer of the Trustee knows are so owned shall be so disregarded. Section 2.10. Temporary Securities. (a) Until Definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Debentures upon a written order of the Company signed by an Officer and delivered or cause to be delivered to a Trust Officer. Temporary Debentures shall be substantially in the form of Definitive Securities but may have variations that the Company considers appropriate for temporary Debentures. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate, upon receipt of a written order of the Company signed by two Officers which shall specify the amount of the temporary Debentures to be authenticated and the date on which the temporary Debentures are to be authenticated, Definitive Securities in exchange for temporary Debentures. (b) A Global Security deposited with the Depositary or with the Trustee as custodian for the Depositary pursuant to Section 2.1 shall be transferred to the beneficial owners thereof only if such transfer complies with Section 2.6 and (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or if at any time such Depositary ceases to be a "clearing agency" registered under the Exchange Act and a successor depositary is not appointed by the Company within 90 days after such notice or (ii) an Event of Default has occurred and is continuing. (c) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section 2.10 shall be surrendered by the Depositary to the Trustee located in Jersey City, New Jersey, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of Initial Notes of authorized denominations. Any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depository shall direct. Any Debenture delivered in exchange for an interest in the Global Security shall, except as otherwise provided by Section 2.6(b) bear the restricted securities legend set forth in Exhibit A hereto. (d) Subject to the provisions of Section 2.10(c), the registered Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Debentures. (e) In the event of the occurrence of either of the events specified in Section 2.10(b), the Company will promptly make available to the Trustee, at the Company's expense, a reasonable supply of certificated Debentures in definitive, fully registered form without interest coupons. Section 2.11. Cancellation. The Company at any time may deliver Debentures to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Debentures surrendered for registration of transfer, exchange, payment, replacement or cancellation and certification of their destruction (subject to the record retention requirements of the Exchange Act) shall be delivered to the Company unless, by a written order, signed by an Officer, the Company shall direct that cancelled Debentures be returned to it. The Company may not issue new Debentures to replace Debentures that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12. Defaulted Interest. If the Company defaults in a payment of interest on the Debentures, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company shall pay the defaulted interest to the Persons who are Holders on a subsequent special record date. The Company shall fix or cause to be fixed (or upon the Company's failure to do so the Trustee shall fix) any such special record date and payment date to the reasonable satisfaction of the Trustee, which specified record date shall not be less than 10 days prior to the payment date for such defaulted interest, and shall promptly mail or cause to be mailed to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment such money when deposited to be held in trust for the benefit of the Person entitled to such defaulted interest as in this subsection provided. Section 2.13. Deposit of Moneys. Prior to 10:00 a.m. New York City time on each Interest Payment Date and the maturity date, the Company shall have deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date or maturity date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date or maturity date, as the case may be. ARTICLE 3. REDEMPTION Section 3.1. Notices to Trustee. If the Company elects to redeem Debentures pursuant to the optional redemption provisions of paragraph 5 of the Debentures, it shall notify the Trustee of the redemption date, the principal amount of Debentures to be redeemed and the redemption price at least 15 days prior to mailing any notice of redemption to the Holders (unless the Trustee consents to a shorter period). Such notice shall be accompanied by an Officers' Certificate from the Company to the effect that such redemption will comply with the conditions herein. The Company shall give notice to the Holders of any redemption pursuant to this Article 3 at least 30 days but not more than 60 days before the redemption date. If fewer than all the Debentures are to be redeemed, the record date relating to such redemption shall be selected by the Company and given to the Trustee, which record date shall be not less than 15 days after the date of notice to the Trustee. Section 3.2. Selection of Debentures to be Redeemed. If less than all the Debentures are to be redeemed, the Trustee shall select the Debentures to be redeemed in compliance with the requirements of the principal national securities exchange, if any, on which the Debentures are quoted or listed or, if the Debentures are not listed, on a pro rata basis, by lot or by such other method that complies with applicable legal requirements and that the Trustee considers fair and appropriate. The Trustee shall make the selection not more than 60 days and not less than 30 days before the redemption date from Debentures outstanding and not previously called for redemption. The Trustee may select for redemption portions of the principal amount of Debentures that have denominations larger than $1,000. Debentures and portions of them it selects shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. The Trustee shall notify the Company promptly of the Debentures or portions of Debentures to be called for redemption. Section 3.3. Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption by first class mail to each Holder whose Debentures are to be redeemed. The notice shall identify the Debentures to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Debenture is being redeemed in part, the portion of the principal amount of such Debenture to be redeemed and that, after the redemption date, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion will be issued; (d) the Conversion Price (as defined in the Debenture); (e) the name and address of the Paying Agent and Conversion Agent; (f) that Debentures called for redemption may be converted at any time before the close of business on the day preceding the redemption date, in accordance with Article 10; (g) that Holders who want to convert Debentures must satisfy the requirements in paragraph 8 of the Debentures; (h) that unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, Debentures called for redemption must be surrendered to the Paying Agent to collect the redemption price; and (i) that interest on Debentures called for redemption ceases to accrue on and after the redemption date. At the Company's request, the Trustee shall give notice of redemption in the Company's name and at its expense. In such event, the Company shall provide the Trustee with the information required by this Section 3.3. Section 3.4. Effect of Notice of Redemption. Notice of redemption shall be deemed to be given when mailed to each Holder at its last registered address, whether or not the Holder receives such notice. Once notice of redemption is mailed, Debentures called for redemption become due and payable on the redemption date at the redemption price set forth in the Debentures. A notice of redemption may not be conditional. Upon surrender to the Trustee or Paying Agent, such Debentures called for redemption shall be paid at the redemption price, plus accrued but unpaid interest thereon to the redemption date. If the redemption date is after an Interest Payment Date but prior to the next succeeding regular interest payment record date, interest with respect to any Debenture converted after delivery of the related notice of redemption shall be paid to the Holder so converting for the period from the last Interest Payment Date to the date of such conversion. If the redemption date is after a regular record date and on or prior to the related Interest Payment Date, the accrued interest shall be payable to Holders of record on such record date. Section 3.5. Deposit of Redemption Price. On or before 10:00 am. New York City time on any redemption date, the Company shall deposit with the Trustee or with the Paying Agent available funds sufficient to pay the redemption price of and accrued interest (if payable under the Debentures) on all Debentures to be redeemed on that date other than Debentures or portions of Debentures called for redemption which prior thereto have been delivered by the Company to the Trustee for cancellation or have been converted. The Trustee or the Paying Agent shall return to the Company any money not required for that purpose. Section 3.6. Debentures Redeemed in Part. Upon surrender of a Debenture that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Debenture equal in principal amount to the unredeemed portion of the Debenture surrendered. ARTICLE 4. COVENANTS Section 4.1. Payment of Debentures. The Company shall pay the principal of and interest on the Debentures on the dates and in the manner provided in the Debentures or pursuant to this Indenture. Principal and interest shall be considered paid on the date due if the Paying Agent (other than the Company or a Subsidiary of the Company) on that date holds money in accordance with this Indenture designated for and sufficient to pay in cash all principal and interest then due and the Paying Agent is not prohibited from paying such money to Holders on that date pursuant to the terms of this Indenture. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on (i) overdue principal at the rate borne by the Debentures and (ii) overdue installments of interest at the same rate. Section 4.2. Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 4.3. Continued Existence. Subject to Article 5 hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence as a corporation and will refrain from taking any action that would cause its existence as a corporation to cease, including without limitation any action that would result in its liquidation, winding up or dissolution. Section 4.4. SEC Reports. The Company shall file with the SEC annual reports and information, documents and other reports which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Within 15 days after each such filing, the Company shall deliver copies of the materials so filed to the Trustee and the Holders (at their addresses as set forth in the Register) or cause the Trustee to deliver copies of such materials to the Holders at the Company's expense. The Company also shall comply with the other provisions of TIA SECTION 314(a). The Company shall timely comply with its reporting and filing obligations under the applicable federal securities laws. Section 4.5. Maintenance of Consolidated Net Worth. (a) The Company is required to maintain a Consolidated Net Worth of at least $18 million. If the Company's Consolidated Net Worth is less than $18 million at the end of any fiscal quarter, the Company shall furnish to the Trustee an Officer's Certificate within 45 days after the end of such fiscal quarter (90 days after the end of any fiscal year) notifying the Trustee that the Company's Consolidated Net Worth has declined below $18 million. If, at any time or from time to time, the Company's Consolidated Net Worth at the end of each of any such two consecutive fiscal quarters (the last day of the second fiscal quarter being referred to as a "Deficiency Date") is less than $18 million, then the Company shall, in each such event, no later than 50 days after each Deficiency Date (100 days if such Deficiency Date is also the end of the Company's fiscal year), mail to the Trustee and each Holder at such Holder's last address as it appears on the Debenture Register a notice (the "Deficiency Notice") of the occurrence of such deficiency, which shall include an offer by the Company (the"Deficiency Offer") to repurchase up to 10% of the aggregate principal amount of Debentures originally issued (or such lesser amount as may be outstanding at the time of the Deficiency Notice) (the "Deficiency Repurchase Amount") at a repurchase price equal to 100% of the principal amount of the Debentures repurchased plus accrued but unpaid interest, if any, to the date of purchase as described below. The failure to maintain a Consolidated Net Worth of at least $18 million as of the end of any fiscal quarter will not be counted towards the making of more than one Deficiency Offer. (b) The Deficiency Notice shall state: (i) that a net worth deficiency has occurred, referencing the applicable paragraph of the Debentures; (ii) that the Company is offering to repurchase the Deficiency Repurchase Amount; (iii) the repurchase price; (iv) the expiration date of the Deficiency Offer, which shall be no earlier than 30 days nor later than 45 days after the date such notice is mailed; (v) the date such purchase shall be effected, which shall be no later than 20 days after expiration date of the Deficiency Offer (the "Deficiency Payment Date"); (vi) that Debentures not accepted for payment pursuant to the Deficiency Offer shall continue to accrue interest; (vii) that, unless the Company defaults in payment of the Deficiency Repurchase Amount, all Debentures accepted for payment pursuant to the Deficiency Offer shall cease to accrue interest after the Deficiency Payment Date; (viii) that if any Debenture is repurchased in part, a new Debenture or Debentures in principal amount equal to the unrepurchased portion will be issued; (ix) the Conversion Price; (x) the name and address of the Paying Agent and Conversion Agent; (xi) that Debentures to be repurchased must be surrendered to the Paying Agent to collect the repurchase price; and (xii) any other information required by applicable law to be included therein and any other procedures that a Holder must follow to have Debentures repurchased in such Deficiency Offer. (c) The Deficiency Offer shall remain open until the close of business on the last day of the Deficiency Offer. If the Deficiency Payment Date is on or after an interest payment record date and on or before the related Interest Payment Date, accrued interest through such Interest Payment Date will be paid to each Person in whose name a Debenture repurchased in the Deficiency Offer is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender Debentures pursuant to such Deficiency Offer. The Company will comply with all applicable securities laws and regulations in connection with each Deficiency Offer. (d) On or before each Deficiency Payment Date, the Company shall, to the extent lawful, purchase the Deficiency Repurchase Amount of Debentures or, if less than the Deficiency Repurchase Amount has been delivered for repurchase, all Debentures delivered for repurchase in response to the Deficiency Offer. If the aggregate principal amount of Debentures delivered for repurchase exceeds the Deficiency Repurchase Amount, the Company will purchase the Debentures delivered to it pro rata (in $1,000 increments only) among the Debentures delivered based on the relative principal amount of Debentures owned by the Holders delivering Debentures for repurchase. The Company may credit against the principal amount of Debentures to be repurchased in any Deficiency Offer 100% of the principal amount (excluding premium) of Debentures acquired by the Company subsequent to the Deficiency Date and prior to the related Deficiency Payment Date through purchase (otherwise than pursuant to this provision or a Change of Control Offer), optional redemption, conversion or exchange and surrendered for cancellation. In addition, on or before such Deficiency Payment Date, the Company shall: (i) if the Company appoints a Depositary or Paying Agent, deposit with such Depositary or Paying Agent money sufficient to pay the repurchase price of all Debentures or portions thereof so accepted; (ii) deliver or cause the Depositary or Paying Agent to deliver an Officers' Certificate stating such Debentures or portion thereof accepted for payment by the Company in accordance with the terms of this Section 4.5. (e) Not later than two Business Days prior to the Deficiency Payment Date, the Company shall provide the Trustee with written notice of whether the Company elects to credit any Debentures against its obligation to repurchase Debentures as provided above and shall set forth the amount of such credit and the basis therefor (including identification of any previously cancelled Debentures not theretofore credited). Such notice shall be accompanied by any Debentures required to be delivered to the Trustee for cancellation, as provided above, in order to be credited against the Company's obligation to purchase Debentures hereunder. (f) The Depositary, the Paying Agent or the Company, as the case may be, shall promptly (but in any case not later than five Business Days after the Deficiency Payment Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Debentures tendered by such Holder and accepted by the Company for purchase, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Debenture equal in principal amount to any unpurchased portion of the Debenture surrendered. Any Debentures not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. Section 4.6. Limitation on Restricted Payments and Investments. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, (i) declare or pay any distribution or dividend on or in respect of any class of its Capital Stock (except dividends or distributions payable by wholly owned Subsidiaries of the Company and dividends or distributions payable in Qualified Stock of the Company or in options, warrants or other rights to purchase Qualified Stock of the Company); (ii) purchase, repurchase, prepay, redeem, defease or otherwise acquire or retire for value (other than in Qualified Stock of the Company or in options, warrants or other rights to purchase Qualified Stock of the Company) any Capital Stock in the Company or any of its Subsidiaries (other than a wholly owned Subsidiary of the Company); (iii) make or permit any Subsidiary to make an Investment (other than Permitted Investments) in any of its or their Affiliates or any Related Person, or any payment on a guaranty of any obligation of any of its or their Affiliates or any Related Person (other than (a) of any wholly owned Subsidiary or (b) of any other Subsidiary in an amount equal to the amount of the obligation with respect to which such guaranty relates multiplied by the fraction whose numerator is the ownership percentage of such Subsidiary by the Company and its wholly owned Subsidiaries and whose denominator is 100%); or (iv) repay, prepay, redeem, defease, retire or refinance, prior to scheduled maturity or scheduled sinking fund payment, any other Debt which is pari passu with, or subordinate to, the Debentures (other than (x) by the payment of Qualified Stock of the Company or of options, warrants or other rights to purchase Qualified Stock of the Company or (y) of up to $10.0 million aggregate principal amount of the 1998 Debentures), except, in the case of this clause (iv), if the proceeds used for such repayment, prepayment, redemption, defeasance, retirement or refinancing are generated from the issuance of Refinancing Debt (any such declaration, payment, distribution, purchase, repurchase, prepayment, redemption, defeasance or other acquisition or retirement or Investment referred to in clauses (i) through (iv) above being hereinafter referred to as a "Restricted Payment"); unless at the time of and after giving effect to a proposed Restricted Payment (the value of any such payment, if other than cash, as determined by the Board of Directors, including the affirmative vote of the Independent Directors, whose determination shall be conclusive and evidenced by a board resolution) (a) no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall have occurred and be continuing and (b) the Company could incur an additional $1.00 of Debt pursuant to the provisions of Section 4.13. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.6 were computed, which calculations may be based upon the Company's latest available financial statements. Section 4.7. Limitation on Sales of Assets and Subsidiary Stock. The Company shall not, and shall not permit any of its Subsidiaries to, make any Asset Disposition having a fair market value or resulting in gross proceeds to the Company or any such Subsidiary in excess of $1 million in any single transaction or series of related transactions or $5 million in the aggregate over the life of the Debentures, unless the Company or any such Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (as determined by the Board of Directors of the Company and evidenced by a board resolution) of the interests and assets subject to such Asset Disposition. Section 4.8. Taxes. The Company shall, and shall cause each of its Subsidiaries to, pay or discharge prior to delinquency all taxes, assessments and governmental levies, except as contested in good faith and by appropriate proceedings. Section 4.9. Change of Control. (a) In the event of a Change of Control, the time of such Change of Control being referred to as the "Change of Control Date," then the Company shall give written notice (the "Change of Control Notice") to the Holders in writing of such occurrence and shall make an offer to purchase (as the same may be extended in accordance with applicable law, the "Change of Control Offer") all then outstanding Debentures at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the Change of Control Payment Date, if any. The Change of Control Offer shall be mailed by the Company not more than 30 days following any Change of Control Date, unless the Company has previously mailed a notice of optional redemption by the Company of all of the Debentures, to each Holder at such Holder's last registered address by first class mail with a copy to the Trustee and the Paying Agent and shall set forth: (i) that a Change of Control has occurred and that the Company is offering to repurchase all of such Holder's Debentures; (ii) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, information with respect to pro forma income, cash flow and capitalization of the Company after giving effect to such Change of Control); (iii) the repurchase price (the "Change of Control Payment"); (iv) the expiration date of the Change of Control Offer, which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed; (v) the date such purchase shall be effected, which shall be no later than 30 days after expiration date of the Change of Control Offer (the "Change of Control Payment Date"); (vi) that any Debentures not accepted for payment pursuant to the Change of Control Offer shall continue to accrue interest; (vii) that, unless the Company defaults in the payment of the Change of Control Payment, all Debentures accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (viii) the Conversion Price; (ix) the name and address of the Paying Agent and Conversion Agent; (x) that Debentures must be surrendered to the Paying Agent to collect the repurchase price; and (xi) any other information required by applicable law to be included therein and any other procedures that a Holder must follow in order to have such Debentures repurchased. (b) The Change of Control Offer shall remain open until the close of business on the last day of the Change of Control Offer. If the Change of Control Payment Date is on or after an interest payment record date and on or before the related Interest Payment Date, accrued interest through such Interest Payment Date will be paid to each Person in whose name a Debenture repurchased in the Change of Control Offer is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender Debentures pursuant to the Change of Control Offer. (c) In the event that the Company is required to make a Change of Control Offer, the Company will comply with any applicable securities laws and regulations, including, to the extent applicable, Section 14(e), Rule 14e-1 and any other tender offer rules under the Exchange Act which may then be applicable in connection with any offer by the Company to purchase Debentures at the option of the Holders thereof. (d) On the Change of Control Payment Date, the Company shall, to the extent lawful: (i) accept for payment Debentures or portions thereof tendered pursuant to the Change of Control Notice, (ii) deposit with the Paying Agent in immediately available funds an amount equal to the Change of Control Payment in respect of all Debentures or portions thereof so accepted, and (iii) deliver or cause to be delivered to the Trustee the Debentures so accepted together with an Officers' Certificate stating the Debentures or portions thereof tendered to the Company. (e) The Paying Agent shall promptly mail to each Holder of Debentures so accepted payment in an amount equal to the purchase price for the Debentures, and the Trustee shall promptly authenticate and mail to each Holder a new Debenture equal in principal amount to any unpurchased portion of the Debentures surrendered by such Holder, if any; provided, that each such new Debenture shall be in principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of any redemptions by Holders pursuant to this Section 4.9 on or as soon as practicable after the Change of Control Payment Date. Section 4.10. Limitation on Stock Splits, Consolidations and Reclassifications. The Company shall not effect a stock split, consolidation or reclassification of any class of its Capital Stock unless (a) an equivalent stock split, consolidation or reclassification is simultaneously made with respect to each other class of Capital Stock of the Company and all securities exchangeable or exercisable for or convertible into any Capital Stock of the Company, and (b) after such stock split, consolidation or reclassification all of the relative voting, dividend and other rights and preferences of each class of Capital Stock of the Company are identical to those in effect immediately preceding such stock split, consolidation or reclassification. Notwithstanding the foregoing, the Company may combine its Class A Common Stock and Class B Common Stock into a single class of Common Stock, such that the holder of each share of Class A Common Stock or Class B Common Stock outstanding immediately prior to such combination shall, from and after such combination, be entitled to the same voting, dividend, liquidation and other rights and preferences with respect to such share as every other holder of Class A Common Stock or Class B Common Stock. Section 4.11. Limitation on Dividend Restrictions Affecting Subsidiaries. The Company shall not, and shall not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction of any kind on the ability of any Subsidiary of the Company to (a) pay to the Company dividends or make to the Company any other distribution on its Capital Stock, (b) pay any Debt owed to the Company or any of the Company's Subsidiaries, (c) make loans or advances to the Company or any of the Company's Subsidiaries or (d) transfer any of its property or assets to the Company or any of the Company's Subsidiaries, other than such encumbrances or restrictions existing or created under or by reason of (i) applicable law, (ii) this Indenture, (iii) covenants or restrictions contained in any instrument governing Debt of the Company or any of its Subsidiaries existing on the date of this Indenture, (iv) customary provisions restricting subletting, assignment and transfer of any lease governing a leasehold interest of the Company or any of its Subsidiaries or in any license or other agreement entered into in the ordinary course of business, (v) any agreement governing Debt of a Person acquired by the Company or any of its Subsidiaries in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrances or restrictions are not applicable to any Person, or the property or assets of any Person, other than the Person, or the property or assets of the Person so acquired, (vi) any restriction with respect to a Subsidiary imposed pursuant to an agreement entered into in accordance with the terms of this Indenture for the sale or disposition of Capital Stock or property or assets of such Subsidiary, pending the closing of such sale or disposition, (vii) with respect to any Subsidiary, the terms of any contract with the United States or any foreign government or any instrumentality thereof or any prime contractor for any such contract pertaining to retention of funds by such Subsidiary equivalent to any progress payments or deposits made pursuant to such contract, or (viii) any Refinancing Debt; provided, however that the encumbrances or restrictions contained in the agreements governing any such Refinancing Debt shall be no more restrictive than the encumbrances or restrictions set forth in the agreements governing the Debt being refinanced as in effect on the date of this Indenture. Section 4.12. Limitation on Preferred Stock. The Company shall not, and shall not permit any of its Subsidiaries to, issue any shares of Disqualified Stock. Section 4.13. Limitation on Debt and Senior Indebtedness. The Company shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or directly or indirectly guarantee or in any other manner become directly or indirectly liable for ("incur") any Debt (including Acquired Debt) or Senior Indebtedness other than Permitted Debt; provided, however that the Company and, subject to the other limitations set forth herein, its Subsidiaries may incur Debt or Senior Indebtedness if the Debt to Operating Cash Flow Ratio of the Company and its Subsidiaries at the time of incurrence of such Debt, after giving pro forma effect thereto, is 6.5:1 or less; provided that any such Debt incurred by the Company that is not Senior Indebtedness shall have a Weighted Average Life to Maturity longer than the Weighted Average Life to Maturity of the Debentures. Notwithstanding the foregoing, at any time the Debt to Operating Cash Flow Ratio of the Company exceeds 6.5:1, the Company will be permitted to incur additional Senior Indebtedness pursuant to lines of credit for working capital of up to $5 million. A calculation of the Debt to Operating Cash Flow Ratio as required by this Section 4.13 shall be made, in each case, for the period of four full consecutive fiscal quarters next preceding the date on which Debt is proposed to be incurred ("Reference Period"). In addition, for purposes of the pro forma calculations required to be made above, (i) (x) the amount of Debt to be incurred (plus all other Debt previously incurred during such Reference Period) and the amount (valued at its liquidation value and including any accrued but unpaid dividends) of Disqualified Stock to be issued (plus all other Disqualified Stock previously issued during such Reference Period) will be presumed to have been incurred or issued on the first day of such Reference Period and (y) the amount of any Debt redeemed, refinanced or repurchased with the proceeds of the Debt referred to in clause (x) will be presumed to have been redeemed, refinanced or repurchased on the first day of such Reference Period, (ii) if any Asset Disposition occurred during such Reference Period, the calculations included in the computation of the Debt to Operating Cash Flow Ratio shall be adjusted to give effect to such Asset Disposition on a pro forma basis as if such Asset Disposition had occurred on the first day of such Reference Period, (iii) if an acquisition of a business or entity occurred during such Reference Period, the calculations included in the computation of the Debt to Operating Cash Flow Ratio will be adjusted to give effect to such acquisition on a pro forma basis as if such acquisition had occurred on the first day of such Reference Period and (iv) if such new Debt is being incurred in connection with an acquisition, no pro forma effect will be given to the negative operating cash flow or losses attributable to the assets or business so acquired. The Company shall not issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) shall be subordinate in right of payment to the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. The Company shall not permit any of its Subsidiaries to issue or incur any Debt (other than Senior Indebtedness or Capitalized Lease Obligations) unless such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) shall provide that such Debt (other than Senior Indebtedness or Capitalized Lease Obligations) shall be subordinate in right of payment to distributions and dividends from such Subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures to at least the same extent that the Debentures are subordinate to Senior Indebtedness. Section 4.14. Limitation on Additional Debt After Default. The Company shall not, and shall not permit any of its Subsidiaries to, incur any additional Debt (other than Permitted Debt) or Senior Indebtedness following the occurrence of an Event of Default unless such Event of Default (and all other Events of Default then pending) is cured or waived. Section 4.15. Limitation on Liens. The Company shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to create, incur, assume or permit to exist any Lien (other than Permitted Liens) upon or with respect to any of the Property of the Company or any such Subsidiary, whether owned on the date of this Indenture or hereafter acquired, or on any income or profits therefrom, to secure any Debt which is pari passu with or subordinate in right of payment to the Debentures. Section 4.16. Transactions with Related Persons. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with (a) any beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) of the Exchange Act) at the time of such transaction, (b) any officer, director or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company as described in clause (a) above or (c) any Related Person unless such transaction or series of related transactions (i) involves an amount of $250,000 or less or (ii) (A) is on terms that are no less favorable to the Company or any such Subsidiary, as the case may be, than would be available in a comparable transaction with an unrelated third party and (B) (x) if such transaction or series of related transactions involve aggregate payments in excess of $400,000, the Company delivers an officers' certificate to the Trustee certifying that such transaction complies with clause (ii)(A) above and such transaction or series of transactions is approved by a majority of the Board of Directors of the Company including the approval of each of the Independent Directors or (y) if such transaction or series of related transactions involve aggregate payments in excess of $1.5 million, the Company obtains an opinion as to the fairness to the Company or such Subsidiary from a financial point of view issued by an investment banking firm, appraisal firm or accounting firm, in each case of national standing. Notwithstanding the foregoing, this provision will not apply to (i) any transaction entered into between the Company and Subsidiaries of the Company (but excluding transactions with any Subsidiary of which more than 20% of the outstanding voting securities (determined in accordance with Section 13(d) under the Exchange Act) are beneficially owned by Persons who are (a) officers, directors or employees of the Company, of any of its Subsidiaries or of any beneficial owner of 20% or more of the outstanding voting securities (determined in accordance with Section 13(d) under the Exchange Act) of the Company at the time of such transaction, (b) a beneficial owner of 20% or more of the outstanding voting securities (determined in accordance with Section 13(d) under the Exchange Act) of the Company or (c) Related Persons), (ii) the payment of compensation and provision of benefits to officers and employees of the Company and loans and advances to such officers and employees in the ordinary course of business, or any issuance of securities, or other payments, awards or grants in cash, securities or otherwise (including the grant of stock options or similar rights to officers, employees and directors of the Company or any Subsidiary) pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans or other benefit plans approved by the Independent Directors, (iii) the Newman Agreement and the Gross Agreement and (iv) transactions with any Person who is a director of the Company or any of its Subsidiaries and who is not (a) the beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) or (b) an officer or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction. Section 4.17. Limitation of Payments to Affiliates after Default. The Company shall not enter into any transaction with any Person who is an officer or director of the Company, or of any of its Subsidiaries or of any beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction (but excluding the Persons identified in the last sentence of this Section 4.17) unless it is provided that the Company's monetary obligations with respect thereto are subordinate in right of payment to the Debentures at least to the same extent as the Debentures are subordinate to Senior Indebtedness. The Company shall not permit any of its Subsidiaries to enter into any transaction with any Person who is an officer or director of the Company, or of any of its Subsidiaries or of any beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction (but excluding the Persons identified in the last sentence of this Section 4.17) unless it is provided that such Subsidiary's monetary obligations with respect thereto are subordinate in right of payment to distributions and dividends from such Subsidiary to the Company in an amount sufficient to satisfy the Company's obligations under the Debentures at least to the same extent that the Debentures are subordinate to Senior Indebtedness. Notwithstanding the foregoing, such limitation shall not apply to (i) the regular compensation payable to any Person who is an employee of the Company, (ii) payments made pursuant to any pension or other plan made available to employees (including officers) of the Company and either existing on the date of the Indenture or thereafter approved by the Independent Directors, (iii) payments pursuant to the Newman Agreement or the Gross Agreement or (iv) any payment made to a director of the Company or of any of its Subsidiaries who is not (a) the beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) or (b) an officer or employee of the Company, of any of its Subsidiaries or of any such beneficial owner of 20% or more of the outstanding voting securities of the Company (determined in accordance with Section 13(d) under the Exchange Act) at the time of such transaction. Section 4.18. Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Events of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto), and that, to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Debentures are prohibited. The Company shall, so long as any of the Debentures are outstanding, deliver to the Trustee, within five Business Days after becoming aware of (i) any Default, Event of Default or default in the performance of any covenant, agreement or condition in this Indenture or (ii) any event of default under any other instrument of Debt to which Section 6.1(d) applies, an Officers' Certificate specifying such Default, Event of Default or default, describing its status and what action the Company is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Section 4.5(a), 4.6, 4.7, 4.11 or 4.13, or if any such violation has occurred, specifying the nature and, if known, the period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. Section 4.19. Further Assurance to the Trustee. The Company shall, upon request of the Trustee, execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the provisions of this Indenture. ARTICLE 5. SUCCESSORS Section 5.1. When Company May Merge or Sell Assets The Company shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person, without the consent of each Holder, unless: (a) the Company is the continuing corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, lease, conveyance or other disposition of assets shall have been made, is organized and existing under the laws of the United States, any state thereof or the District of Columbia and such Person (if other than the Company) assumes by supplemental indenture executed and delivered to the Trustee and in a form reasonably satisfactory to the Trustee, all the obligations of the Company under the Debentures and this Indenture including, without limitation, conversion rights in accordance with Article 11 hereof; (b) immediately after giving effect to the transaction no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; (c) immediately after giving effect to such transaction, the Debentures and this Indenture will be a valid and enforceable obligation of the Company or such successor; and (d) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such proposed transaction and such supplemental indenture comply with the applicable provisions of this Indenture. Section 5.2. Successor Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1, the Person formed by such consolidation or into or with which the Company is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person has been named as the Company herein; provided, however that the predecessor Company in the case of a sale, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of and interest on the Debentures. ARTICLE 6. DEFAULTS AND REMEDIES Section 6.1. Events of Default. The following shall constitute an "Event of Default": (a) failure to pay principal of or premium, if any, on any Debenture when due and payable at maturity, upon redemption, upon a Change of Control Offer, Net Worth Deficiency Offer or otherwise, whether or not such payment is prohibited by the subordination provisions of this Indenture; (b) failure to pay any interest on any Debenture when due and payable, which failure continues for 30 days, whether or not such payment is prohibited by the subordination provisions of this Indenture; (c) failure to perform the other covenants of the Company in this Indenture, which failure continues for 60 days after written notice as provided in this Indenture; (d) a default occurs (after giving effect to any applicable grace periods or any extension of any maturity date) in the payment when due of principal of and/or acceleration of, any indebtedness for money borrowed by the Company or any of its Subsidiaries in excess of $1 million, individually or in the aggregate, if such indebtedness is not discharged, or such acceleration is not annulled, within 10 days after written notice as provided in this Indenture; (e) the Company pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of it or for all or substantially all of its property, and such Custodian is not discharged within 30 days, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is unable to pay its debts as the same become due; (f) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any Subsidiary of the Company in an involuntary case, (ii) appoints a Custodian of the Company or any Subsidiary of the Company or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any Subsidiary of the Company, and, in each case, the order or decree remains unstayed and in effect for 60 days. The term "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A Default under clause (c) (other than a Default under Section 5.1, which Default shall be an Event of Default with the notice but without the passage of time specified in this Section 6.1) or (d) shall not be an Event of Default until the Trustee notifies the Company or the Holders of at least 25% in principal amount of the then outstanding Debentures notify the Company and the Trustee of the Default and the Company does not cure the Default under such clause (c) within 60 days after receipt of the notice, or under clause (d) within 10 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Section 6.2. Acceleration. If an Event of Default (other than an Event of Default specified in clauses (e) and (f) of Section 6.1) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Debentures by notice to the Company and the Trustee, may declare the unpaid principal of and accrued interest on all the Debentures to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. If an Event of Default specified in clause (e) or (f) of Section 6.1 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Debentures by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. No such recision shall affect any subsequent Default or impair any right consequent thereto. Section 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.4. Waiver of Existing and Past Defaults. The Holders of a majority in principal amount of the then outstanding Debentures by written notice to the Trustee may waive an existing Default or Event of Default and its consequences, except (i) a continuing Default or Event of Default in the payment of the principal of, or the interest on, any Debenture or (ii) a Default or Event of Default in respect of a provision that under Section 9.2 cannot be amended without the consent of each Holder affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.5. Control by Majority. The Holders of a majority in principal amount of the then outstanding Debentures may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with applicable law or this Indenture, that the Trustee determines is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In the event the Trustee takes any action or follows any direction pursuant to this Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against any loss or expense caused by taking such action or following such direction. Section 6.6. Limitation on Suits. A Holder may pursue a remedy with respect to this Indenture or the Debentures only if: (a) the Holder gives to the Trustee notice of a continuing Event of Default; (b) the Holders of at least 25% in principal amount of the then outstanding Debentures make a request to the Trustee to pursue the remedy; (c) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Debentures do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Section 6.7. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to receive payment of principal and interest on the Debenture, on or after the respective due dates expressed in the Debenture, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to bring suit for the enforcement of the right to convert the Debenture shall not be impaired or affected without the consent of the Holder. Section 6.8. Collection Suit by Trustee. If an Event of Default specified in Section 6.1(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Debentures and interest on overdue principal and interest, and such further amount as shall be sufficient to cover the costs and, to the extent lawful, expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 6.8 or 7.7; Second: to holders of Senior Indebtedness to the extent required by Article 11; Third: to Holders for amounts due and unpaid on the Debentures for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for principal and interest, respectively; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. At least 15 days before the record date, the Company shall mail to the Trustee and each Holder (at such Holder's address as it appears on the Register, a notice that states the record date, the payment date and amount to be paid. Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Debentures. ARTICLE 7. TRUSTEE Section 7.1. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) The Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others. (ii) In the absence of negligence, misconduct or bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture, but the Trustee need not verify the contents thereof. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own misconduct, except that: (i) This paragraph does not limit the effect of paragraph (b) of this Section. (ii) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (iii) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of the TIA, paragraphs (a), (b), (c) and (e) of this Section 7.1 and Section 7.2. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds held in trust except to the extent required by law. Section 7.2. Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters to the extent reasonably deemed necessary by it, and if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled upon reasonable notice, to examine the books and records and premises of the Company, personally or by agent, authorized representative or attorney. (b) Before the Trustee acts or refrains from acting pursuant to the terms of the Indenture or otherwise, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any Agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. Section 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to and must comply with Sections 7.10 and 7.11. Section 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Debentures, it shall not be accountable for the Company's use of the proceeds from the Debentures, and it shall not be responsible for any statement of the Company in the Indenture or any statement in the Debentures other than its authentication. Section 7.5. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to each Holder a notice of the Default or Event of Default within 90 days after it occurs, unless such Default or Event of Default shall have been cured or waived. Except in the case of a Default or Event of Default in payment on any Debenture under Section 6.1(a) or (b), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the best interests of Holders. The second sentence of this Section 7.5 shall be in lieu of the proviso to Section 315(b) of the TIA, which proviso is hereby expressly excluded from this Indenture, as permitted by the TIA. Section 7.6. Reports by Trustee to Holders. Within 60 days after each July 1, commencing July 1, 1996, the Trustee shall mail to Holders, at the Company's expense, a brief report dated as of such reporting date that complies with TIA SECTION 313(a) (but if no event described in TIA SECTION 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA SECTION 313(b)(2) to the extent applicable. The Trustee shall also transmit by mail all reports as required by TIA SECTION 313(c). A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange or market on which the Debentures are listed or quoted. The Company shall notify the Trustee when the Debentures are listed on any stock exchange or quoted on any market. Section 7.7. Compensation and Indemnity. The Company shall pay to the Trustee (in its capacities as Trustee, Debentures Custodian, Conversion Agent, Paying Agent and Registrar) from time to time such compensation as may be agreed in writing between the Company and the Trustee for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses may include the reasonable compensation and out-of-pocket expenses of the Trustee's Agents and counsel, except such disbursements, advances and expenses as may be attributable to its negligence, misconduct or bad faith. The Company shall indemnify and hold harmless the Trustee (in its capacities as Trustee, Paying Agent and Registrar) against any claim, demand, expense (including reasonable attorney's fees and expenses), loss or liability incurred by it in connection with the administration of this trust and the performance of its duties hereunder, except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. In the event that a conflict of interest or conflict of defenses would arise in connection with representation of the Company and the Trustee by the same counsel, the Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through misconduct, negligence or bad faith. To secure the Company's payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Debentures on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Debentures. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(e) or (f) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. The Company's payment obligations pursuant to this Section 7.7 shall survive the discharge of this Indenture. Section 7.8. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation; provided, however, that no such resignation shall be effective until a successor Trustee has accepted its appointment pursuant to this Section 7.8. The Holders of a majority in principal amount of the then outstanding Debentures may remove the Trustee by so notifying the Trustee and the Company. The Company shall remove the Trustee if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Debentures may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee is not appointed or does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the then outstanding Debentures may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. Notwithstanding the replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. Section 7.9. Successor Trustee by Merger. etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10. Eligibility; Disqualification. This indenture shall always have a Trustee who satisfies the requirements of TIA SECTIONSECTION 310(a)(1) and 310(a)(2). The Trustee shall always have a combined capital and surplus as stated in its most recent published annual report of condition of at least $150 million. The Trustee shall comply with TIA SECTION 310(b), including the optional provision permitted by the second sentence of TIA SECTION 310(b)(9). The provisions of TIA SECTION 310 shall apply to the Company, as obligor of the Debentures. Section 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA SECTION 311(a), excluding any creditor relationship listed in TIA SECTION 311(b). A Trustee who has resigned or been removed shall be subject to TIA SECTION 311(a) to the extent indicated therein. The provisions of TIA SECTION 311 shall apply to the Company, as obligor of the Debentures. ARTICLE 8. DISCHARGE OF INDENTURE Section 8.1. Termination of Company's Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Section 7.7 and 8.3 shall survive) when all outstanding Debentures theretofore authenticated and issued (other than destroyed, lost or stolen Debentures which have been replaced or paid) have been delivered to the Trustee for cancellation and the Company has paid all sums payable hereunder. In addition, the Company shall be discharged from all of its obligations under Section 2.13 and Sections 4.3 through 4.19 while the Debentures remain outstanding if all outstanding Debentures will become due and payable at their scheduled maturity within one year and the following conditions have been satisfied: (a) the Company has deposited, or caused to be deposited, irrevocably with the Trustee as trust funds specifically pledged as security for, and dedicated solely for, such purpose, (i) money in an amount, (ii) non-callable U.S. Government Obligations which through the payment of principal, premium, if any, and interest in accordance with their terms (without the reinvestment of such interest or principal) will provide not later than one day before the due date of any payment money in an amount, or (iii) a combination thereof, sufficient with respect to clauses (ii) and (iii) in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee at or prior to the time of such deposit, to pay the principal of, premium, if any, and discharge each installment of interest on the outstanding Debentures, together with all other amounts payable by the Company under this Indenture. (b) no Default or Event of Default with respect to the Debentures has occurred and is continuing on the date of such deposit or shall occur as a result of such deposit or at any time during the period ending on the 91st day after the date of such deposit, as evidenced to the Trustee by an Officer's Certificate delivered to the Trustee concurrently with such deposit. (c) such defeasance does not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound, and is not prohibited by Article 11, as evidenced to the Trustee by an Officers' Certificate delivered to the Trustee concurrently with such deposit, (d) the Company has delivered to the Trustee a private Internal Revenue Service ruling or an opinion of counsel that Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount, in the same manner, and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred, (e) the Company has delivered to the Trustee an Opinion of Counsel to the effect that the deposit shall not result in the Company, the Trustee or the trust being deemed to be an "investment company" under the Investment Company Act of 1940, as amended, (f) 91 days pass after the deposit is made and during such 91 day period no event of Default specified in Section 6.1(e) or (f) shall occur and be continuing at the end of such period, and (g) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent relating to the discharge of such provisions of the Indenture have been complied with. Notwithstanding the foregoing, the Company's obligations to pay principal, premium, if any, and interest on the Debentures shall continue until the Internal Revenue Service ruling or Opinion of Counsel referred to in clause (d) above is provided. If the Company exercises such option to discharge such provisions of the Indenture, payment of the Debentures may not be accelerated because of an event of default specified in Sections 6.1(c) with respect to the failure to perform any of the covenants set forth in Section 2.13 and Section 4.3 through 4.19, or Section 6.1(d). After a deposit made pursuant to this Section 8.1, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations specified above under this Indenture. Section 8.2. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.1. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Debentures. Money and securities so held in trust are not subject to Article 11. Section 8.3. Repayment to Company. Subject to Section 7.7, the Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon written request by the Company any money held by them for the payment of principal or interest that remains unclaimed for one year after the date upon which such payment shall have become due; provided, however that the Company shall have first caused notice of such payment to the Company to be mailed to each Holder entitled thereto no less than 30 days prior to such payment. After payment to the Company, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. Section 8.4. Reinstatement. If the Trustee or Paying Agent is unable to apply any money in accordance with Section 8.2 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2; provided, however that if the Company makes any payment of interest on or principal of any Debenture following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Debentures to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENTS Section 9.1. Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Debentures without the consent of any Holder: (a) to cure any ambiguity, defect or inconsistency; provided that such amendment does not in the opinion of the Trustee adversely affect the rights of any Holder; (b) to comply with Section 5.1; (c) to provide for uncertificated Debentures in addition to or in lieu of certificated Debentures; (d) to make any change that does not adversely affect the legal rights hereunder of any Holder; or (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; provided, however, that, in each case, the Company has delivered to the Trustee an Opinion of Counsel and an Officers' Certificate, each stating that such amendment complies with the provisions of this Section 9.1. Section 9.2. With Consent of Holders. Subject to the provisions of Sections 6.4 and 6.7, the Company and the Trustee may amend or modify this Indenture or the Debentures with the written consent of the Holders of at least a majority in principal amount of the then outstanding Debentures, and the Holders of a majority in principal amount of the Debentures then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Debentures; provided, however, that, without the consent of each Holder affected, an amendment, modification or waiver under this Section 9.2 may not (with respect to any Debentures held by a non-consenting Holder): (a) change the stated maturity of, or any installment of interest on, any Debenture; (b) reduce the principal amount of any Debenture or reduce the rate or extend the time of payment of interest on any Debenture; (c) increase the conversion price (other than in connection with a reverse stock split as provided in this Indenture); (d) change the place or currency of payment of principal of, or premium or repurchase price, if any, or interest on, any Debenture; (e) impair the right to institute suit for the enforcement of any payment on or with respect to any Debenture; (f) adversely affect the right to exchange or convert Debentures; (g) reduce the percentage of the aggregate principal amount of outstanding Debentures, the consent of the Holders of which is necessary to modify or amend this Indenture; (h) reduce the percentage of the aggregate principal amount of outstanding Debentures, the consent of the Holders of which is necessary for waiver of compliance with certain provisions of this Indenture or for waiver of certain defaults; (i) modify the provisions of this Indenture with respect to the subordination of the Debentures in a manner adverse to the Holders; (j) modify the provisions of this Indenture with respect to the right to require the Company to repurchase Debentures in a manner adverse to the Holders; or (k) modify the provisions of this Indenture with respect to the vote necessary to amend this Section 9.2. To secure a consent of the Holders under this Section 9.2, it shall not be necessary for the Holders to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9.2 becomes effective, the Company shall mail to Holders a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notices, or any defect therein, shall not, however, in any way, impair or affect the validity of any such amendment or waiver. Section 9.3. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Debentures shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 9.4. Revocation and Effect of Consents. Until an amendment, supplemental indenture or waiver becomes effective, a consent to it by a Holder of a Debenture is a continuing consent by such Holder and every subsequent Holder of a Debenture or portion of a Debenture that evidences the same debt as such consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, prior to becoming effective, any such Holder or subsequent Holder may revoke the consent as to its Debentures or a portion thereof if the Trustee receives written notice of revocation before the consent of Holders of the requisite aggregate principal amount of Debentures has been obtained and not revoked. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Debentures required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment or waiver becomes effective it shall bind every Holder, unless it is of the type described in any of clauses (a) through (k) of Section 9.2. In such case, the amendment or waiver shall bind each Holder of a Debenture who has consented to it and every subsequent Holder of a Debenture that evidences the same debt as the consenting Holder's Debenture. Section 9.5. Notation on or Exchange of Debentures. The Trustee (in accordance with the written direction of the Company) may (at the Company's expense) place an appropriate notation about an amendment, supplement or waiver on any Debenture thereafter authenticated. The Company in exchange for all Debentures may issue and the Trustee shall authenticate new Debentures that reflect the amendment or waiver. Failure to make the appropriate notation or issue a new Debenture shall not affect the validity and effect of such amendment, supplement or waiver. Section 9.6. Trustee Protected. The Trustee shall sign all supplemental indentures, except that the Trustee need not sign any supplemental indenture that adversely affects its rights. In signing or refusing to sign such supplemental Indenture, the Trustee shall be entitled to receive an Officer's Certificate and Opinion of Counsel to the effect that such supplemental Indenture is authorized or permitted by this Indenture and will be valid and binding on the Company in accordance with its terms. ARTICLE 10. CONVERSION Section 10.1. Conversion Privilege. Each Holder may, at such Holder's option, at any time prior to the close of business of October 1, 2003, unless earlier redeemed or repurchased, convert such Holder's Debentures, in whole or in part (in denominations of $1,000 or multiples thereof), at 100% of the principal amount so converted, into fully paid and non-assessable shares of the Company's Class A Common Stock at a conversion price per share equal to $8.85, as such conversion price may be adjusted from time to time in accordance with Section 10.4 (the "Conversion Price"). Section 10.2. Conversion Procedure. To convert a Debenture, a Holder must (1) complete and sign the notice on the reverse of the Debenture, (2) surrender such Debenture to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent and (4) pay any transfer or similar tax if required by Section 10.6. The Company's delivery to the Holder of a fixed number of shares of Class A Common Stock (and any cash in lieu of fractional shares of Class A Common Stock into which such Debenture is converted) shall be deemed to satisfy the Company's obligation to pay the principal amount of such Debenture and, subject to the provisions of Section 3.4, unless such Debenture is converted after a record date and prior to the related Interest Payment Date, all accrued interest that has not previously been paid. If such Debenture is converted after a record date and prior to the related Interest Payment Date, the interest installment on such Debenture scheduled to be paid on such Interest Payment Date shall be payable on such Interest Payment Date to the Holder of record at the close of business on such record date through such Interest Payment Date. As promptly as practicable after the surrender of such Debenture in compliance with this Section 10.2, the Company shall issue and deliver at such office or agency to such Holder, or on such Holder's written order, a certificate or certificates for the number of full shares of Class A Common Stock issuable upon the conversion of such Debenture or portion thereof in accordance with the provisions of this Article 10 and a check or cash in respect of any fractional interest in respect of a share of Class A Common Stock arising upon such conversion, as provided in Section 10.3. In case any Debenture of a denomination greater than $1,000 shall be surrendered for partial conversion, subject to Article 2, the Company shall execute and the Trustee shall authenticate and deliver to the Holder of the Debenture so surrendered, without charge to such Holder, a new Debenture or Debentures in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Debenture. Each conversion shall be deemed to have been effected on the date on which such Debenture shall have been surrendered in compliance with this Section 10.2, and the Person in whose name any certificate or certificates for shares of Class A Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the Person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such Debenture shall have been surrendered. If the last day on which a Debenture may be converted is a Legal Holiday in a place where a Conversion Agent is located, the Debenture may be surrendered to that Conversion Agent on the next succeeding day that is not a Legal Holiday. Provisions of this Indenture that apply to conversion of all of a Debenture also apply to conversion of a portion of such Debenture. Section 10.3. Cash Payments in Lieu of Fractional Shares. No fractional shares of Class A Common Stock or scrip representing fractional shares shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Debentures (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of Class A Common Stock would be issuable upon the conversion of any Debenture or Debentures, the Company shall make an adjustment therefor in cash at the Current Market Price of the Class A Common Stock as of the close of business on the Business Day prior to such conversion. Section 10.4. Adjustment of Conversion Price. (a) In the event that the Company shall (i) pay a dividend or other distribution, in shares of its Class A Common Stock, on any class of Capital Stock of the Company or any Subsidiary which is not wholly owned by the Company, (ii) subdivide its outstanding Class A Common Stock into a greater number of shares or (iii) combine its outstanding Class A Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the Holder of any Debenture thereafter surrendered for conversion shall be entitled to receive the number of shares of Class A Common Stock of the Company that such Holder would have owned or have been entitled to receive after the happening of any of the events described above had such Debenture been converted immediately prior to the happening of such event. An adjustment made pursuant to this subsection (a) shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of subdivision or combination. (b) In the event that the Company shall issue or distribute Capital Stock or issue rights, warrants or options entitling the holder thereof to subscribe for or purchase Capital Stock at a price per share less than the Current Market Price per share on the date of issuance or distribution (provided that the issuance of Capital Stock upon the exercise of warrants or options will not cause an adjustment in the Conversion Price if no such adjustment would have been required at the time such warrant or option was issued), then at the earliest of (i) the date the Company shall enter into a firm contract for such issuance or distribution, (ii) the record date for the determination of stockholders entitled to receive any such rights, warrants or options, if applicable, or (iii) the date of actual issuance or distribution of any such Capital Stock or rights, warrants or options, the Conversion Price in effect immediately prior to such earliest date shall be adjusted so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to such earliest date by: (x) if such Capital Stock is Class A Common Stock, the fraction whose numerator shall be the number of shares of Class A Common Stock outstanding on such date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price (such amount, with respect to any such rights, warrants or options, determined by multiplying the total number of shares subject thereto by the exercise price of such rights, warrants or options and dividing the product so obtained by the Current Market Price), and of which the denominator shall be the number of shares of Class A Common Stock outstanding on such date plus the number of additional shares of Class A Common Stock to be issued or distributed or receivable upon exercise of any such warrant, right or option; or (y) if such Capital Stock is other than Class A Common Stock, the fraction whose numerator shall be the Current Market Price per share of Class A Common Stock on such date minus an amount equal to (A) the sum of (I) the Current Market Price per share of such class of Capital Stock multiplied by the number of shares of such class of Capital Stock to be so issued minus (II) the offering price per share of such Capital Stock multiplied by the number of shares of such class of Capital Stock to be so issued (B) divided by the number of shares of Class A Common Stock outstanding on such date and whose denominator is the Current Market Price of the Class A Common Stock on such date. Such adjustment shall be made successively whenever any such Capital Stock, rights, warrants or options are issued or distributed at a price below the Current Market Price therefor as in effect on the date of issuance or distribution. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase shares of Capital Stock at less than such Current Market Price, and in determining the aggregate offering price of shares of Capital Stock so issued or distributed, there shall be taken into account any consideration received by the Company for such Capital Stock, rights, warrants or options, the value of such consideration, if other than cash, to be determined by the Board of Directors, whose determination shall be conclusive and described in a certificate filed with the Trustee. If any right, warrant or option to purchase Capital Stock, the issuance of which resulted in an adjustment in the Conversion Price pursuant to this subsection (b), shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed to the Conversion Price which would have been in effect had the adjustment of the Conversion Price made upon the issuance of such right, warrant or option been made on the basis of offering for subscription or purchase only that number of shares of Capital Stock actually purchased upon the actual exercise of such right, warrant or option. (c) In the event that the Company shall pay as a dividend or other distribution to holders of any class of its Capital Stock generally or to holders of any class of Capital Stock of any Subsidiary which is not wholly owned by the Company evidences of indebtedness or assets (including, without limitation, shares of Capital Stock, cash or other securities, but excluding dividends, rights, warrants, options and distributions for which adjustment is made as described in subsections (a) and (b) above and further excluding cash dividends paid out of cumulative retained earnings of the Company arising after the date hereof and determined in accordance with GAAP), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the Current Market Price per share of Class A Common Stock on the record date mentioned below less the fair market value on such record date (as determined by the Board of Directors, whose determination shall be conclusive and described in a certificate filed with the Trustee) of the portion of the Capital Stock or assets or evidences of indebtedness so distributed or of such rights or warrants attributable to one share of Class A Common Stock (the amount so attributable equaling the aggregate fair market value of such indebtedness or assets, as so determined by the Board of Directors, divided by the number of shares of Class A Common Stock outstanding on such record date), and the denominator shall be the Current Market Price of the Class A Common Stock on such record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution, except as provided in subsection (f) below. (d) Notwithstanding anything contained herein to the contrary, no adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price then in effect; provided, however, that any adjustments which by reason of this subsection (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 10 shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be and the Trustee shall be entitled to rely thereon. Anything in this Section 10.4 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Conversion Price, in addition to those required by this Section 10.4, as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. Except as provided in this Article 10, no adjustment in the Conversion Price will be made for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock, or carrying the right to purchase any of the foregoing. In addition, no adjustment in the Conversion Price shall be made in the event of the issuance of Common Stock upon the exercise of the Company's outstanding stock options under the 1981 Incentive Stock Option Plan, 1981 Non- Qualified Stock Option Plan and 1991 Stock Option Plan, unless the exercise price thereof is changed after the date hereof (other than solely by operation of anti-dilution provisions thereof), or the issuance of Common Stock upon the conversion of currently outstanding 1998 Debentures, unless the conversion price thereof is changed after the date hereof (other than solely by operation of the anti-dilution provisions thereof). (e) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which such adjustment becomes effective and shall mail or cause to be mailed such notice to each Holder at his last address appearing on the Debenture Register. (f) In any case in which this Section 10.4 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holder of any Debenture converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustments and (ii) paying to such Holder any amount in cash in lieu of any fraction pursuant to Section 10.3 hereof. Section 10.5. Effect of Reclassification, Consolidation, Merger or Sale. In the event of (i) any reclassification or change of outstanding shares of Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Class A Common Stock shall be entitled to receive securities or other Property (including cash) with respect to or in exchange for such Class A Common Stock or (iii) any sale or conveyance of the Property of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Class A Common Stock shall be entitled to receive securities or other Property (including cash) with respect to or in exchange for such Class A Common Stock, then the Company or the successor or purchasing corporation, as the case may be, shall enter into a supplemental indenture providing that each Debenture shall be convertible into the kind and amount of securities or other Property (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Class A Common Stock issuable upon conversion of such Debentures immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 10. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at his address appearing on the Register. The above provisions of this Section 10.5 shall similarly apply to successive reclassification, changes, consolidations, mergers, combinations, sales and conveyances. Section 10.6. Taxes on Shares Issued. The issuance of stock certificates on conversions of Debentures shall be made without charge to the converting Holder for any tax in respect of the issuance thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of a stock certificate in any name other than that of the Holder of any Debenture converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. Section 10.7. Reservation of Shares; Shares to be Fully Paid; Compliance with Government Requirements; Listing of Common Stock. The Company shall reserve, out of its authorized but unissued Class A Common Stock or its Class A Common Stock held in treasury, sufficient shares of Class A Common Stock to provide for the conversion of the Debentures that are outstanding from time to time. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Class A Common Stock issuable upon conversion of the Debentures, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of Class A Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Class A Common Stock which may be issued upon conversion of Debentures will upon issuance be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Class A Common Stock to be provided for the purpose of conversion of Debentures hereunder require registration with or approval of any governmental authority under any applicable federal or state law (excluding federal or state securities laws) before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that if at any time Class A Common Stock shall be listed on the American Stock Exchange or any other national securities exchange or on the Nasdaq Stock Market the Company will, if permitted by the rules of such exchange or market, list and keep listed so long as the Class A Common Stock shall be so listed on such exchange or market, all Class A Common Stock issuable upon conversion of the Debentures. Section 10.8. Responsibility of Trustee Requirements. The Trustee and any other Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any fact exists which may require any adjustment of the Conversion Price or other adjustment or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Class A Common Stock, or of any securities or other Property, which may at any time be issued or delivered upon the conversion of any Debenture; and neither the Trustee nor any other Conversion Agent makes any representations with respect thereto. Subject to the provisions of Section 8.1 hereof, neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Class A Common Stock or stock certificates or other securities or other Property (including cash) upon the surrender of any Debenture for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article 10. Without limiting the generality of the foregoing, neither the Trustee nor any Conversion Agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 10.5 hereof relating either to the kind or amount of securities or other Property (including cash) receivable by Holders upon the conversion of their Debentures after any event referred to in Section 10.5 hereof or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 8.1 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. Section 10.9. Notice to Holders Prior to Certain Actions. In the event that: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or (b) the Company shall authorize the granting to the holders of its Common Stock generally of rights or warrants to subscribe for or purchase any shares of any class of its Capital Stock or any other rights or warrants; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in each such case, the Company shall file or cause to be filed with the Trustee and to be mailed to each Holder at his address appearing on the Register, as promptly as possible but in any event at least 15 days prior to the applicable date hereinafter specified, a notice prepared by the Company stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occurring and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other Property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. ARTICLE 11. SUBORDINATION Section 11.1. Agreement to Subordinate. The Company agrees, and each Holder by accepting a Debenture agrees, that the indebtedness evidenced by the Debentures is subordinated in right of payment, to the extent and in the manner provided in this Article 11, to the prior payment in full of all Senior Indebtedness, and that the subordination is for the benefit of the holders of Senior Indebtedness. The Debentures are senior in right of payment to the Company's 1998 Debentures. All provisions of this Article 11 shall be subject to Section 11.13. Section 11.2 Liquidation; Dissolution; Bankruptcy. Upon any payment or distribution to creditors of the Company in a liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (a) holders of Senior Indebtedness shall be entitled to receive payment in full of all Senior Indebtedness before Holders shall be entitled to receive any payments of principal of or premium, if any, or interest on the Debentures; and (b) until the Senior Indebtedness is paid in full, any distribution to which Holders would be entitled but for this Article 11 shall be made to holders of Senior Indebtedness as their interests may appear, except that Holders may receive securities that are subordinated to Senior Indebtedness to at least the same extent as the Debentures; provided that no such default will prevent any payment on, or in respect of, the Debentures for more than 120 days unless the maturity of such Senior Indebtedness has been accelerated. A distribution may consist of cash, securities or other property. Section 11.3 Company Not to Make Payment with Respect to Debentures in Certain Circumstances. (a) Upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, all principal thereof, premium, if any, and interest thereon and any other amounts owing in respect thereof shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to the holders of such Senior Indebtedness before any payment is made on account of the principal of or premium, if any, or interest on the Debentures or to acquire any of the Debentures. (b) Upon the happening of an event of default (or if any event of default would result upon any payment upon or with respect to Debentures) with respect to any Senior Indebtedness as such event of default is defined therein or in the instrument under which it is outstanding, permitting holders to accelerate the maturity thereof, and, if the default is other than default in payment of the principal of, premium, if any, or interest on or any other amount owing in respect of such Senior Indebtedness, upon written notice thereof given to the Company and the Trustee by the holders of Senior Indebtedness or their Representative, then, unless (i) such an event of default shall have been cured or waived or shall have ceased to exist or (ii) the Company and the Trustee receive written notice from the Representatives of the Senior Indebtedness with respect to which such event of default relates approving payment on the Debentures, no payment shall be made by the Company with respect to the principal of or premium, if any, or interest on the Debentures or to acquire any of the Debentures; provided that no such default will prevent any payment on, or in respect of, the Debentures for more than 120 days unless the maturity of such Senior Indebtedness has been accelerated. Not more than one such 120 day delay may be made in any consecutive 360 day period, irrespective of the number of defaults with respect to Senior Indebtedness during such period. Section 11.4 Acceleration of Debentures. If payment of the Debentures is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. Section 11.5 When Distribution Must Be Paid Over. If a distribution is made to Holders that, because of this Article 11, should not have been made to them, the Holders who receive the distribution shall hold it in trust for holders of Senior Indebtedness and pay it over to them as their interests may appear. Section 11.6 Notice by Company. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of principal of or premium, if any, or interest on the Debentures to violate this Article 11. Section 11.7 Subrogation. After all Senior Indebtedness is paid in full and until the Debentures are paid in full, Holders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. A distribution made under this Article 11 to holders of Senior Indebtedness which otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on Senior Indebtedness. Section 11.8 Relative Rights. This Article 11 defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture shall: (a) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and premium, if any, and interest on the Debentures in accordance with their terms; (b) affect the relative rights of Holders and creditors of the Company, other than holders of Senior Indebtedness; or (c) prevent the Trustee or any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to Holders. If the Company fails because of this Article 11 to pay principal of or premium, if any, or interest on a Debenture on the date, such failure shall nevertheless be deemed a Default. Nothing in this Article 11 shall have any effect on the right of the Holders or the Trustee to accelerate the maturity of the Debentures. Section 11.9 Subordination May Not be Impaired by Company. No right of any holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Debentures shall be impaired by any act or failure to act by the Company or by its failure to comply with the terms of this Indenture. Section 11.10 Distribution of Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative, if any. Section 11.11 Rights of Trustee and Paying Agent. Notwithstanding any provisions of this Indenture to the contrary, the Trustee and any Paying Agent may continue to make payments on the Debentures and shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of such payments until it receives written notice (received by a Trust Officer, in the case of the Trustee) reasonably satisfactory to it that payments may not be made under this Article 11 and, prior to the receipt of any such notice, the Trustee, subject to the provisions of Article 7, and any agent shall be entitled to assume conclusively that no such facts exist. The Company, an Agent, a Representative or a holder of Senior Indebtedness may give the notice. If an issue of Senior Indebtedness has a Representative, only the Representative (or any Representative, if more than one) may give the notice with respect to such Senior Indebtedness. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a Representative) to establish that such notice has been given by a holder of Senior Indebtedness (or a Representative), and shall be entitled to rely on any written notice by a Person representing himself to be a holder of Senior Indebtedness to the effect that such issue of Senior Indebtedness has no Representative. Any deposit of moneys by the Company with the Trustee or any Paying Agent (whether or not in trust) for the payment of the principal of or premium, if any, or interest on, or payment on account of a Change of Control or Net Worth Deficiency, if any, of, any Debentures shall be subject to the provisions of this Article 11, except that if, at least three business days prior to the date on which by the terms of this Indenture any such moneys may become payable for any purpose (including without limitation, the payment of principal of or premium, if any, or interest on any Debenture), the Trustee shall not have received with respect to such moneys the notice provided for in this Section 11.11, then the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary which may be received by it within three business days prior to or on or after such date. This Section 11.11 shall be construed solely for the benefit of the Trustee and Paying Agent and shall not otherwise affect the rights of holders of Senior Indebtedness. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article 11, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of the Senior Indebtedness held by such Person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article 11, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive payment. The Trustee shall not be deemed to owe any fiduciary duty to holders of Senior Indebtedness by virtue of the provisions of this Article 11. The Trustee's responsibilities to the holders of Senior Indebtedness are limited to those set forth in this Article 11 and no implied covenants or obligations shall be read into this Indenture. The Trustee shall not become liable to holders of Senior Indebtedness if it makes a payment prohibited by this Article 11 in good faith. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 11.12 Effectuation of Subordination by Trustee. Each Holder of Debentures, by acceptance thereof, authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article 11 and appoints the Trustee his attorney-in-fact for any and all such purposes. Section 11.13 Trust Moneys Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from money or the proceeds of U.S. Government Obligations held in trust under Article 8 by the Trustee for the payment of principal of and interest on the Debentures shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article 11, and none of the Holders shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness of the Company or any other creditor of the Company. ARTICLE 12. MISCELLANEOUS Section 12.1. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Section 12.2. Notices. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery addressed as follows: if to the Company: 5 Sylvan Way Parsippany, New Jersey 07054 Fax No. (201) 898-4730 Attention: President if to the Trustee: 35 Journal Square Jersey City, New Jersey 07306 Fax. No. (201) 420-2928 Attention: Corporate Trust Department The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA SECTION 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. Section 12.3. Communication by Holders with Other Holders. Holders may communicate pursuant to TIA SECTION 312(b) with other Holders with respect to their rights under this Indenture or the Debentures. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA SECTION 312(c). Section 12.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) at the Trustee's reasonable request, an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 12.5. Statements Required in Certificate or Opinion of Counsel. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that the individual making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (c) a statement that, in the opinion of such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such condition or covenant has been complied with; provided, however, that, with respect to certain matters of fact not involving any legal conclusion, an Opinion of Counsel may, upon the consent of the parties relying on such opinion, rely on an Officers' Certificate or certificates of public officials. Section 12.6. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar, Paying Agent or Conversion Agent may make reasonable rules and set reasonable requirements for its functions. Section 12.7. Legal Holidays. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding Business Day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 12.8. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Debentures or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation including with respect to any certificates delivered thereunder or hereunder. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. Section 12.9. Counterparts. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 12.10. Governing Law. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE DEBENTURES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. Section 12.11. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 12.12. Successors. All agreements of the Company in this Indenture and the Debentures shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. Section 12.13. Severability. In case any provision of this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.14. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be executed as of the day and year first above written. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: /s/ Mark S. Newman ---------------------------- Name: Mark S. Newman Title: Chief Executive Officer and President Attest: /s/ Nancy R. Pitek --------------------- Name: Nancy R. Pitek THE TRUST COMPANY OF NEW JERSEY By: /s/ Roger T. Bernhammer ----------------------------- Name: Roger T. Bernhammer Title: Vice President Attest: /s/ Robert F. Baker --------------------- Name: Robert F. Baker Dated: September 29, 1995 EXHIBIT A [Face of Debenture] DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. __% SENIOR SUBORDINATED CONVERTIBLE DEBENTURE DUE 2003 [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] THIS DEBENTURE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS DEBENTURE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. EACH PURCHASER OF THIS DEBENTURE IS HEREBY NOTIFIED THAT THE SELLER OF THIS DEBENTURE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS DEBENTURE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS DEBENTURE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (IV) TO THE COMPANY OR (V) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (V) IN ACCORDANCE WITH ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS DEBENTURE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. [Institutional Accredited Investor Legend] IN CONNECTION WITH ANY TRANSFER OF THIS DEBENTURE, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. CUSIP No. 252456AB4 No._________ $_____________ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC., a Delaware corporation, promises to pay to or registered assigns, the principal sum of Dollars on October 1, 2003. Interest Payment Dates: April 1 and October 1, commencing April 1, 1996. Record Dates: March 15 and September 15. Reference is made to the further provisions of this Debenture set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Dated: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: Officer of the Company (SEAL) Attest: By: Secretary Authentication: This is one of the Debentures referred to in the within-mentioned Indenture: THE TRUST COMPANY OF NEW JERSEY, as Trustee By: Authorized Signature Dated: [Reverse Side] Capitalized terms used herein without definition shall have the meaning ascribed to them in the Indenture, dated as of September 22, 1995 (the "Indenture"), as amended from time to time, between Diagnostic/Retrieval Systems, Inc. (the "Company") and The Trust Company of New Jersey, as trustee (the "Trustee"). 1. Interest. (a) The Company shall pay interest on the outstanding principal amount of this Debenture at the rate of 9% per annum from September 29, 1995 until maturity. The Company will pay interest semi-annually on April 1 and October 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Debentures will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from September 29, 1995; provided, however, that if there is no existing Default in the payment of interest, and if this Debenture is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided further, however, that the first Interest Payment Date shall be April 1, 1996. Interest will be computed on the basis of a 360-day year of twelve 30-day months. (b) To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on (i) overdue principal, premium, if any, at the rate borne by the Debentures; and (ii) overdue installments of interest at the same rate. 2. Method of Payment. The Company will pay interest (except defaulted interest) on the Debentures to the Persons who are registered Holders at the close of business on the March 15 or September 15 next preceding the applicable Interest Payment Date, even if such Debentures are cancelled after such record date and on or before such Interest Payment Date. Defaulted interest shall be paid to Holders as of a special record date established for purposes of determining the Holders entitled thereto. The Debentures will be payable as to principal and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest on the Global Security. Such payment shall be in currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent, Registrar and Conversion Agent. Initially, the Trustee will act as Paying Agent, Registrar and Conversion Agent. The Company may change any Paying Agent, Registrar or Conversion Agent without notice to any Holder. The Company or any of its subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Debentures under the Indenture. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code SECTION 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms. The Debentures are general unsecured obligations of the Company limited to $25 million in aggregate principal amount, subject to Section 2.7 of the Indenture. 5. Optional Redemption by the Company. The Debentures will not be subject to redemption at the option of the Company prior to October 1, 1998, except as described in this paragraph 5. On or after October 1, 1998, the Debentures will be redeemable at any time prior to maturity at the option of the Company, in whole or in part from time to time, upon not less than 30 days' nor more than 60 days' prior notice to the Holders at the redemption prices (expressed as percentages of principal amount) set forth below: After October 1, Percentage 1998 105.00% 1999 103.75 2000 102.50 2001 101.25 In each case together with accrued but unpaid interest, if any, to the redemption date. 6. Mandatory Redemption. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption payments with respect to the Debentures. 7. Redemption at the Option of Holder. (a) Upon a Change of Control, the Company shall offer to repurchase all or any part of the Debentures (at each Holder's option) at a repurchase price equal to 100% of the aggregate principal amount thereof, plus accrued but unpaid interest, if any, to the date of repurchase. Within 30 days after a Change of Control, the Company shall mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. A Holder may tender or refrain from tendering all or any portion of such Holder's Debentures, at such Holder's discretion, by completing the form entitled "Option of Holder to Elect Repurchase" below and delivering such form, together with the Debentures with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company, to the Trustee. Any partial tender of Debentures must be in an integral multiple of $1,000. (b) If, at any time or from time to time, the Company's Consolidated Net Worth at the end of each of any two consecutive fiscal quarters (the last day of the second fiscal quarter being referred to as a "Deficiency Date") is less than $18 million, then the Company shall offer to repurchase up to 10% of the aggregate principal amount of Debentures originally issued (or such lesser amount as may be outstanding at the time notice of such deficiency is sent) (the "Deficiency Repurchase Amount") at a repurchase price equal to 100% of the principal amount of the Debentures to be repurchased, plus accrued but unpaid interest to the date of repurchase. The failure to have a Consolidated Net Worth of at least $18 million at the end of any fiscal quarter shall not be counted towards more than one Deficiency Offer. Within 50 days after each Deficiency Date (100 days if a Deficiency Date is also the end of the Company's fiscal year), the Company shall mail a notice to each Holder setting forth the procedures governing the Deficiency Offer as required by the Indenture. A Holder of Debentures may tender or refrain from tendering all or any portion of such Holder's Debentures at such Holder's discretion by completing the form entitled "Option of Holder to Elect Repurchase" below and delivering such form, together with the Debentures with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company, to the Trustee prior to the expiration of the Deficiency Offer. Any partial tender of Debentures must be in an integral multiple of $1,000. If the aggregate principal amount of Debentures delivered for repurchase pursuant to any Deficiency Offer exceeds the Deficiency Repurchase Amount, the Debentures to be repurchased shall be selected pro rata (in $1,000 increments) based on the relative principal amounts of Debentures owned by the Holders delivering Debentures for repurchase. The Company may credit against the principal amount of Debentures to be repurchased in any Deficiency Offer 100% of the principal amount (excluding premium) of Debentures acquired by the Company subsequent to a Deficiency Date and prior to the related Deficiency Repurchase Date through purchase (other than pursuant to the provisions contained in this paragraph 7), optional redemption, conversion or exchange and surrendered for cancellation. 8. Conversion. (a) Subject to the provisions of the Indenture, the Holder hereof may, at such Holder's option, at any time prior to the close of business on October 1, 2003, unless earlier redeemed or repurchased, convert this Debenture, in whole or in part (in denominations of $1,000 or multiples thereof), at 100% of the principal amount hereof so converted, into shares of Class A Common Stock of the Company, par value $.01 per share, at a conversion price per share of $8.85, subject to adjustment as provided in the Indenture. To convert a Debenture, a Holder must (i) complete and sign the conversion notice below, (ii) surrender the Debenture to the Conversion Agent, (iii) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent and (iv) pay any transfer or similar tax if required by the Indenture. No fractional shares will be issued upon any conversion, but an adjustment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon surrender of any Debenture for conversion. A Holder is not entitled to any rights of a holder of Common Stock until such Holder has converted its Debentures into Common Stock as provided in the Indenture. 9. Subordination. The Debentures are subordinated to Senior Indebtedness. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Debentures may be paid. The Company agrees, and each Holder by accepting a Debenture agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give effect to such provisions, and each Holder appoints the Trustee its attorney-in- fact for any and all such purposes. 10. Denominations, Transfer, Exchange. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Debentures as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Definitive Security (or portion thereof selected for redemption). Also, it need not exchange or register the transfer of any Debentures during the 15 day period preceding the mailing of a notice of redemption or an offer to repurchase Debentures or the 15 day period preceding an Interest Payment Date. 11. Persons Deemed Owners. The registered Holder of a Debenture may be treated as its owner for all purposes. 12. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Debentures may be amended with the consent of the Holders of at least a majority in principal amount of the Debentures then outstanding, and any existing Default (except a payment default) may be waived with the consent of the Holders of at least a majority in principal amount of the Debentures then outstanding. Without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Debentures to (i) cure any ambiguity, defect or inconsistency, provided that such amendment does not in the opinion of the Trustee adversely affect the rights of any Holder, (ii) provide for uncertificated Debentures in addition to or in lieu of certificated Debentures, (iii) comply with Section 5.1 of the Indenture, (iv) make any change that does not adversely affect the legal rights of any Holder, or (v) comply with requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA. 13. Defaults and Remedies. Events of Default include: (a) failure to pay principal of or premium, if any, on any Debenture when due and payable at maturity, upon redemption, upon a Change of Control Offer, Deficiency Offer or otherwise, whether or not such payment is prohibited by the subordination provisions of the Indenture; (b) failure to pay any interest on any Debenture when due and payable, which failure continues for 30 days, whether or not such payment is prohibited by the subordination provisions of the Indenture; (c) failure to perform the other covenants of the Company in the Indenture, which failure continues for 60 days after written notice as provided in the Indenture; (d) a default occurs (after giving effect to any applicable grace periods or any extension of any maturity date) in the payment when due of principal of and or acceleration of, any indebtedness for money borrowed by the Company or any of its Subsidiaries in excess of $1,000,000, individually or in the aggregate, if such indebtedness is not discharged, or such acceleration is not annulled, within 10 days after written notice as provided in the Indenture; and (e) certain events of bankruptcy, insolvency or reorganization of the Company or any Subsidiary. If an Event of Default shall occur and be continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Debentures may accelerate the maturity of all Debentures, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Debentures shall immediately so accelerate. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debentures at the request or direction of any of the Holders. Subject to certain limitations, the Holders of a majority in aggregate principal amount of the outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. The Company must furnish an annual compliance certificate to the Trustee. 14. Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee; provided, however, that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. 15. No Recourse Against Others. A director, officer, employee, incorporator or stockholder, of the Company, as such, shall not have any liability for any obligations of the Company under the Debentures or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. 16. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors Act). 18. Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of Debentures under the Indenture, Holders of Transfer Restricted Securities shall have all the rights set forth in the Registration Rights Agreement. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. 5 Sylvan Way Parsippany, NJ 07054 Attn: President SCHEDULE OF EXCHANGES OF GLOBAL SECURITY FOR DEFINITIVE SECURITIES The following exchanges of this Global Security for Definitive Securities have been made: Amount of Principal Signature decrease in Amount of Amount of of Principal increase in this Global authorized Amount of Principal Security officer of Date of this Global Amount of following Trustee or Exchange Security this Global such Debentures Security decrease or Custodian increase FORM OF ELECTION TO CONVERT I (we) hereby irrevocably exercise the option to convert this Debenture, or the portion below designated, into shares of Common Stock of Diagnostic/Retrieval Systems, Inc. in accordance with the terms of the Indenture referred to in this Debenture, and direct that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned registered Holder hereof, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Portion of this Debenture to be converted (if partial conversion, $1,000 or an integral multiple thereof): $ If shares of Common Stock are to be issued and registered otherwise than to the registered Holder named above, please print the name and address, including zip code, and social security or other taxpayer identification number of the person to whom such Common Stock is to be issued. Your Name: (exactly as your name appears on the face of this Debenture) By: Title: Date: ASSIGNMENT FORM To assign this Debenture, fill in the form below: (I) or (we) assign and transfer this Debenture to (Insert assignee's social security or tax I.D. no.) (Print or type assignee's name, address and zip code) and irrevocably appoint agent to transfer this Debenture on the books of the Company. The agent may substitute another to act for him. Date: Your Name: (exactly as your name appears on the face of this Debenture) By: Title: Date: Signature Guaranteed: By: (Bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc.) In connection with any transfer or exchange of any of the Debentures evidenced by this certificate occurring prior to the date that is three years after the later of the date of original issuance of such Debentures and the last date, if any, on which such Debentures were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Debentures are being: CHECK ONE BOX BELOW: ( ) (1) acquired for the undersigned's own account, without transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of the Indenture; or ( ) (2) transferred to the Company; or ( ) (3) transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or ( ) (4) transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or ( ) (5) transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Company and the Trustee a signed letter containing certain representations and agreements (the form of which letter appears as Exhibit C to the Indenture); or ( ) (6) transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Debentures evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (4), (5) or (6) is checked, the Company, Trustee or Registrar may require, prior to registering any such transfer of the Debentures, in their sole discretion, such legal opinions, certifications and other information as the Company, Trustee or Registrar has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, including but not limited to the exemption provided by Rule 144 under such Act. Your Name: (exactly as your name appears on the face of this Debenture) By: Title: Date: Signature Guaranteed: By: (Bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc.) OPTION OF HOLDER TO ELECT REPURCHASE 1. If you want to elect to have all or any part of this Debenture repurchased by the Company pursuant to Article IV of the Indenture (in connection with a Change of Control Offer or Deficiency Offer), state the amount you elect to have repurchased (if all, write "ALL"): $ . Your Name: (exactly as your name appears on the face of this Debenture) By: Title: Date: Signature Guaranteed: By: (Bank or trust company having an office or correspondent in the United States or a broker or dealer which is a member of a registered securities exchange or the National Association of Securities Dealers, Inc.) EXHIBIT B TRANSFEREE LETTER OF REPRESENTATION Diagnostic/Retrieval Systems, Inc. c/o The Trust Company of New Jersey 35 Journal Square Jersey City, New Jersey 07396 Dear Sirs: This Certificate is delivered to request a transfer of $ principal amount of the 9% Senior Subordinated Convertible Debentures due 2003 (the "Debentures") of Diagnostic/Retrieval Systems, Inc. (the "Company"). Upon transfer, the Debentures would be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: The undersigned represents and warrant to you that: 1. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the "Securities Act")) purchasing for our own account or for the account of such an institutional "accredited investor," and we are acquiring the Debentures for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial business matters as to be capable of evaluating the merits and risk of our investment in the Debentures and weinvest in or purchase securities similar to the Debentures in the normal course of our business. We and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 2. We understand that the Debentures have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Debentures to offer, sell or otherwise transfer such Debentures prior to the date which is three years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Debentures (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) so long as the Debentures are eligible for resale pursuant to Rule 144A under the Secuirities Act, to a person we reasonably believe is a qualified institutional buyer, as defined in RUle 144A under the Securities Act, (a "QIB") in a transaction complying with the requirements of Rule 144A, (b) in an offshore transaction in accordance with Regulation S under the Securities Act, (c) pursuant to a registration statement which has been declared effective under the Securities Act, (d) to the Company, or (e) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. Each purchaser acknowledges that the Company, Trustee and Registrar reserve the right prior to any offer, sale or other transfer prior to the Resale Termination Date of the Debentures pursuant to clauses (b) or (e) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company, Trustee and Registrar. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. TRANSFEREE: _________________________ BY:__________________________________ EX-99 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT is made as of September 22, 1995, by and between Diagnostic/Retrieval Systems, Inc., a Delaware corporation (the "Company"), and Forum Capital Markets L.P. (the "Initial Purchaser"). The Company proposes to issue and sell to the Initial Purchaser, upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), up to $25,000,000 aggregate principal amount of its Senior Subordinated Convertible Debentures due 2003 (the "Debentures"), which Debentures are convertible into Common Stock (as defined herein) as provided in the Debentures and the Indenture (as defined herein). As an inducement to the Initial Purchaser to enter into the Purchase Agreement and in satisfaction of a condition to the Initial Purchaser's obligations thereunder, the Company agrees with the Initial Purchaser, for the benefit of the Initial Purchaser and the other Holders (as defined herein), as follows: 1. Definitions. As used in this Agreement, the following capitalized terms shall have the following meanings: "ACT" means the Securities Act of 1933, as amended from time to time. "CLOSING DATE" has the meaning set forth in the Purchase Agreement. "COMMON STOCK" means the Class A Common Stock, par value $.01 per share, of the Company, or any successor class thereto, issuable upon conversion of the Debentures. "COMMISSION" means the Securities and Exchange Commission. "DAMAGES PAYMENT DATE" means with respect to the Debentures and the outstanding shares of Common Stock, if any, each Interest Payment Date. "EFFECTIVENESS PERIOD" has the meaning set forth in Section 2 hereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time. "HOLDERS" means Persons owning Transfer Restricted Securities. "INDENTURE" means the Indenture, to be dated the date hereof, between the Company and The Trust Company of New Jersey, as trustee (the "TRUSTEE"), pursuant to which the Debentures are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. "INTEREST PAYMENT DATE" has the meaning set forth in the Form of Debenture attached as Exhibit A to the Indenture. "LIQUIDATED DAMAGES" has the meaning set forth in Section 4 hereof. "OPTION CLOSING DATE" has the meaning set forth in the Purchase Agreement. "PERSON" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof. "PROSPECTUS" means the prospectus included in the Shelf Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. "RECORD HOLDER" means (i) with respect to any Damages Payment Date relating to the Debentures, each Person who is a Holder of Debentures on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur and (ii) with respect to any Damages Payment Date relating to the Common Stock, each Person who is a Holder of Common Stock on the day that is fifteen days prior to the succeeding Damages Payment Date. "REGISTRATION DEFAULT" has the meaning set forth in Section 4 hereof. "SHELF REGISTRATION STATEMENT" has the meaning set forth in Section 2 hereof. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. "TRANSFER RESTRICTED SECURITIES" means each Debenture and, if such Debenture has been converted, each share of Common Stock issued in connection with such conversion, until (a) the date on which such Debenture or shares of Common Stock, as applicable, have been effectively registered under the Act and disposed of in accordance with the Shelf Registration Statement or (b) the date on which such Debenture or shares of Common Stock, as applicable, are distributed to the public pursuant to Rule 144 or any other applicable exemption under the Act without additional restriction upon public resale. "UNDERWRITTEN OFFERING" means a registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Shelf Registration. The Company shall use its reasonable best efforts to file a registration statement with the Commission within 90 days after the Closing Date relating to the offer and sale of the Transfer Restricted Securities by Holders from time to time pursuant to Rule 415 under the Act and in accordance with the methods of distribution set forth therein, which registration statement may be substituted for by one or more subsequent registration statements each relating to the offer and sale of the Transfer Restricted Securities by Holders from time to time (as in effect from time to time, the "Shelf Registration Statement"), and the Company shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission within 150 days after the Closing Date, provided, however, that the Company may delay such filing or effectiveness under the circumstances and during the periods described in Section 3 hereof. In addition, the Company shall use its reasonable best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended for a period (the "Effectiveness Period") of not less than three years following the later of the Closing Date or any Option Closing Date or such shorter period that will terminate when all the shares of Common Stock and the Debentures covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. 3. Delay Periods; Suspension of Sales. (a) If at any time prior to the expiration of the Effectiveness Period, counsel to the Company (which counsel shall be experienced in securities laws matters) has determined in good faith that the filing of the Shelf Registration Statement or the compliance by the Company with its disclosure obligations in connection with the Shelf Registration Statement would require the disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, then the Company may delay the filing of the Shelf Registration Statement (if not then filed) and shall not be required to maintain the effectiveness thereof or amend or supplement the Shelf Registration Statement for a period (an "Information Delay Period") expiring upon the earlier to occur of (A) the date on which such material information is disclosed to the public or ceases to be material or the Company is able to so comply with its disclosure obligations and Commission requirements or (B) 30 days after counsel to the Company makes such good faith determination. There shall not be more than four Information Delay Periods during the Effectiveness Period, and there shall not be two Information Delay Periods during any contiguous 90 day period. (b) If at any time prior to the expiration of the Effectiveness Period, the Company is advised by a nationally recognized investment banking firm selected by the Company that, in such firm's written reasonable opinion addressed to the Company (a copy of which shall be delivered to each Holder of Transfer Restricted Securities registered under the Shelf Registration Statement), sales of Common Stock pursuant to the Shelf Registration Statement at such time would materially adversely affect any immediately planned underwritten public equity financing by the Company of at least $5 million, the Company shall not be required to maintain the effectiveness of the Shelf Registration Statement or amend or supplement the Shelf Registration Statement for a period (a "Transaction Delay Period") commencing on the date of pricing of such equity financing and expiring upon the earliest to occur of (i) the abandonment of such financing or (ii) 90 days after the completion of such financing. There shall not be more than two Transaction Delay Periods during the Effectiveness Period. (c) A Transaction Delay Period and an Information Delay Period are hereinafter collectively referred to as "Delay Periods" or a "Delay Period." The Company will give prompt written notice, in the manner prescribed by Section 10(a) hereof, to each Holder of each Delay Period. Such notice shall be given (i) in the case of a Transaction Delay Period, 30 days in advance of the commencement of such Delay Period and (ii) in the case of an Information Delay Period, as soon as practicable after the circumstances giving rise thereto are identified. Such notice shall state to the extent, if any, as is practicable, an estimate of the duration of such Delay Period. Each Holder, by his acceptance of any Transfer Restricted Securities, agrees that (i) upon receipt of such notice of an Information Delay Period it will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the Shelf Registration Statement, (ii) upon receipt of such notice of a Transaction Delay Period it will forthwith discontinue disposition of the Common Stock pursuant to the Shelf Registration Statement and (iii) in either such case, will not deliver any prospectus forming a part of the Shelf Registration Statement in connection with any sale of Transfer Restricted Securities or Common Stock, as the case may be, until the expiration of such Delay Period. 4. Liquidated Damages. If (i) the Shelf Registration Statement is not filed with the Commission within 90 days after the Closing Date, (ii) the applicable Registration Statement has not been declared effective by the Commission within 150 days after the Closing Date (the "Effectiveness Target Date"), or (iii) at any time prior to the third anniversary of the later of the Closing Date or any Option Closing Date, the Shelf Registration Statement is filed and declared effective but shall thereafter cease to be effective (other than as a result of the effectiveness of a successor registration statement) or fail to be useable for its intended purpose without being succeeded promptly by a post-effective amendment to the Shelf Registration Statement that cures such failure and that is itself declared effective within 45 days after the Shelf Registration Statement ceases to be effective (each such event referred to in clauses (i) through (iii), a "Registration Default"), the Company will pay liquidated damages ("Liquidated Damages") to each Holder who has complied with its obligations under this Agreement. During the first 90-day period immediately following the occurrence of such Registration Default, the amount of such Liquidated Damages shall be $.05 per week per $1,000 principal amount of Debentures and, if applicable, $.01 per week per share (subject to adjustment in the event of stock splits, stock consolidations, stock dividends and the like) of Common Stock constituting Transfer Restricted Securities registered under the Shelf Registration Statement. During each subsequent 90-day period following the occurrence of such Registration Default, the amount of Liquidated Damages shall increase by an additional $.05 per week per $1,000 principal amount of Debentures and $.01 per week per share (subject to adjustment as set forth above) of Common Stock constituting Transfer Restricted Securities registered under the Shelf Registration Statement; provided, however, the maximum amount of Liquidated Damages shall be $.20 per week per $1,000 principal amount of Debentures and $.04 per week per share (subject to adjustment as set forth above) of Common Stock constituting Transfer Restricted Securities registered under the Shelf Registration Statement. All accrued Liquidated Damages shall be paid by the Company to Record Holders entitled thereto on the next succeeding Damages Payment Date by wire transfer of immediately available funds or by federal funds check. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease, but any Liquidated Damages accrued through the date of cure shall be paid to Record Holders on the next succeeding Damages Payment Date. If the Registration Defaults described in either of clauses (i) or (ii) above arose solely because the applicable Holder or Holders failed to provide the Company with certain information within 20 business days after request therefor pursuant to Section 5(m), Liquidated Damages in respect thereof will not begin to accrue until five business days after such information has been provided to the Company. All of the Company's obligations set forth in the preceding paragraph which are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. 5. Registration Procedures. In connection with the Shelf Registration Statement and any Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities, the following provisions shall apply: (a) The Company shall furnish to each Holder, prior to the filing thereof with the Commission, a copy of the Shelf Registration Statement and each amendment thereto or each amendment or supplement to the Prospectus included therein, and shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as any Holder reasonably may propose. (b) The Company shall take such action as may be necessary so that (i) the Shelf Registration Statement and any amendment thereto and any Prospectus forming a part thereof and any supplement or amendment thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) the Shelf Registration and any amendment thereto (in either case, other than with respect to written information furnished to the Company by or on behalf of any Holder specifically for inclusion therein) does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make any statement therein not misleading and (C) the Prospectus and any supplement thereto (in either case, other than with respect to such information from Holders), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) The Company shall promptly advise the Holders of Transfer Restricted Securities registered under the Shelf Registration Statement (which advice pursuant to clauses (ii) - (iv) shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) and, if requested by such Persons, to confirm such advice in writing; (i) when the Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments to the Shelf Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes; and (iv) of the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the Shelf Registration Statement and the Prospectus do not contain an untrue statement of a material fact and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading. (d) If at any time the Commission shall issue any stop order suspending the effectiveness of the Shelf Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (e) The Company shall furnish to each Holder of Transfer Restricted Securities included under the Shelf Registration Statement, without charge, at least one copy of the Shelf Registration Statement and each post-effective amendment thereto, including all financial statements and schedules, documents incorporated by reference therein and, if the Holder so requests in writing, all exhibits (including exhibits incorporated therein by reference). (f) The Company shall, during the Effectiveness Period, deliver to each Holder of Transfer Restricted Securities included under the Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus and any amendment or supplement thereto by each of the selling Holders in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto during the Effectiveness Period. (g) Prior to any public offering pursuant to the Shelf Registration Statement, the Company shall use its reasonable best efforts to register or qualify or cooperate with the Holders of Transfer Restricted Securities registered thereunder, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of such Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as such Holders or underwriters reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of such Transfer Restricted Securities; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (h) Unless any Transfer Restricted Securities shall be in book-entry form only, the Company shall cooperate with the Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold under the Shelf Registration Statement, free of any restrictive legends and in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request in connection with the sales of Transfer Restricted Securities pursuant to the Shelf Registration Statement. (i) Upon the occurrence of any event contemplated by Section 5(c)(ii) - (iv), the Company shall file (and use its reasonable best efforts to have declared as soon as possible) a post-effective amendment to the Shelf Registration Statement or an amendment or supplement to the Prospectus or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities registered under the Shelf Registration Statement, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading. Each Holder of Transfer Restricted Securities registered under the Shelf Registration Statement agrees by acquisition of such Transfer Restricted Securities that, upon receipt of any notice from the Company of the existence of any fact of the kind described in Section 5(c)(ii) - (iv) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the Shelf Registration Statement until such Holder receives copies of the supplemented or amended Prospectus contemplated by this Section 5(i), or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and such Holder has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus. If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time period regarding the Company's obligations to maintain the effectiveness of the Shelf Registration Statement set forth in Section 2 hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(c) hereof to and including the date when such Holder shall have received the copies of the supplemented or amended Prospectus contemplated by this Section 5(i). (j) The Company shall provide a CUSIP number for all Transfer Restricted Securities registered under the Shelf Registration Statement, in the event of and at the time of any distribution thereof to Holders, not later than the effective date of the Shelf Registration Statement and provide the Trustee and the transfer agent for the Common Stock with printed certificates for such Transfer Restricted Securities which are in a form eligible for deposit with the Depository Trust Company. (k) The Company shall use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders or otherwise provide in accordance with Section 11(a) of the Act, as soon as practicable after the effective date of the Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (l) The Company shall cause the Indenture to be qualified under the TIA in a timely manner not later than the effective date of the Shelf Registration Statement, and, in connection therewith, cooperate with the Trustee and the Holders of Debentures to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA. (m) The Company may require each Holder of Transfer Restricted Securities to be registered under the Shelf Registration Statement to furnish to the Company such information regarding such Holder and the distribution of such Holder's securities thereunder as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement and the Company may exclude from such registration the Transfer Restricted Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (n) The Company shall, if requested by the Holders of Transfer Restricted Securities being sold in an Underwritten Offering or the underwriter(s) thereof, promptly incorporate in the Shelf Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment, if necessary, such information as such underwriters and Holders reasonably agree should be included therein and to which the Company does not reasonably object including, without limitation, information relating to the plan of distribution of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and with respect to any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (o) The Company shall enter into such customary agreements (including an underwriting agreement in customary form, if applicable) and take all such other appropriate actions in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to the Shelf Registration Statement, and in connection therewith, the Company shall (1) make such representations and warranties to the Holders of Transfer Restricted Securities registered thereunder and the underwriter(s), if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to such underwriters and the Holders of a majority of the Transfer Restricted Securities being sold) addressed to each such Holder and underwriter covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (3) if and to the extent permitted by Statement of Auditing Standards No. 72, obtain comfort letters and updates thereof from the Company's independent certified public accountants addressed to the underwriters requesting the same, such letters to be in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings; (4) in connection with an Underwritten Offering only, set forth in full or incorporate by reference in the underwriting agreement the indemnification provisions and procedures of Section 6 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) deliver such documents and certificates as may be reasonably requested by such Holders or underwriters to evidence compliance with Section 5(i) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company pursuant to this Section 5(o). The foregoing actions set forth in clauses (1), (2), (3) and (5) of this Section 5(o) shall be performed at each closing under any underwriting or similar agreement as and to the extent required thereunder. (p) The Company shall make available at reasonable times for inspection by the Holders of the Transfer Restricted Securities, any underwriter participating in any disposition pursuant to the Shelf Registration Statement, and any attorney or accountant retained by any such Holders or underwriters, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with the Shelf Registration Statement subsequent to the filing thereof as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by such Holders or any such underwriter, attorney or accountant, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; and provided, further that the foregoing inspection and information gathering shall, to the greatest extent possible, be coordinated on behalf of the Holders and the other parties entitled thereto by one counsel designated by and on behalf of such Holders and other parties. (q) The Company shall use its reasonable best efforts, subject to any applicable rules thereto, to cause all Common Stock included among the Transfer Restricted Securities to be listed on each securities exchange on which the Common Stock is listed and, if requested by the Holders of a majority in aggregate principal amount of Debentures, to list the Debentures registered under the Shelf Registration Statement on a national securities exchange or the Nasdaq Stock Market. 6. Registration Expenses. (a) Except as otherwise provided in Section 8, the Company shall bear all expenses incurred in connection with the performance of or compliance with its obligations under Sections 2, 4 and 5 hereof, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses and fees and disbursements of counsel for the Company and all independent certified public accountants, and other persons retained by the Company (all such expenses being herein called "Registration Expenses"). Registration Expenses shall also include the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the Nasdaq Stock Market. The Company will reimburse the Holders for the reasonable fees and disbursements of one firm of attorneys chosen by the Holders of a majority of the Debentures to be sold pursuant to the Shelf Registration Statement to act as counsel therefor in connection therewith not to exceed $15,000. (b) Each Holder will pay any discounts and commissions incurred upon the sale of securities by it under the Shelf Registration Statement. 7. Indemnification and Contribution. (a) In connection with any Shelf Registration Statement, the Company shall indemnify and hold harmless each Holder, its officers and directors and each Person who controls such Holder within the meaning of the Act against any and all losses, claims, damages or liabilities and expenses whatsoever as incurred, insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any untrue or alleged untrue statement of material fact contained in the Shelf Registration Statement, or any Prospectus or preliminary Prospectus or any amendment thereof or supplement thereto or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified Person, as incurred, for any legal or other expense reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that (i) the Company will not be liable in any case to the extent that any loss, claim, damage, liability or expense arises out of or is based upon any such untrue or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein and (ii) the foregoing indemnity with respect to any untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus relating to the Shelf Registration Statement shall not inure to the benefit of any Holder (or any person controlling such Holder) from whom the person asserting any such loss, claim, damage or liability purchases any of the Transfer Restricted Securities that are the subject thereof if such person did not receive a copy of the final prospectus (or the final prospectus as supplemented) at or prior to the written confirmation of the sale of such Transfer Restricted Securities to such person and the untrue statement or alleged omission contained in the preliminary prospectus was corrected in the final prospectus (or the final prospectus as supplemented). The Company also agrees to indemnify or contribute to losses of, as provided in Section 6(d), any underwriters of Transfer Restricted Securities registered under the Shelf Registration Statement, their officers and directors and each Person, if any, who controls any such underwriter (within the meaning of the Act) on substantially the same basis as that of the indemnification of the Holders provided in this Section 7(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 5(o) hereof. (b) Each Holder shall indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company (within the meaning of the Act) against any and all losses, claims, damages, liabilities and expenses described in the indemnity contained in Section 7(a) hereof, as incurred, resulting from any untrue or alleged untrue statement of material fact contained in the Shelf Registration Statement or any amendment thereof or supplement thereto or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such loss, claim, damage, liability or expense relates to or arises from information relating to such Holder furnished in writing by such Holder specifically for use in the Shelf Registration Statement; provided, however, that the obligation to indemnify will be individual to each Holder and will be limited to the amount of net proceeds received by such Holder from the sale of Transfer Restricted Securities pursuant to the Shelf Registration Statement. (c) Any Person entitled to indemnification hereunder shall give notice as promptly as reasonably practicable to each indemnifying party of any claim or action commenced against it in respect of which indemnity may be sought hereunder; provided, however, that failure to so notify an indemnifying party shall not relieve such indemnifying party from any obligation that it may have pursuant to this Section except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; provided further, however, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than on account of this indemnity agreement. If any such claim or action shall be brought against an indemnified party, the indemnified party shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that an indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition to the indemnity agreements contained in Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement or any such action effected without its written consent, but if settled with its written consent or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If a claim by an indemnified party for indemnification under this Section 6 is found unenforceable in a final judgment by a court of competent jurisdiction (not subject to further appeal or review) even though the express provisions hereof provide for indemnification in such case, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified as a result of such losses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions, statements or omissions that resulted in such losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any losses shall be deemed to include, subject to the limitations set forth in Section 7(c) herein, any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceedings. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section, an indemnifying party that is a Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the Transfer Restricted Securities sold by such indemnifying party and distributed to the public were offered to the public exceeds the amount of any damages that such indemnifying party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled any contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Rules 144 and 144A. The Company shall use commercially reasonable efforts to file the reports required to be filed by it under the Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the written request of any Holder of Transfer Restricted Securities, make publicly available other information so long as necessary to permit sales of such Holder's securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell securities without registration under the Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). 9. Underwritten Registrations. If any of the Transfer Restricted Securities included under the Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the shares of Common Stock included among such Transfer Restricted Securities (calculated as if all of the then outstanding Debentures were converted into Common Stock at the time of such selection), provided, however, that such managing underwriters shall be reasonably satisfactory to the Company and the Company shall not be obligated to arrange for more than one underwritten offering during the Effectiveness Period. No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents reasonably required under the terms of such underwriting arrangements and (iii) at least 20% of the outstanding Transfer Restricted Securities are included in such underwritten offering. The Holders participating in any underwritten offering shall be responsible for any expenses customarily borne by selling securityholders, including underwriting discounts and commissions and fees and expenses of counsel to the selling securityholders. 10. Miscellaneous. (a) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority of the Common Stock issued or issuable upon conversion of the Debentures (calculated as if all of the then outstanding Debentures were converted into Common Stock at the time of such consent). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of the Holders of Transfer Restricted Securities being sold pursuant to the Shelf Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by Holders of a majority of the shares of Common Stock included among such Transfer Restricted Securities. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand- delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the address of such Holder maintained by the Registrar under the Indenture; (2) if to the Initial Purchaser, at the address set forth in the Purchase Agreement; (3) if to the Company, at its address set forth in the Purchase Agreement; or to such other addresses as the recipient party has specified to the sending party by prior written notice to the sending party. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being delivered to a next-day air courier; five business days after being deposited in the mail; when answered back, if faxed; and when receipt is acknowledged by the recipient's telecopier machine, if telecopied. (c) Remedies. In the event of a breach by the Company or by a Holder of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (d) Severability. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (e) No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Holders in this Agreement. (f) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of their respective heirs, executors, administrators, successors, legal representatives and assigns. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of Holders are also for the benefit of, and enforceable by, any subsequent Holder. (g) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. (h) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (i) Governing Law. All questions concerning the construction, validity and interpretation of this Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: /s/ Mark S. Newman -------------------------------- Its: Chief Executive Officer and President ------------------------------------- FORUM CAPITAL MARKETS L.P., acting on behalf of itself and as the representative of the Holders By: /s/ Michael F. McNulty --------------------------------- Its: Managing Director --------------------------------- EX-23 5 EXHIBIT 23.1 - CONSENT EXHIBIT 23.1 Accountants' Consent and Report on Schedule The Board of Directors Diagnostic/Retrieval Systems, Inc.: The audits referred to in our report dated May 18, 1995, included the related financial statement schedule for each of the years in the three-year period ended March 31, 1995, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such 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. We consent to the use of our reports included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. KPMG Peat Marwick LLP Short Hills, New Jersey November 29, 1995 EX-99 6 FORM T-1 Securities Act of 1933 File No. _________ (If application to determine eligibility of trustee for delayed offering pursuant to Section 305 (b) (2)) _______________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ________________ FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)___________ __________________ THE TRUST COMPANY OF NEW JERSEY (Exact name of trustee as specified in its charter) 22-1337980 (I.R.S. Employer Identification Number) 35 JOURNAL SQUARE, JERSEY CITY, NEW JERSEY (Address of principal executive offices) 07036 (Zip Code) ________________ DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (Exact name of obligor as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 13-2632319 (I.R.S. Employer Identification No.) 5 SYLVAN WAY PARSIPPANY, NEW JERSEY (Address of principal executive offices) 07054 (Zip Code) __________________________________ 9% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES DUE October 1, 2003 (Title of the indenture securities) _______________________________________________________________________ ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Federal Deposit Insurance Corporation 550 17th Street, NW Washington, DC 20429 New Jersey Department of Banking 36 West State Street CN-440 Trenton, NJ 08625 (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The Trustee is not the obligor, nor is the Trustee directly or indirectly controlling, controlled by, or under common control with the obligor. ITEM 3. VOTING SECURITIES OF THE TRUSTE FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF THE TRUSTEE. As of November 30, 1995: Column A Column B Title of Class Amount Outstanding ------------------------------- -------------------- Common Stock ($2.00 par Value) 19,594,170 shares 9 3/4 % Cumulative Preferred Stock 60,000 shares ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES. IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISHING THE FOLLOWING INFORMATION: (A) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH OTHER INDENTURE. None (B) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS FOR THE CLAIM THAT NO CONFLICTING INTEREST WITHIN THE MEANING OF SECTION 310 (B) (1) OF THE ACT ARISES AS A RESULT OF THE TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING A STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS COMPARED WITH THE SECURITIES ISSUED UNDER SUCH OTHER INDENTURE. Reference is made to the response to Item 4 (a) above. ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE OR A REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION. None. ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF THE OBLIGOR. As of November 30, 1995 None. ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER. As of November 30, 1995 None. ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE TRUSTEE. As of November 30, 1995 None. ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR THE OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE. As of November 30, 1995 None. ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITIES HOLDERS OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR THE OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, (1) OWNS 10 PERCENT OF THE VOTING SECURITIES OF THE OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON. As of November 30, 1995 None. ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE. As of November 30, 1995 None. ITEM 12. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY. *1. -- A copy of the Articles of Association of the trustee as now in effect. *2. -- Not Applicable. *3. -- Not Applicable. *4. -- A copy of the existing by-laws of The Trust Company of New Jersey. *5. -- Not Applicable 7. -- A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. ___________________ * The Exhibits thus designated are incorporated herein by reference. Following the description of such Exhibits is a reference to the copy of the Exhibit heretofore filed with the Securities and Exchange Commission, to which there have been no amendments or changes. NOTE Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base a responsive answer to Item 2 the answer to said Item is based on incomplete information. Item 2 may, however, be considered as correct unless amended by an amendment to this Form T-1. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, The Trust Company of New Jersey a corporation organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Jersey City, and the State of New Jersey, on this 30th day of November, 1995. THE TRUST COMPANY OF NEW JERSEY By:/s/ Roger T. Bernhammer _____________________________ Roger T. Bernhammer Vice President EXHIBIT 7 CONSOLIDATED REPORT OF CONDITION THE TRUST COMPANY OF NEW JERSEY of Jersey City in the State of New Jersey, at the close of business on June 30, 1995, published in response to call made by Comptroller of the Currency, under title 12, United States Code, Section 161. COMPTROLLER OF THE CURRENCY NORTHEASTERN DISTRICT STATEMENT OF RESOURCES AND LIABILITIES THOUSANDS ASSETS OF DOLLARS Cash and balances due from depository institutions: $93,709 Federal funds sold 85,000 Total cash and cash equivalents 178,709 SECURITIES: Available-for-sale securities (Market value $493,231 in 1995) 493,231 Held to maturity (Market value $669,534 in 1995) 672,497 Total securities 1,165,728 LOANS: $960,337 Less: Unearned income (22,156) Less: Allowance for possible loan losses (21,628) Net loans 916,553 ------- Premises and equipment 22,341 Other real estate owned, net of reserves 44,180 Accrued interest receivable 18,832 Other assets 40,333 TOTAL ASSETS $2,386,676 LIABILITIES AND STOCKHOLDERS EQUITY DEPOSITS: Noninterest-bearing $337,343 Interest-bearing 1,837,812 ---------- Total deposits 2,175,155 Securities sold under agreement to repurchase 41,173 Accrued taxes and other liabilities 15,321 Total liabilities 2,231,649 Commitments and contingencies Preferred stock, $100 par value, issueable in series, authorized 60,000 shares; outstanding 60,000 shares Series A 9.75% cumulative shares (preference on liquidation at par value) 6,000 Common stock, $2.00 par value; authorized 72,000,000 shares; outstanding 19,594,170 in 1995 39,188 Additional paid in capital 20,051 Undivided profits 95,083 Unrealized holding loss on securities, net of related income taxes (5,295) Total stockholders equity 155,027 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,386,676 I, Michael A. Marinelli., Executive Vice President and Chief Financial Officer of the above named bank do hereby declare that this Report of Condition is true and correct to the best of my knowledge and belief. (Signed) Michael A. Marinelli We the undersigned directors, attest to the correctness of this statement of resources and liabilities. We declare that it has been examined by us, and to the best of our knowledge and belief has been prepared in conformance with the instructions and is true and correct. (Signed) Siggi B. Wilzig (Signed) Fred F. Moses Directors (Signed) Peter J. O Brien -----END PRIVACY-ENHANCED MESSAGE-----