-----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, K3J/JQhSSxstQo+BAUjBS2eH+4tqufCyUKwCitQLfCAQzhPyiy235pY84xBlbBdp TTgew/GTSU8SKVX1A2jc2w== 0000950172-96-000097.txt : 19960227 0000950172-96-000097.hdr.sgml : 19960227 ACCESSION NUMBER: 0000950172-96-000097 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19960222 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64641 FILM NUMBER: 96524366 BUSINESS ADDRESS: STREET 1: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 201-898-1500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 S-2/A 1 Registration No. 33-64641 As filed with the Securities and Exchange Commission on February 22, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1 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 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. ( ) __________________________ 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-1 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; Security Ownership; Certain Relationships and Related Transactions; Description of the Debentures; Description of Capital Stock; Plan of Distribution; Index to Financial Statements 12. Disclosure of Commission Position on Indem- nification for Securities Act Liabilities Not Applicable SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED FEBRUARY 22, 1996 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 has applied for listing of the Debentures and the shares of Class A Common Stock which are issuable upon conversion 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 February 20, 1996, the last reported sale price of the Class A Common Stock on the AMEX was $7-3/4 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 December 31, 1995, Senior Indebtedness (excluding current installments) was approximately $2.8 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.6 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 ___________, 1996 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-1 (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, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. 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 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 exhibits thereto, may be obtained, upon payment of the prescribed fees, at the offices of the SEC as set forth above. 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 nine months ended December 31, 1995 the Company had revenues of $65.6 million, net income of $2.5 million and fully diluted earnings per share of $.44, representing increases of 38.4%, 45.7% and 29.4%, respectively, compared with the same nine-month period ended December 31, 1994.
SUMMARY FINANCIAL INFORMATION Year Ended March 31, Nine Months Ended December 31, 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 $ 65,628,000 $ 47,404,000 Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 60,289,000 44,143,000 Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 5,339,000 3,261,000 Interest and Related Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (1,675,000) (1,020,000) Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 425,000 613,000 Earnings (Loss) before Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 4,089,000 2,854,000 Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,594,000 1,142,000 Net Earnings (Loss) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 2,495,000 $ 1,712,000 Net Earnings (Loss) per share of Class A and Class B Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34 OTHER OPERATIONS DATA: EBITDA(2) . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 7,565,000 $ 5,228,000 Ratio of Earnings to Fixed Charges(3)(4) 2.9x 2.3x 1.8x - - 2.8x 2.7x Ratio of Earnings to Fixed Charges, as adjusted(3)(5) 1.8x 2.2x
December 31, 1995 Actual As Adjusted(6) BALANCE SHEET DATA: Working Capital $ 40,585,000 $ 38,085,000 Net Property, Plant and Equipment $ 14,728,000 $ 14,728,000 Total Assets $ 90,770,000 $ 85,631,000 Long-Term Debt, Excluding Current Installments $ 35,319,000 $ 32,819,000 Net Stockholders' Equity $ 24,907,000 $ 24,907,000 (1) No cash dividends have been distributed during any of the years in the five-year period ended March 31, 1995 or the nine months ended December 31, 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 application of the proceeds from the Debenture Offering, which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995). The ratio also assumes additional interest income was earned on the proceeds remaining after the redemption of the Company's 1998 Debentures (as defined herein). See "Use of Proceeds." (6) Adjusted to give effect to the use of the net proceeds from the Debenture Offering to redeem $4,963,000 of the 1998 Debentures and for the payment of $176,000 of accrued interest thereon as of December 31, 1995. 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 December 31, 1995, Senior Indebtedness (excluding current installments) was approximately $2.8 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.6 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 December 31, 1995, Senior Indebtedness (excluding current installments) was approximately $2.8 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 $16.6 million at December 31, 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 February 20, 1996, 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 2,154,808 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock") outstanding (excluding 65,795 shares of Class B Common Stock in treasury). Of such shares, 760,168 shares of the Class A Common Stock and 307,180 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 approximately $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 333,333 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 has applied for listing of the Debentures and the shares of Class A Common Stock which are issuable upon conversion 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 Board of Directors of the Company has authorized and is currently soliciting proxies from the stockholders of the Company with respect to a proposal 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 nine months ended December 31, 1995, the Company had revenues of $65.6 million, net income of $2.5 million and fully diluted earnings per share of $.44, representing increases of 38.4%, 45.7% and 29.4%, respectively, compared with the same nine-month period ended December 31, 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. On February 16, 1996, the Company used approximately $5.0 million of such net proceeds to redeem $4,963,000 aggregate principal amount of the Company's 1998 Debentures (of which $2,463,000 aggregate principal amount was classified as current as of December 31, 1995), plus accrued and unpaid interest thereon. The balance will be used 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 December 31, 1995 as adjusted to give effect to the use of net proceeds from 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). The information presented below should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this Prospectus. December 31, 1995 Actual As Adjusted Long-term debt, excluding current installments(1): Senior Indebtedness(2) . . . $ 2,819,000 $ 2,819,000 81/2% Convertible Subordinated Debentures due August 1, 1998 . . . . . 7,500,000 5,000,000 Senior Subordinated Convertible Debentures due 2003 . . . . . 25,000,000 25,000,000 Total long-term debt . . . 35,319,000 32,819,000 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 . . . . . . 13,414,000 13,414,000 27,052,000 27,052,000 Less Treasury Stock -at cost: 432,639 shares of Class A Common Stock and 21,619 shares of Class B Common Stock . . (1,918,000) (1,918,000) Less unamortized restricted stock compensation . . . . . . . (227,000) (227,000) Net stockholders' equity . . 24,907,000 24,907,000 Total capitalization . . . . . $ 60,226,000 $ 57,726,000 _________________ (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 . . . . . . . . 8 7 7-7/8 6-3/4 Fourth Quarter (through February 20, 1996) 8-11/16 7-5/8 8-5/16 7-3/8 ________________ * As of February 20, 1996, the Class A Common Stock was held by 1,416 stockholders (of which 298 were registered holders and 1,118 were beneficial holders) and the Class B Common Stock was held by 845 stockholders (of which 207 were registered holders and 638 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 nine months ended December 31, 1995 and 1994 and the selected consolidated balance sheet data as of December 31, 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 nine months ended December 31, 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.
Nine Months Year Ended March 31, Ended December 31, 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 $ 65,628,000 $ 47,404,000 Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 60,289,000 44,143,000 Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 5,339,000 3,261,000 Interest and Related Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (1,675,000) (1,020,000) Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 425,000 613,000 Earnings (Loss) before Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 4,089,000 2,854,000 Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,594,000 1,142,000 Net Earnings (Loss ) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 2,495,000 $ 1,712,000 Net Earnings (Loss) per share of Class A and Class B Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34 OTHER OPERATIONS DATA: EBITDA(2) . . . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 7,565,000 $ 5,228,000 Ratio of Earnings to Fixed Charges(3)(4) . 2.9x 2.3x 1.8x - - 2.8x 2.7x Ratio of Earnings to Fixed Charges, as adjusted(3)(5) 1.8x 2.2x March 31, December 31, l995 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 $ 40,585,000 $ 38,085,000 Net Property, Plant and Equipment 9,849,000 8,893,000 9,768,000 11,602,000 13,904,000 14,728,000 14,728,000 Total Assets . . 64,590,000 58,836,000 51,948,000 53,904,000 58,527,000 90,770,000 85,631,000 Long-Term Debt, Excluding Current Installments 11,732,000 14,515,000 17,290,000 19,958,000 22,240,000 35,319,000 32,819,000 Net Stockholders' Equity 22,509,000 19,759,000 18,115,000 17,047,000 22,300,000 24,907,000 24,907,000 ____________________ (1) No cash dividends have been distributed during any of the years in the five-year period ended March 31, 1995 or the nine months ended December 31, 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 application of the proceeds from the Debenture Offering, which was consummated on September 29, 1995 (including the over-allotment option which was exercised on November 3, 1995). The ratio also assumes additional interest income was earned on the proceeds remaining after the redemption of the Company's 1998 Debentures. See "Use of Proceeds." (6) Adjusted to give effect to the use of the net proceeds from the Debenture Offering to redeem $4,963,000 of the 1998 Debentures and for the payment of $176,000 of accrued interest thereon as of December 31, 1995. 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 nine months ended December 31, 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 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. Currently, the Company does not intend to continue discussions with NAI regarding any proposed merger. 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." 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 Nine Months Ended Decem ber 31, 1995 Nine vs. Months Nine Ended Months Year Ended March 31, December 31, Ended Fiscal Fiscal Decem 1995 1994 ber vs. vs. 31, 1995 1994 1993 1995 1994 1994 1993 1994 Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 20.9% 21.0% 38.4% Costs and Expenses 92.7 94.0 95.2 91.9 93.1 19.2 19.6 36.6 Operating Income 7.3 6.0 4.8 8.1 6.9 47.7 49.2 63.7 Interest and Related Expenses (2.0) (2.7) (3.6) (2.5) (2.2) (12.8) (9.3) 64.2 Other Income, Net .8 1.4 2.6 0.6 1.3 (36.0) (31.9) (30.7) Earnings before Income Taxes 6.1 4.7 3.8 6.2 6.0 57.2 50.4 43.3 Income Taxes 2.4 1.9 1.5 2.4 2.4 51.1 52.9 39.6 Net Earnings 3.7% 2.8% 2.3% 3.8% 3.6% 61.2% 48.8% 45.7% COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1995 WITH NINE MONTHS ENDED DECEMBER 31, 1994 Revenues for the nine-month period ended December 31, 1995 increased 38.4% to $65.6 million from $47.4 million for the same nine-month period in fiscal 1995. The revenue growth was due primarily to increased shipments of display workstations and data storage systems, as well as from higher commercial product sales. In addition, revenue growth was partly due to higher sales of electro-optical systems following the acquisition of substantially all of the assets of Opto Mechanik, Inc. on July 5, 1995 (the "OMI Asset Acquisition"). Operating income for the nine-month period ended December 31, 1995 increased 63.7% to $5.3 million from $3.3 million for the same nine-month period in fiscal 1995. Operating income as a percentage of revenues was 8.1% for the nine-month period ended December 31, 1995 as compared with 6.9% for the comparable prior year period. Higher operating income was due primarily to the overall increase in revenues, together with higher margins on the company's commercial products. Interest and related expenses were $1.7 million for the nine months ended December 31, 1995 as compared to $1.0 million for the comparable prior year period. The increase for the period was primarily due to the increase in debt associated with the Debenture Offering, offset in part by a reduction in interest resulting from repurchases of the Company's 1998 Debentures, in satisfaction of the August 1, 1995 sinking fund requirement for this debt. Other income, net, was $0.4 million for the nine-month period ended December 31, 1995, representing a decrease from $0.6 million in the comparable prior year period. This decrease was due to a gain on the sale of fixed assets of approximately $0.2 million in the third quarter of fiscal 1995, offset in part by interest earned on higher average cash balances this fiscal year, primarily resulting from the net proceeds generated from the Debentures. The Company's effective tax rate for the nine-month period ended December 31, 1995 was 39%, as compared to 40% in the comparable prior year period. 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 nine months ended December 31, 1995 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 December 31, 1995 and March 31, 1995 represented approximately 25% and 17%, respectively, of total assets. During the nine-month period ended December 31, 1995, cash increased $11.9 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, and the additional placement of $5,000,000 in aggregate principal amount of the Debentures, pursuant to an over-allotment option, completed on November 3, 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 Asset 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 $3.7 million for capital expenditures. Additionally, approximately $3.5 million was used in support of operations, primarily for material procurement. 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, excluding assets acquired as a result of the OMI Asset Acquisition, are expected to approximate $4.4 million. The majority of these expenditures will be for facilities improvements, as well as for computer and laboratory-related equipment, which will be required to support the Company's growth. Working capital as of December 31, 1995 was $40.6 million, as compared to $20.3 million at March 31, 1995. The increase was primarily due to higher cash balances resulting from the Debenture Offering. Net proceeds from the Debenture Offering were used on February 16, 1996 to repurchase approximately $5.0 million in principal amount of outstanding 1998 Debentures, for working capital requirements and for future acquisition-related transactions. During the first quarter of fiscal 1996, the Company obtained a $5.0 million unsecured line of credit from NatWest Bank, in order to supplement its working capital needs. This line of credit expired on December 31, 1995 and has not been renewed. As of August 1995, the Company satisfied its $2.5 million sinking fund obligation under the 1998 Debentures. 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 $3.2 million in the nine-month period ended December 31, 1995, primarily resulting from increased billings associated with certain contracts and, to a lesser extent, from the OMI Asset Acquisition. 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 $4.8 million during the first nine months of fiscal 1996, primarily due to increased material procurement related to higher production activity on certain display workstation programs. The increase in inventories was also due, in part, to the OMI Asset Acquisition. 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 $23.6 million during the nine-month period ended December 31, 1995 to $35.3 million, primarily due 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 December 31, 1995 and 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 $2.4 million during the nine-month period ended December 31, 1995 to $24.9 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 December 31, 1995, the Company's backlog of orders was approximately $147 million as compared to $126 million at March 31, 1995. The increase in backlog for the first nine months of the fiscal year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $16 million of backlog from the OMI Asset Acquisition. New contract awards of approximately $71 million were booked during the nine-month period ended December 28, 1995. As of January 28, 1996, backlog totalled approximately $147 million, including approximately $16 million of backlog from the OMI Asset 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-1 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 December 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 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 December 31, 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 $25,000,000 aggregate principal amount of the Debentures, the Debt Ratio at December 31, 1995 was 0.4:1. The Company has obtained a waiver, renewable quarterly, 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. On July 5, 1995 (the "OMI Closing Date"), Photronics Corp., a New York corporation and a wholly-owned subsidiary of the Company ("Photronics Corp."), acquired (through OMI, a Delaware corporation and a wholly-owned subsidiary of Photronics Corp.), substantially all of the assets of Opto Mechanik, Inc. ("Opto"), a Delaware corporation, pursuant to an Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5, 1995, between Photronics Corp. and Opto (the "OMI Agreement"), and approved by the United States Bankruptcy Court for the Middle District of Florida on June 23, 1995. OMI, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. Pursuant to the OMI Agreement, the Company paid a total of $5,450,000 consisting of (i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. ("PNC"), (ii) a note to PNC in the principal amount of $1,450,000 payable in forty eight (48) equal monthly installments of principal and interest commencing with the first day of the month subsequent to the OMI Closing Date (the "PNC Note"), (iii) $2,550,000 in cash to MetLife Capital Corporation and (iv) a note in the principal amount of $300,000 to Opto payable in six (6) equal monthly installments of principal and interest commencing on August 5, 1995 (the "Opto Note"). The PNC Note bears interest at a floating rate equal to the lesser of (i) PNC's stated prime interest rate plus 0.5% or (ii) the prime rate as reported by the Wall Street Journal plus 0.5%. The Opto Note bears interest at a rate of 9.5% per annum. Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. Total cash consideration paid in the acquisition was obtained from the Company's working capital. The acquisition of the assets of Opto has been accounted for under the purchase method. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. The fair value of the assets acquired represented slightly less than 10% of the total assets of the Company as of March 31, 1995. Prior to the asset acquisition, on October 11, 1994, Opto filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. For the twelve months ended March 31, 1995, Opto had revenues of approximately $13.9 million and an operating loss of approximately $6.6 million, primarily attributable to excessive labor and overhead costs, which the Company believes caused significant cost overruns on substantially all of Opto's contracts. The operating results of OMI, the acquiring corporation, have been included in the Company's reported operating results since the date of acquisition. For the period from the date of acquisition to December 31, 1995, revenues generated in respect of the assets acquired constituted approximately 10% of the consolidated revenues of the Company for that period. These assets were operated at a modest profit, which was less than 10% of the consolidated operating income of the Company for such period. Interest expense for such period incurred in connection with the acquired assets was immaterial to the Company's consolidated results of operations. At the present time, there is no single contract being performed or to be performed with the acquired assets which is expected to significantly affect the Company's operating results in the foreseeable future. The business currently being conducted with such assets is subject to risks and uncertainties similar to those of the Company as a whole. See "Risk Factors" and "Business -- Industry Consolidation." Since the asset acquisition, the Company has relocated a portion of the Electro-Optical Systems Group's manufacturing operations from Hauppauge, New York to OMI's new location in Palm Bay, Florida. The Company expects to realize certain cost benefits and other efficiencies as a result of this consolidation. See "The Company -- Company Organization" and Business -- Strategy." On February 6, 1996, pursuant to a Joint Venture Agreement, dated February 6, 1996, by and among DRS/MS, Inc. ("DRS/MS"), a wholly-owned subsidiary of the Company, Universal Sonics Corporation ("Universal Sonics"), a New Jersey corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos, and a Partnership Agreement, dated February 6, 1996, by and between DRS/MS and Universal Sonics, the Company entered into a partnership with Universal Sonics (the "Partnership") for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the Partnership consisted of $400,000 in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in the Partnership. On February 9, 1996, Precision Echo acquired (through Ahead Technology Acquisition Corporation ("Ahead Acquisition"), a Delaware corporation and a wholly-owned subsidiary of Precision Echo), certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. ("Mag-Head"), a Minnesota corporation, pursuant to an Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head and Ahead Acquisition for approximately $400,000 in cash. Mag-Head produces audio and flight recorder heads. 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 nine months ended December 31, 1995, the Company had revenues of $65.6 million, net income of $2.5 million and fully diluted earnings per share of $.44, representing increases of 38.4%, 45.7% and 29.4%, respectively, compared with the same nine-month period ended December 31, 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. 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 previously located in Melbourne, Florida through OMI. In order to reduce its production costs, Photronics Corp. consolidated a portion of its manufacturing operations to OMI's new facility in Palm Bay, 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 December 31, 1995, the Company's backlog of orders was approximately $147 million compared to $126 million at March 31, 1995. The increase in backlog for the first nine months of the fiscal year was due to the net effect of bookings, partially offset by revenues, and the addition of approximately $16 million of backlog from the OMI Asset Acquisition. New contract awards of approximately $71 million were booked during the nine-month period ended December 31, 1995. As of January 28, 1996, backlog totalled approximately $147 million, which includes approximately $16 million of backlog from the OMI Asset 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 As of January 28, 1996, the Company employed 799 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, $1.5 million and $1.9 million in fiscal 1995, 1994, 1993, and the nine-month period ended December 31, 1995 (unaudited), 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 58 Electronic Systems Group; President of TAS Stuart F. Platt . . Vice President and Director; 62 President of Precision Echo Richard Ross . . . Vice President; President of 41 Photronics Corp. Leonard Newman . . Director and Chairman Emeritus 71 Jack Rachleff . . . Director 82 Theodore Cohn . . . Director 72 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 Photronics 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. EXECUTIVE COMPENSATION Summary of Cash and Certain other Compensation. There is shown below information concerning the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended March 31, 1995, 1994 and 1993, of those persons who were, at March 31, 1995 (i) the chief executive officer and (ii) the other four most highly compensated executive officers of the Company (the "Named Officers"): SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation (i) Awards Stock All Other Name and Principal Fiscal Salary Bonus Options Compensation Position Year ($) ($) (#) ($) Leonard Newman . 1995 321,910 0 0 57,000(a)(b)(c)(d) Chairman of the 1994 331,140 100,000 0 52,538(a)(b)(c)(d) Board 1993 332,294 20,000 0 43,974(a)(b)(c)(d) & Secretary Mark S. Newman . 1995 281,344 120,000 150,000(f) 19,440(b)(c)(d) President & 1994 230,767 52,993 0 86,728(b)(c)(d)(e) Chief 1993 226,083 15,000 0 13,910(b)(c)(d) Executive Officer Paul G. Casner, Jr. 1995 198,000 40,000 0 32,201(b)(d)(h) Vice President & President-- Electronics Systems Group Stuart F. Platt . 1995 256,970 50,000 0 4,414(c)(d) Vice President & 1994 262,854 21,597 5,000(g) 3,664(c)(d) President-- 1993 187,889 0 0 2,426(c)(d) Precision Echo Richard Ross . . 1995 198,618 36,000 0 9,070(b)(c)(d) Vice President & 1994 155,596 27,237 5,000(g) 7,010(b)(c)(d) President-- 1993 159,166 10,000 0 5,851(b)(c)(d) Photronics ___________________ (a) Includes deferred compensation of $25,000 pursuant to a Deferred Compensation Agreement (as defined herein) between the Company and Mr. L. Newman. See "-Deferred Compensation Agreement." (b) Includes the amounts of employer contributions which vested pursuant to the Company's Retirement/Savings Plan (as defined herein) (See"-Retirement/Savings Plan") in the fiscal years ended March 31, 1995 and 1994, respectively, in the accounts of the Named Officers, as follows: Mr. L. Newman, $4,292 and $1,626; Mr. M. Newman, $4,838 and $3,530; Mr. P. Casner, Jr., $3,000; and Mr. R. Ross, $3,486 and $2,234. There were no employer contributions under the Retirement/Savings Plan during fiscal 1993. (c) Includes the fixed annual amounts, computed on a fiscal year basis, provided by the Company for the benefit of the Named Officers, to reimburse such officers for the amounts of medical and hospital expenses actually incurred by them, which are not covered or paid to them under the Company's group medical and hospitalization plans during the fiscal years ended March 31, 1995, 1994 and 1993, respectively, as follows: Mr. L. Newman, $4,000, $3,250 and $3,750; Mr. M. Newman, $4,500, $3,250 and $5,250; Mr. S. Platt, $4,000, $3,250 and $2,150; and Mr. R. Ross, $4,000, $3,250 and $4,500. (d) The Company pays the cost of policies of life insurance and long-term disability insurance, in excess of the amounts furnished under the group coverage provided to all employees, for the benefit of the Named Officers. Under certain of the life insurance policies, the Company is a beneficiary to the extent of the premiums paid. The total amounts of the premiums paid by the Company or the economic benefit to the Named Officers for such insurance policies during the fiscal years ended March 31, 1995, 1994 and 1993, respectively, were as follows: Mr. L. Newman, $23,708, $22,662 and $15,224; Mr. M. Newman, $10,102, $9,948, and $8,660; Mr. P. Casner, Jr., $124; Mr. S. Platt, $414, $414 and $276; and Mr. R. Ross, $1,584, $1,526 and $1,350. (e) Includes $70,000 earned by Mark S. Newman as a consequence of his involvement in the Company's October 1993 acquisition of TAS. (f) Represents non-qualified stock options to purchase 50,000 shares of Class B Common Stock and incentive stock options to purchase 100,000 shares of Class B Common Stock issued to Mr. M. Newman under the Company's 1991 Stock Option Plan (the "1991 Stock Option Plan"). Such options, granted on June 9, 1994, became exercisable six months from the date of grant with respect to 20% of such options and are further exercisable cumulatively at 20% per year on each of the first four anniversaries of the date of grant. (g) Represents incentive stock options to purchase shares of Class B Common Stock issued to the Named Officers under the Company's 1991 Stock Option Plan. Such options, granted on August 5, 1993, became exercisable six months from the date of grant with respect to 20% of such options and are further exercisable cumulatively at 20% per year on each of the first four anniversaries of the date of grant. (h) Includes forgiveness of principal and interest owed pursuant to the Grid Note (as defined herein) in an amount equal to $29,077. (i) The dollar value of perquisites and other personal benefits provided for the benefit of the Named Officers during the fiscal years ended March 31, 1995, 1994 and 1993, respectively, did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus reported for the Named Officers in those period. There were no other amounts of compensation required to be reported as "Other Annual Compensation", by Item 402 of Regulation S-K, earned by the Named Officers. Stock Options. The following table contains information concerning the grant of stock options under the Company's 1991 Stock Option Plan to the Named Officer during the Company's fiscal year ended March 31, 1995. OPTION GRANTS IN LAST FISCAL YEAR Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term Number % of of Total Securi- Options ties Granted Under- to lying Employ Exer- Options ees in cise Expira- Granted Fiscal Price tion Name (#) 1995 ($/Sh) Date 0% ($) 5%($)(c) 10%($)(c) Mark S. Newman 50,000(a) 33.0% $0.01 06/08/99 $224,500 $286,500 $362,000 ______________ 100,000(b) 67.0% $4.95 06/08/99 --- $79,000 $230,000 ______________ (a) The options granted were for shares of Class B Common Stock at an exercise price equal to the par value of the Company's Class B Common Stock on the date of grant. The options become exercisable over a five year period in increments of 20% beginning six months from the date of grant and continuing at an additional 20% per year on the anniversary of the date of grant. The grant date of the options was June 9, 1994. (b) The options granted were for shares of Class B Common Stock at an exercise price equal to 110% of the fair market value of the Company's Class B Common Stock on the date of grant. The options become exercisable over a five year period in increments of 20% beginning six months from the date of grant and continuing at an additional 20% per year on the anniversary of the date of grant. The grant date of the options is June 9, 1994. (c) The amounts shown under these columns are the result of calculations at the 5% and 10% rates required by the SEC and are not intended to forecast future appreciation of the Company's stock price. Option Exercises and Fiscal Year-End Values. Shown below is information with respect to the options exercised during fiscal 1995 by the Named Officers and the unexercised options to purchase the Company's Class A and Class B Common Stock granted through March 31, 1995 under the Company's 1981 Incentive Stock Option Plan, 1981 Non-Qualified Stock Option Plan and 1991 Stock Option Plan to the Named Officers and held by them at that date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR- END OPTION VALUE
Number of Value of Unexercised Unexercised Options in-the-Money Options at March 31, 1995 at March 31, 1995(a) ______________________________________ _____________________________________ Class A Class B Class A Class B Common Common Common Common Stock Stock Stock Stock Shares __________________ __________________ __________________ __________________ Acquired Value Un- Un- Un- Un- on Real- Exer- exer- Exer- exer- Exer exer- Exer- exer Exercise ized cisa cisa cisa cisa cisa cisa cisa cisa Name (#) ($) ble ble ble ble ble ble ble ble ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Leonard Newman -- -- -- -- 25,000 -- -- -- $85,925 -- Mark S. Newman -- -- 40,000 -- 30,000 120,000 $105,500 -- $65,900 $263,600 Paul G. Casner, Jr. -- -- -- -- 20,000 30,000 -- -- $109,800 $164,700 Stuart F. Platt -- -- -- -- 2,000 3,000 -- -- $3,750 $5,625 Richard Ross 10,600 $32,719 -- -- 2,000 3,000 -- -- $3,750 $5,625 ___________________ (a) Based on the difference between the exercise price of each grant and the closing price on the AMEX-Composite Transactions of the Company's Class A and Class B Common Stock on that date, $5.25 and $5.50, respectively.
DEFERRED COMPENSATION AGREEMENT In June 1993, pursuant to approval by the Board of Directors, the Company and Mr. Leonard Newman entered into a deferred compensation agreement (the "Deferred Compensation Agreement") providing for certain deferred benefits which would become payable upon the termination of his employment for any reason including death, and providing for certain changes to certain insurance policies maintained by the Company. Under the terms of the Deferred Compensation Agreement, in the event of termination of employment compensation (the "Deferred Benefit") equal to $25,000 multiplied by the number of complete years of employment from July 1, 1969 through the date of termination of employment, payable in twenty quarterly installments commencing on the first day of the month following the date of termination, is to be provided to Mr. L. Newman or, in the case of death, to his designated beneficiary. The terms used for computing the Deferred Benefit are similar in all material respects to those that had been used in the computation of deferred compensation provided pursuant to an employment agreement that expired on June 30, 1990, between the Company and Mr. L. Newman. In the event of permanent disability, as defined in the Deferred Compensation Agreement, the Company is required to pay the employee an amount equal to five times the employee's annual base compensation in effect immediately prior to his permanent disability. Such payments are to be made on the Company's regular payroll dates during the five-year period following the permanent disability. In the event of the death of the employee during the five-year pay-out period, the Company will pay to the employee's designated beneficiary the Deferred Benefit described above reduced by the total of the disability payments previously paid in equal quarter-annual installments over the remainder of the five-year period. In addition, pursuant to the terms of the Deferred Compensation Agreement, a keyman term insurance policy owned by the Company for Mr. L. Newman was transferred to him. The Company is required to provide Mr. L. Newman, on an annual basis, the sum sufficient to pay the schedule premium on such policy. TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS In April 1994, the company entered into agreement with Mr. Richard Ross which provided for a severance benefit in the event of (i) termination of his employment other than for cause, (ii) diminution in compensation and/or responsibilities and (iii) the change in ownership of the Company or Photronics. The severance benefit is equal to 30 months of Mr. Ross' then current salary plus reimbursement of outplacement expenses up to a maximum of $15,000. Effective July 20, 1994, the Company entered into the Gross Agreement and the Gross Stock Purchase Agreement with David E. Gross. 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 terms 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 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 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 described above. RETIREMENT/SAVINGS PLAN The Summary Compensation Table above includes amounts deferred by the Named Officers pursuant to the Company's Retirement/Savings Plan under Section 401(k) of the Internal Revenue Code of 1986 (the "Retirement/Savings Plan"). The value of a participant's contributions to the Retirement/Savings Plan is fully vested at all times; the value of employer contributions becomes 50% vested after the employee has completed three years of service, 75% vested after completion of four years of service, and 100% vested after completion of five years of service. MEDICAL REIMBURSEMENT PLAN At the beginning of each calendar year, the Company accrues fixed annual amounts for the benefit of certain officers to be paid as needed to reimburse such officers for the amounts of medical and hospital expenses actually incurred by such officers which are not covered, and until January 1, 1993, the excess of the amounts of medical and hospital expenses actually incurred by such officers over the amount paid to them, under the Company's group medical and hospitalization plans. The amount accrued for the benefit of each such officer is included in such officer's compensation for tax purposes regardless of whether such accrued amount is actually paid to him. The excess of the amount accrued over the amounts paid is used to offset the administrative expenses payable by the Company to the medical insurance carrier. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Leonard Newman, who was appointed to the Board of Director's Executive Compensation Committee on May 26, 1994, served as the Chairman of the Board and Secretary of the Company during fiscal 1995. Mr. Newman does not participate in compensation decisions relating to himself or Mark S. Newman. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION During fiscal 1995, the Executive Compensation Committee (the "Committee") established the compensation of the Chief Executive Officer and the President of the Company. The bonus awards of the Named Officers in respect of the 1995 fiscal year were determined at a meeting of the Committee as constituted on May 23, 1995. In determining the individual elements of compensation, the Committee strives to enable the Company to attract and retain key executives critical to the long-term success of the Company and each of its subsidiaries, provide compensation opportunities which are comparable to those offered by similar companies, reward long-term strategic management and the enhancement of shareholder value and create a performance- oriented environment. In order to meet the foregoing objectives, the Committee has attempted to design and choose components of compensation. The Committee consulted with Compensation Resources, Inc. to assist in this process and provide competitive information, advice, documentation and recommendations relating to compensation issues. Compensation packages consist of cash, certain benefits and equity-based compensation. The Company's compensation provides for competitive base salaries which reflect individual performance, level of responsibility and are based on compensation paid by companies of relatively similar size in the same industry as that of the Company. Annual bonuses, when given, are linked to the financial performance of the Company and its subsidiaries as a whole, job performance and the meeting of specified goals. Also included are plans which reward the enhancement of long-term values to the Company's stockholders. The other components of the Company's compensation focus on both short-term and long-term performance, rewarding profitability and growth in stockholder value and delivering competitive levels of compensation. The compensation of the Chief Executive Officer was based on the policies described above. The Chief Executive Officer's compensation for the fiscal year ending March 31, 1995 was based on a comparison of compensation provided to chief executive officers and other members of senior management of companies of relatively similar size within the same industry as that of the Company. The bonus award for fiscal 1995 was computed on the basis of a formula that applied a weighted performance factor to a target award established for the Chief Executive Officer's salary level. The weighted performance factor was derived as a result of the Chief Executive Officer's achievement of certain Company and individual performance targets including, but not limited to, the achievement of a certain level of consolidated earnings before income taxes for fiscal 1995. For fiscal 1995, the Chief Executive Officer recommended the compensation, excluding the bonus awards, for the other Named Officers, based on substantially the same criteria as described above. Bonus awards for the other Named Officers were computed by the Committee on a similar basis as that used for the Chief Executive Officer using specific target awards that had been established for each individual's salary level. The Committee has not formally addressed the restrictions under Section 162(m) of the Internal Revenue Code because the Committee does not anticipate paying compensation to its executive officers in an amount to which Section 162(m) would apply. Mark N. Kaplan, Chairman Donald C. Fraser Jack Rachleff Leonard Newman until 8/8/95 Theodore Cohn since 8/8/95 PERFORMANCE GRAPH Set forth below is a chart comparing the yearly percentage change in the cumulative total stockholder return on the Company's Class A and Class B Common Stock against the total return of the AMEX Market Index and a peer group index consisting of companies comprising the Standard Industrial Classification (SIC) Codes 3812, Search and Navigation Equipment and 3827, Optical Instruments and Lenses. A listing of the companies included in these SIC Codes is available through publications, such as the Standard Industrial Classification Manual, and computer data bases, such as Dialog Information Systems. SIC Code 3812 includes both the Company's Class A and Class B Common Stock. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* AMONG DIAGNOSTIC/ RETRIEVAL SYSTEMS, INC. CLASS A AND CLASS B COMMON STOCK, AMEX MARKET INDEX AND PEER GROUP INDEX Class A Class B AMEX Peer Common Stock Common Stock Market Index Group Index 1990 100 100 100 100 1991 100 124.10 101.91 111.11 1992 58.06 136.34 109.25 59.26 1993 95.16 170.70 117.52 100 1994 96.77 194.42 121.11 114.81 1995 135.48 211.66 127.73 162.96 * Assumes that the value of the investment in the Company's Class A and Class B Common Stock and each index was $100 on April 1, 1990 and that all dividends were reinvested. SECURITY OWNERSHIP The following table shows, as of January 15, 1996, the number of shares of Class A Common Stock and Class B Common Stock held by each director and executive officer, and by all directors and executive officers of the Company as a group and the percentage of each class beneficially owned (within the meaning of Rule 13d-3 of the Exchange Act). Class A Class B Common Stock (a) Common Stock (a)(b) _________________________ _________________________ Name of Percent Percent Beneficial Owner Shares of Class Shares of Class ___________ ___________ ___________ ___________ Leonard Newman 617,600 18.7% 200,824 29.6% Mark S. Newman 71,618(c)(f) 2.2 92,531(d)(e)(g) 7.2 Theodore Cohn 1,600 (h) 4,300 0.3 Donald C. Fraser ____ ___ ___ ___ Mark N. Kaplan 1,000 (h) ___ ___ Stuart F. Platt ____ ___ 3,000(e) 0.1 Jack Rachleff 1,000 (h) ___ ___ Paul G. Casner, Jr 1,000 (h) 30,000 1.4 Nancy R. Pitek 5,724(c) 0.2 8,583(d)(e) 0.7 Richard Ross ____ ___ 3,000(e) 0.1 All directors and executive officers as a group (10 persons) 699,542(c)(f) 21.2% 342,238(d)(e)(g) 35.3% __________________ (a) As of January 15, 1996, the Company had outstanding 3,307,324 shares of Class A Common Stock (excluding 432,639 shares of Class A Common Stock held in treasury) and 2,151,458 shares of Class B Common Stock (excluding 65,795 shares of Class B Common Stock held in treasury). Unless otherwise noted, each director and executive officer had sole voting power and investment power over the shares of Class A Common Stock and Class B Common Stock indicated opposite such director's and executive officer's name. (b) Each share of Class A Common Stock is convertible at any time into one share of Class B Common Stock and, accordingly, each person who owns Class A Common Stock may be deemed to be the beneficial owner of the number of shares of Class B Common Stock equal to the number of shares of Class A Common Stock owned. The number of shares of Class B Common Stock shown does not include the number of shares of Class B Common Stock into which the number of shares of Class A Common Stock shown may be converted. However, the computation of the percentage of class shown includes the number of shares of Class B Common Stock into which the number of shares of Class A Common Stock shown may be converted. (c) Includes 5,724 shares of Class A Common Stock held by the trustee of the Company's Retirement/Savings Plan. Mr. M. Newman and Ms. N. Pitek share the power to direct the voting of such shares as members of the administrative committee of such plan. Mr. M. Newman and Ms. N. Pitek disclaim beneficial ownership as to and of such shares. (d) Includes 7,383 shares of Class B Common Stock held by the trustee of the Company's Retirement/Savings Plan. Mr. M. Newman and Ms. N. Pitek share the power to direct the voting of such shares as members of the administrative committee of such plan. Mr. M. Newman and Ms. N. Pitek disclaim beneficial ownership as to and of such shares. (e) Includes shares of Class B Common Stock which might be purchased upon exercise of options which were exercisable on January 15, 1996 or within 60 days thereafter, as follows: Mr. P. Casner, Jr., 30,000 shares; Mr. Newman, 60,000 shares; Ms. N. Pitek, 1,200 shares; Mr. S. Platt, 3,000 shares; Mr. R. Ross, 3,000 shares; and all directors and executive officers as a group, 97,200 shares. (f) Includes 3,200 shares of Class A Common Stock held by Mr. M. Newman as custodian for his daughter over which Mr. M. Newman has sole voting and investment power. (h) Less than 0.1%. The following table sets forth certain information, as of January 15, 1996 with respect to each person, other than executive officers and directors of the Company, which has advised the Company that it may be deemed to be the beneficial owner (within the meaning of Rule 13d-3 of the Exchange Act) of more than five percent of a class of voting securities of the Company. Such information has been derived from statements on Schedule 13D or 13G filed with the SEC by the person(s) listed below. Class A Class B Common Stock Common Stock _________________________ _________________________ Amount and Amount and Nature of Nature of Name and Address Beneficial Percent of Beneficial Percent of Beneficial Ownership Class Ownership of Class Owner _________________________ _________________________ First Pacific Advisors, Inc. 10301 West Pico Blvd. Los Angeles, CA 90064 . . . . . . 965,678(a) 25.7% 1,717,955(d) 51.7% Michael N. Taglich Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated 100 Wall Street New York, NY 10005 . . . . . . 286,550(b) 8.7 529,850(f) 21.7 David E. Gross 27 Cameron Road Saddle River, NJ 07458 . . . . 65,880(c) 2.0 335,701(e) 15.1 __________________ (a) Includes 451,978 shares of Class A Common Stock from the assumed conversion of $4,000,000 principal amount of the Debentures and 310,000 shares of Class A Common Stock beneficially owned by First Pacific Advisors, Inc. ("First Pacific") through control of FPA Capital Fund, Inc. ("FPA") to which First Pacific serves as investment advisor. The Company has been advised that FPA has sole voting power and shared dispositive power with respect to 310,000 shares. First Pacific has advised the Company that it has shared voting power with respect to 100,000 shares and shared dispositive power with respect to 965,678 shares. (b) Consists of 186,300 shares of Class A Common Stock held by Lander Partners, Inc. ("Lancer Partners"), 7,500 shares of Class A Common Stock held by Antrade, N.V. ("Antrade"), 10,200 shares of Class A Common Stock held by Album N.V. ("Album"), 7,600 shares of Class A Common Stock held by Ralco Investments Group ("Ralco"), 71,100 shares of Class A Common Stock held by Lancer Offshore, Inc. ("Lancer Offshore") and 3,850 shares of Class A Common Stock held by Michael Lauer. Michael N. Taglich and Michael Lauer serve as general partners of Lancer Partners and managing partners of Lancer Offshore. The Company has been advised that Messrs. Taglich and Lauer also share voting and dispositive authority over the shares held by Album, Antrade and Ralco resulting in shared voting and shared dispositive power with respect to a total of 282,700 shares. (c) Includes 25,000 shares of Class A Common Stock held by Mr. Gross for which he has voting and dispositive power. Also included are 20,000 shares of Class A Common Stock held by David E. Gross' wife personally, and 20,880 shares of Class A Common Stock held by her as custodian for her two children, as to which Mr. Gross disclaims any beneficial interest and over which he has neither voting power nor investment power. (d) Consists of 543,000 shares of Class B Common Stock, the beneficial ownership of 513,700 shares of Class B Common Stock from the assumed conversion of Class A Common Stock, beneficial ownership of 451,978 shares of Class B Common Stock from the assumed conversion of $4,000,000 principal amount of the Debentures and an additional 208,877 shares of Class B Common Stock from the assumed conversion of $3,133,000 principal amount of the Company's 1998 Debentures beneficially owned by First Pacific through its control of FPA, Source Capital, Inc. ("Source Capital") and FPA New Income, Inc. ("New Income") to which First Pacific serves as investment advisor. The Company has been advised that FPA has sole voting power and shared dispositive power with respect to 510,000 shares, Source Capital has sole voting power and shared dispositive power with respect to 262,363 shares and New Income has sole voting power and shared dispositive power with respect to 339,328 shares. First Pacific has advised the Company that it has shared dispositive power with respect to 1,717,955 shares. (e) Includes 257,381 shares of Class B Common Stock held by Mr. Gross for which he has sole voting and dispositive power and the beneficial ownership of an additional 25,000 shares of Class B Common Stock through the assumed conversion of Class A Common Stock owned, as described in note (c) above. Also included are 6,000 shares of Class B Common Stock held by Mrs. Gross' wife personally, 6,440 shares of Class B Common Stock held by her as custodian for her two children and the beneficial ownership of an additional 40,880 shares of Class B Common Stock through the assumed conversion of the shares of Class A Common Stock owned by Mr. Gross' wife and held by her as custodian for her two children, as described in note (c) above. Mr. Gross has neither voting power nor investment power over the shares of Class A Common Stock and Class B Common Stock held by his wife, either personally or as custodian for her children, and disclaims any beneficial interest in such shares. (f) Consists of 126,150 shares of Class B Common Stock held by Lancer Partners, 4,000 shares of Class B Common Stock held by Antrade, 5,000 shares of Class B Common Stock held by Album, 4,000 shares of Class B Common Stock held by Ralco, 85,750 shares of Class B Common Stock held by Lancer Offshore, 18,400 shares of Class B Common Stock held by Michael Lauer and the assumed conversion of the shares of Class A Common Stock owned by each of such entities, respectively, as described in note (b) above. The Company has been advised that Messrs. Taglich and Lauer share voting and dispositive authority over the shares held by Album, Antrade and Ralco resulting in shared voting and shared dispositive power with respect to a total of 224,700 shares of the Class B Common Stock and assuming the conversion of the Class A Common Stock, with respect to an additional 282,700 shares. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company was a party to a loan agreement, as amended March 30, 1993, entered into with Leonard Newman as the Chairman of the Board, Chief Executive Officer and Secretary of the Company (the "Newman Loan"). At March 31, 1995, the outstanding principal amount due to the Company was $160,257. The original Newman Loan in the principal amount of $267,000 was made in March 1984 to provide financing for the purchase of a new house, closer to the offices of the Company, during the time required to sell his old house. The loan was restructured in October 1986 with the Board of Directors authorizing a new loan to Mr. Newman in the principal amount of $111,430, which was used to pay all amounts then due and outstanding under the original Newman Loan. With the concurrence of the Board of Directors and Mr. Newman, an advance of $77,500 made to Mr. Newman by the Company in October 1989 against an anticipated bonus was converted subsequently into a loan in that amount from the Company. In March 1990, the Board of Directors authorized a consolidation of the then outstanding principal amount and accrued interest on each of the two outstanding Newman Loans. The consolidated loan in the principal amount of $160,257 was evidenced by a promissory note bearing interest at the rate of 1% over the prime commercial rate of interest as announced from time to time by Morgan Guaranty Trust Company of New York and was secured by a pledge of 109 shares owned by Mr. Newman in, and an assignment of his interest in a proprietary lease from, an apartment corporation in New York City. Pursuant to approval by the Board of Directors effective March 1993, the maturity date of the consolidated loan was extended from March 30, 1993 to March 30, 1996. Principal and interest on the consolidated loan was due in one installment at maturity and could be paid in cash or in shares of Class A Common Stock or Class B Common Stock of the Company, or in any combination of cash or such shares. At March 31, 1995, the largest aggregate amount of indebtedness under the consolidated Newman Loans since April 1, 1994 was $244,355. The loan was repaid as of June 1995. The Company is currently occupying and leasing a building at 138 Bauer Drive (the "LDR Building") owned by LDR Realty Co. ("LDR"), a partnership wholly owned, in equal amounts, by Leonard Newman and David E. Gross, the former President and Chief Technical Officer of the Company. The current renegotiated lease agreement is for a ten-year term beginning June 1, 1988 at a monthly rental of $19,439. The Company is required to pay all real estate taxes and is responsible for all repairs and maintenance, structural and otherwise, subject to no cumulative limits. The terms of the LDR lease were determined by the Company and LDR, based on the formal appraisal of an appraisal firm and informal appraisals from real estate brokers in the area. Such appraisals indicated that the rental provided for in the LDR lease is not in excess of the range of fair market rentals in the relevant area. The Company believes that the LDR 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. Skadden, Arps, Slate, Meagher & Flom, a law firm of which Mark N. Kaplan, a director, is a member, provided legal services to the Company during its 1995 fiscal year. In July 1993, the Company and Donald C. Fraser, a director, entered into a consulting agreement pursuant to which Dr. Fraser will provide consultation to the Company concerning defense technologies. Under the terms of the consulting agreement, as amended, consulting services are to be provided to the Company through July 5, 1995 on an as-requested basis, for a fee of $1,500 per day plus approved travel and miscellaneous expenses. During fiscal 1995, total remuneration paid to Dr. Fraser under this agreement approximated $9,000. In October 1993, the Company issued a Demand Grid Note (the "Grid Note") in the principal amount of $100,000 to Paul G. Casner, Jr. The loan bears interest at the applicable federal rate necessary under the Internal Revenue Code of 1986, as amended, to avoid an imputed rate of interest. In May 1995, the Company became a party to a loan with Mark S. Newman, the President and Chief Executive Officer of the Company, to provide an amount equal to the exercise price of incentive stock options which had been granted to him under the Company's 1981 Incentive Stock Option Plan. The loan is evidenced by a promissory note in the principal amount of $104,500 and bears interest at an annual rate of 8%. The loan is payable on the earlier of (i) the sale or disposition of the shares of stock obtained pursuant to the exercise of the stock options, (ii) cessation of Mr. M. Newman's employment by the Company or (iii) May 25, 2005. Interest is payable on May 25 of each calendar year or at such earlier time as the loan is repaid. 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 February 20, 1996, $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 December 31, 1995, Senior Indebtedness (excluding current installments) was approximately $2.8 million and the indebtedness (excluding liability for income taxes) of the Company's subsidiaries was approximately $16.6 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 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 February 20, 1996, there were 3,307,324 shares of Class A Common Stock and 2,154,808 shares of Class B Common Stock issued and outstanding (exclusive of 432,639 shares of Class A Common Stock and 65,795 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 Board of Directors of the Company has authorized and is currently soliciting proxies from the stockholders of the Company with respect to a proposal 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 has applied for listing of the Debentures and the shares of Class A Common Stock which are issuable upon conversion of 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 Amount Principal of Amount of Percent Debentures Debentures of Beneficially Being Outstanding Name Owned Registered Debentures ___________ ____________ ___________ BT Holdings . . . . . . . . . . . $1,650,000 $1,650,000 6.6% 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.* . . 4,500,000 4,500,000 18.0 Forest Fulcrum Ltd. . . . . . . . 570,000 570,000 2.3 Forest Fulcrum Fund . . . . . . . 980,000 980,000 3.9 Franklin Investors Securities Trust Convertible Securities Fund . . . . . . . . . . . 750,000 750,000 3.0 ICI American Holdings . . . . . . 250,000 250,000 1.0 IDS Bond Fund, Inc.** . . . . . . 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%. * 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. ** 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 herein and in the Registration Statement, have been included herein and in the Registration Statement, in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, 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 December 31, 1995 (unaudited) . . . . . . . F-3 Consolidated Statements of Earnings for the fiscal years ended March 31, 1995, 1994 and 1993 and for the nine months ended December 31, 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 nine months ended December 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the fiscal years ended March 31, 1995, 1994 and 1993 and for the nine months ended December 31, 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 December 31, March 31, 1995 1995 1994 (unaudited) ___________ __________ __________ Assets Current Assets: Cash and Cash Equivalents . . . . . . . . $11,197,000 $15,465,000 $23,069,000 Accounts Receivable (Notes 2 and 6) . . . 17,432,000 15,538,000 20,594,000 Inventories, Net of Progress Payments (Note 3) . . . . . . . . . . . . . . . . 11,724,000 5,042,000 16,558,000 Other Current Assets . . . . . . . . . . 2,445,000 2,563,000 2,477,000 ___________ __________ __________ Total Current Assets . . . . . . . . . . 42,798,000 38,608,000 62,698,000 ___________ __________ __________ Property, Plant and Equipment, at Cost (Notes 4 and 6) . . . . . . . . . . . . . 33,661,000 32,182,000 39,958,000 Less Accumulated Depreciation and Amorti- zation . . . . . . . . . . . . . . . . . 23,812,000 23,289,000 25,230,000 ___________ __________ __________ Net Property, Plant and Equipment . . . . 9,849,000 8,893,000 14,728,000 ___________ __________ __________ Intangible Assets, Less Accumulated Amor- tization of $3,457,000, $3,008,000 and $3,883,000 at March 31, 1995 and 1994 and December 31, 1995, respectively . . . . . 8,920,000 8,414,000 8,494,000 Other Assets . . . . . . . . . . . . . . 3,023,000 2,921,000 4,850,000 ___________ __________ __________ Total Assets . . . . . . . . . . . . . . $64,590,000 $58,836,000 $90,770,000 ___________ __________ __________ ___________ __________ __________ Liabilities and Stockholders' Equity Current Liabilities: Current Installments of Long-Term Debt (Note 6) . . . . . . . . . . . . . . . . $ 2,492,000 $ 2,664,000 $ 3,436,000 Accounts Payable and Accrued Expenses (Note 5) . . . . . . . . . . . . . . . . 19,989,000 16,141,000 18,677,000 ___________ __________ __________ Total Current Liabilities . . . . . . . . 22,481,000 18,805,000 22,113,000 Long-Term Debt, Excluding Current In- stallments (Note 6) . . . . . . . . . . . 11,732,000 14,515,000 35,319,000 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 3,826,000 ___________ __________ __________ Total Liabilities . . . . . . . . . . . . 42,081,000 39,077,000 65,863,000 ___________ __________ __________ 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 December 31, 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 December 31, 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 13,414,000 24,413,000 21,343,000 27,052,000 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, 423,419 Shares of Class A Common Stock and 21,440 Shares of Class B Common Stock at March 31, 1994, and 432,639 Shares of Class A Common Stock and 65,795 Shares of Class B Common Stock at December 31, 1995 (Note 10) . . . . . . (1,617,000) (1,579,000) (1,918,000) Unamortized Restricted Stock Compensation (287,000) (5,000) (227,000) ___________ __________ __________ Net Stockholders' Equity . . . . . . . . 22,509,000 19,759,000 24,907,000 ___________ __________ __________ Commitments and Contingencies (Note 10) Total Liabilities and Stockholders' Equi- ty . . . . . . . . . . . . . . . . . . . $64,590,000 $58,836,000 $90,770,000 __________________ See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF EARNINGS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Nine Months Ended Years Ended March 31, December 31 ------------------------------------------- -------------------------- 1995 1994 1993 1995 1994 ----------- ----------- ----------- ----------- ----------- (unaudited) Revenues ...................... $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 65,628,000 $ 47,404,000 Costs and Expenses (Note 3) ... 64,836,000 54,372,000 45,461,000 60,289,000 44,143,000 Operating Income .............. 5,094,000 3,448,000 2,311,000 5,339,000 3,261,000 Interest and Related Expenses . (1,372,000) (1,574,000) (1,735,000) (1,675,000) (1,020,000) Other Income, Net (Notes 7 and 11) ....................... 534,000 834,000 1,224,000 425,000 613,000 Earnings before Income Taxes .. 4,256,000 2,708,000 1,800,000 4,089,000 2,854,000 Income Taxes (Note 8) ......... 1,652,000 1,093,000 715,000 1,594,000 1,142,000 ------------ ------------ ------------ ------------ ------------ Net Earnings .................. $ 2,604,000 $ 1,615,000 $ 1,085,000 $ 2,495,000 $ 1,712,000 ============ ============ ============ ============ ============ Earnings per Share of Class A and Class B Common Stock: Primary .............. $ .50 $ .30 $ .20 $ .44 $ .34 Fully diluted ........ $ .50 $ .30 $ .20 $ .44 $ .34 Weighted Average Number of Shares of Class A and Class B Common Stock Outstanding: Primary ............... 5,231,000 5,334,000 5,324,000 5,647,000 5,026,000 Fully diluted ......... 5,231,000 5,334,000 5,324,000 6,552,000 5,026,000 - ----------------- See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Years Ended March 31, 1995, 1994 and 1993, and Nine Months Ended December 31, 1995 (unaudited) Common Stock --------------------------------------- Additional Unamortized Class A Class B Paid Restricted Net ------------------ ------------------ In Retained Treasury Stock Stockholders' Shares Amount Shares Amount Capital Earnings Stock Compensation Equity - ----------------- --------- ------- --------- ------- ------------ ----------- ------------ ---------- ------------ 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 Relating to Stock -- -- -- -- (39,000) -- -- 22,000 (17,000) Options, Net .... _________ _______ _________ ________ ___________ ___________ ___________ _________ ___________ 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 Relating 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 Relating to Stock Options, Net .... -- -- -- -- 388,000 -- -- (282,000) 106,000 Purchase of Treasury Stock .. -- -- -- -- -- -- (2,900,000) -- (2,900,000) Sale of Treasury Stock ........... -- -- -- -- (111,000) -- 2,862,000 -- 2,751,000 _________ _______ _________ _______ ___________ ___________ ___________ _________ ___________ 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 (unaudited) ..... -- -- -- -- -- 2,495,000 -- -- 2,495,000 Stock Options Exercised (unaudited) ..... 40,000 -- 53,100 -- 220,000 -- -- -- 220,000 Expenses relating to the Sale of Treasury Stock (unaudited) ..... -- -- -- -- (76,000) -- -- -- (76,000) Receipt of Stock Into Treasury (unaudited) ... -- -- -- -- -- -- (301,000) -- (301,000) Compensation Relating to Stock Options Net ..... -- -- -- -- -- -- -- 60,000 60,000 (unaudited) ..... _________ _______ _________ _______ ___________ ___________ ___________ _________ ___________ Balances at December 31, 1995 (unaudited) ..... 3,739,963 $ 37,000 2,216,353 $ 22,000 $ 13,579,000 $ 13,414,000 $(1,918,000) $(227,000) $ 24,907,000 _________ _______ _________ _______ ___________ ___________ ___________ _________ ___________ - -------------------- See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Nine Months Ended Years Ended March 31, December 31, --------------------------------------- ------------------------ 1995 1994 1993 1995 1994 ------------- ----------- ----------- ------------ ----------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings..................... $2,604,000 $1,615,000 $1,085,000 $2,495,000 $1,712,000 Adjustments to Reconcile Net Earnings to Cash Flows from Operating Activities: Depreciation and Amortization. 2,480,000 2,558,000 3,202,000 2,226,000 1,967,000 Deferred Income Taxes......... 26,000 (15,000) (31,000) -- -- Other, Net.................... (77,000) (233,000) (446,000) 305,000 (235,000) Changes in Assets and Liabilities, Net of Effects from Business Combinations: (Increase) Decrease in Accounts Receivable.................. (1,415,000) 1,443,000 (880,000) (2,859,000) 2,265,000 (Increase) Decrease in Inventories....................... (6,408,000) 2,069,000 2,186,000 (4,141,000) (5,543,000) (Increase) Decrease in Other Current Assets.................... (7,000) (133,000) 1,400,000 667,000 (130,000) Increase (Decrease) in Accounts Payable and Accrued Expenses . 3,640,000 2,928,000 (400,000) (2,381,000) (182,000) Other, Net..................... 1,643,000 (62,000) (357,000) 194,000 160,000 ---------- --------- --------- ---------- -------- Net Cash Provided by (Used in) Operating 2,486,000 10,170,000 5,759,000 (3,494,000) 14,000 Activities:...................... ---------- --------- --------- ---------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures............. (2,543,000) (988,000) (922,000) (3,712,000) (1,014,000) Sales of Fixed Assets............ -- -- -- 2,380,000 -- Payments Pursuant to Business Combinations, Net of Cash Acquired......................... (1,514,000) (696,000) -- (4,140,000) (1,514,000) Cash Advanced to Company Acquired for Repayment of Debt Prior to Acquisition............. -- (1,800,000) -- -- -- Other, Net....................... 263,000 11,000 2,000 -- 236,000 ---------- --------- --------- ---------- -------- Net Cash Used in Investing (3,794,000) (3,473,000) (920,000) (5,472,000) (2,292,000) Activities....................... ---------- --------- --------- ---------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on Long-Term Debt....... (275,000) (168,000) (262,000) (374,000) (56,000) Repurchases of Convertible Subordinated Debentures....................... (2,667,000) (2,354,000) (1,880,000) (2,242,000) (2,639,000) Net Proceeds From Issuance of Senior Subordinated -- -- -- 23,360,000 -- Convertible Debentures........... Other Borrowings................. 20,000 325,000 -- 55,000 75,000 Purchase of Treasury Stock....... (2,900,000) -- -- -- (2,900,000) Sale of Treasury Stock........... 2,862,000 -- -- -- 2,625,000 Other, Net....................... -- -- -- 39,000 -- ---------- --------- --------- ---------- -------- Net Cash Used in Financing (2,960,000) (2,197,000) (2,142,000) 20,838,000 (2,895,000) Activities....................... ---------- --------- --------- ---------- -------- Net Increase (Decrease) in Cash and Cash Equivalents................. (4,268,000) 4,500,000 2,697,000 11,872,000 (5,173,000) 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 $23,069,000 $10,292,000 ---------- --------- --------- ---------- -------- - -------------------- 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 consolidation. The Consolidated Financial Statements include information as of December 31, 1995 and for the nine months ended December 31, 1995 and 1994, which is unaudited. In the opinion of Management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal and recurring adjustments) necessary for the fair presentation of the Company's consolidated financial position as of December 31, 1995, the statements of earnings for the nine months ended December 31, 1995 and 1994, cash flows for the nine months ended December 31, 1995 and 1994 and the statement of stockholders' equity for nine months ended December 31, 1995. The results of operations for the nine months ended December 31, 1995 are not necessarily indicative of the results to be expected for the full year. B. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. C. REVENUE RECOGNITION Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as shipments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues on contracts with significant engineering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total contract costs at completion (cost-to-cost) with consideration given for risk of performance and estimated profit. Revenues related to incentive-type contracts also are determined on a percentage-of- completion basis measured by the cost-to-cost method. Revenues from cost-reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Revenues recognized under the cost-to-cost percentage-of-completion basis during fiscal 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 expenses, which include research and development costs, where such costs are recoverable under customer contracts. In accordance with industry practice, inventories include amounts relating to contracts having production cycles longer than one year, and a portion thereof will not be realized within one year. E. DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been provided on the straight-line method. The ranges of estimated useful lives are: office furnishings, motor vehicles and equipment, 3-10 years; building and building improvements, 15-40 years; and leasehold improvements, over the shorter of the estimated useful lives or the life of the lease. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. The cost of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in operations. F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED Intangibles resulting from acquisitions represent 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 recognized in income in the period that includes the enactment date. SFAS 109 supersedes Statement of Financial Accounting 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 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. Deferred tax expense 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 (UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED DECEMBER 31, 1995) 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. In fiscal 1995, the computation of earnings per share included approximately 123,000 shares 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, because their effect was not material. Furthermore, additional shares assumed to be outstanding applicable to the Company's 8 1/2% Convertible Subordinated Debentures also are not included for any of the periods presented, because their effet on earnings per share was antidilutive. For the nine month period ended December 31, 1995, the computation of primary earnings per share included approximately 174,000 shares from the assumed exercise of dilutive stock options computed using the treasury stock method. Options outstanding to purchase shares of common stock were excluded from the computation of earnings per share for the nine month period ended December 31, 1994, because their effect was not material. The computation of fully diluted earnings per share for the nine month period ended December 31, 1995 included approximately 185,000 shares, also from the assumed exercise of dilutive stock options and, in addition, included approximately 894,000 shares from the assumed conversion of the Company's 9% Senior Subordinated Convertible Debentures (the "Debentures"). Additional shares assumed to be outstanding applicable to the Company's 8 1/2% Convertible Subordinated Debentures were excluded from the computations for the interim 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 Accrued Profit on Progress Completed, Not 7,264,000 5,374,000 Billed......................... --------------- -------------- 13,149,000 11,120,000 --------------- -------------- Other U.S. Defense Contracts: Amounts Billed................. 1,418,000 2,981,000 Recoverable Costs and Accrued Profit on Progress Completed, Not 639,000 537,000 Billed......................... --------------- -------------- 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 incurred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final acceptance of the product. In addition, the Company may bill based upon units delivered. NOTE 3. INVENTORIES Inventories are summarized as follows: ============================================================================== March 31, December 31, ------------------------------ ---------------- 1995 1994 1995 ------------- ------------- ---------------- (unaudited) Work-in-Process....... 23,017,000 14,639,000 $38,356,000 Raw Material.......... 2,573,000 2,917,000 836,000 ------------- ------------- ------------- 25,590,000 17,556,000 39,192,000 Less Progress Payments 13,866,000 12,514,000 22,634,000 ------------- ------------- ------------- Total................. $ 11,724,000 $ 5,042,000 $ 16,558,000 ------------- ------------- ------------- ============================================================================== General and administrative costs included in work-in-process were $6,584,000 and $3,753,000 at March 31, 1995 and 1994 and $9,111,000 at December 31, 1995 (unaudited), respectively. General and administrative costs included in costs and expenses amounted to $17,681,000, $16,896,000, $14,028,000 and $14,622,000 in fiscal 1995, 1994, 1993, and for the nine months ended December 31, 1995 (unaudited), respectively. Included in those amounts are expenditures for Company-sponsored independent research and development, amounting to approximately $795,000, $537,000, $470,000 and $218,000 in fiscal 1995, 1994, 1993, and for the nine months ended December 31, 1995 (unaudited), 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 2,384,000 2,289,000 Improvements................. Office Furnishings and 3,621,000 3,754,000 Equipment.................... Laboratory and Production 15,639,000 14,457,000 Equipment.................... 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 $ 648,000 $ 1,753,000 Payroll Taxes.............. Holiday and Vacation Pay... 1,102,000 849,000 Income Taxes Payable....... 1,821,000 1,917,000 Losses and Future Costs Accrued on 4,555,000 3,214,000 Uncompleted Contracts...... 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, December 31, 1995 1994 1995 __________ __________ __________ (unaudited) Convertible Subordinated Debentures, Due 1998 . . $12,209,000 $14,889,000 $ 9,963,000 Industrial Revenue Bonds, Due 1998 . . . . . . . . 1,895,000 2,095,000 1,895,000 Senior Subordinated Convertible Debentures, Due 2003 . . . . . . . . -- -- 25,000,000 Other Obligations . . . . 120,000 195,000 1,897,000 __________ __________ __________ 14,224,000 17,179,000 38,755,000 Less Current Installments of Long-Term Debt . . . . 2,492,000 2,664,000 3,436,000 Total . . . . . . . . . . $11,732,000 $14,515,000 $35,319,000 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 fourth quarter of fiscal 1994, each quarter of fiscal 1995 and the first, second and third 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 1996 1995 1995 1994 ___________ ___________ ___________ __________ Revenues . . $ 25,563,000 $ 15,742,000 $ 22,526,000 $ 22,451,000 Operating Income . . . $ 2,181,000 $ 1,005,000 $ 1,833,000 $ 1,275,000 Income Taxes . . . . $ 590,000 $ 425,000 $ 510,000 $ 413,000 Net Earnings $ 924,000 $ 634,000 $ 892,000 $ 617,000 Net Earnings per Share . . $ .16 $ .13 $ .16 $ .12 Primary and fully diluted net earnings per share amounts are the same for each of the periods presented above. NOTE 13. SUBSEQUENT EVENTS AND OTHER MATTERS (UNAUDITED) On July 5, 1995 (the "OMI Closing Date"), Photronics Corp., a New York corporation and a wholly-owned subsidiary of the Company ("Photronics Corp."), acquired (through OMI Acquisition Corp. ("OMI"), a Delaware corporation and a wholly-owned subsidiary of Photronics Corp.), substantially all of the assets of Opto Mechanik, Inc. ("Opto"), a Delaware corporation, pursuant to an Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5, 1995, between Photronics Corp. and Opto (the "OMI Agreement"), and approved by the United States Bankruptcy Court for the Middle District of Florida on June 23, 1995. OMI, now located in Palm Bay, Florida, designs and manufactures electro-optical sighting and targeting systems used primarily in military fire control devices and in various weapons systems. Pursuant to the OMI Agreement, the Company paid a total of $5,450,000 consisting of i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. ("PNC"), ii) a note to PNC in the principal amount of $1,450,000 payable in forty eight (48) equal monthly installments of principal and interest commencing with the first day of the month subsequent to the OMI Closing Date (the "PNC Note"), iii) $2,550,000 in cash to MetLife Capital Corporation and iv) a note in the principal amount of $300,000 to Opto payable in six (6) equal monthly installments of principal and interest commencing on August 5, 1995 (the "Opto Note"). The PNC Note bears interest at a floating rate equal to the of i) PNC's stated prime interest rate plus 0.5% or ii) the prime rate as reported by the Wall Street Journal plus 0.5%. The Opto Note bears interest at a rate of 9.5% per annum. Professional fees and other costs associated with the acquisition were capitalized as part of the total purchase price. Total cash consideration paid in the acquisition was obtained from the Company's working capital. The acquisition of the assets of Opto has been accounted for under the purchase method. The operating results of OMI, the acquisition corporation, have been included in the Company's reported operating results since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. 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 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 December 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 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 December 31, 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 $25,000,000 aggregate principal amount of the Senior Subordinated Convertible Debentures on September 29, 1995, the Debt Ratio at December 31, 1995 was 0.4:1. The Company has obtained a waiver, renewable quarterly, from the bank of the required debt ratio and is in compliance with all covenants under the letter of credit. On February 6, 1996, pursuant to a Joint Venture Agreement, dated February 6, 1996, by and among DRS/MS, Inc. ("DRS/MS"), a wholly-owned subsidiary of the Company, Universal Sonics Corporation ("Universal Sonics"), a New Jersey corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos, and a Partnership Agreement, dated February 6, 1996, by and between DRS/MS and Universal Sonics, the Company entered into a partnership with Universal Sonics (the "Partnership") for the purpose of developing, manufacturing and marketing medical ultrasound imaging equipment. The Company's contribution to the Partnership consisted of $400,000 in cash and certain managerial expertise and manufacturing capabilities, representing a 90% interest in the Partnership. On February 9, 1996, Precision Echo acquired (through Ahead Technology Acquisition Corporation ("Ahead Acquisition"), a Delaware corporation and a wholly-owned subsidiary of Precision Echo), certain assets and assumed certain liabilities (principally, obligations under property leases) of Mag-Head Engineering Company, Inc. ("Mag-Head"), a Minnesota corporation, pursuant to an Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head and Ahead Acquisition for approximately $400,000 in cash. Mag-Head produces audio and flight recorder heads. 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 Prospectus Summary . . . . 3 Risk Factors . . . . . . . 7 The Company . . . . . . . . 11 Use of Proceeds . . . . . . 13 Capitalization . . . . . . 13 , 1996 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 Security Ownership . . . . 47 Certain Relationships and Related Transactions . . . 49 Description of the Debentures 51 Description of 1998 Debentures 72 Description of Capital Stock 73 Plan of Distribution . . . 75 Selling Security Holders . 77 Legal Matters . . . . . . . 79 Experts . . . . . . . . . . 79 Index to Financial Statements F-1 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. 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 . . . . . . . . . . . . . . . . . 22,500.00 Blue Sky fees and expenses . . . . . . . . . . . . 2,500.00 Accountants' fees and expenses . . . . . . . . . . 100,000.00 Legal fees and expenses . . . . . . . . . . . . . 250,000.00 Trustee's fees . . . . . . . . . . . . . . . . . . 12,500.00 Transfer agent and registrar fees and expenses . . 2,500.00 Miscellaneous . . . . . . . . . . . . . . . . . . 101,379.31 Total . . . . . . . . . . . . . . . . . $500,000.00 _____________________________________ ITEM 14. 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 15. Recent Sales of Unregistered Securities. Other than the Debenture Offering, there were no recent sales by the Registrant of securities which were not registered under the Securities Act. ITEM 16. Exhibits and Financial Statement Schedules. (a) Certain of the following exhibits, designated with an asterisk (*), have been previously filed and certain of the following exhibits, designated with two asterisks (**), are filed herewith. 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] 3.6 - Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] *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 February 14, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [P] **10.68 - Amendment, dated April 4, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [P] **10.69 - Amendment, dated June 20, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [P] **10.70 - Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company [P] **10.71 - Amendment, dated November 7, 1995, to Purchase Order No. CN74325 between Precision Echo and Lockheed Aeronautical Systems Company [P] 10.72 - Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.73 - Contract No. N00019-95-C-0057, dated December 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.74 - Employment, Non-Competition and Termination Agreement, dated July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 1] 10.75 - Stock Purchase Agreement, dated as of July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 2] 10.76 - Asset Purchase Agreement, dated October 28, 1994, Acquisition by PE Acquisition Corp., a subsidiary of Precision Echo, Inc. of all of the Assets of Ahead Technology Corporation [Form 10-Q, quarter ended December 31, 1994, File No. 1-8533, Exhibit 1] 10.77 - Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] **10.78 - Contract No. N00421-95-D-1067, dated September 30, 1995, between the Company and the Navy [P] **10.79 - Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests **10.80 - Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army [P] **10.81 - Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. **10.82 - Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [P] **10.83 - Amendment to Contract No. 2025, dated August 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense [P] **10.84 - 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 - Lease, dated August, 1995, by and between OMI Acquisition Corp and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties **10.86 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties **10.87 - 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 **10.88 - Master Lease, dated August 31, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. **10.89 - Schedule No. 001, dated September 1, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. **10.90 - Schedule No. 002, dated October 20, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. **10.91 - Joint Venture Agreement, dated as of February 6, 1996, by and among DRS/MS, Inc., Universal Sonics Corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos **10.92 - Partnership Agreement, dated as of February 6, 1996, by and between DRS/MS, Inc. and Universal Sonics Corporation **10.93 - Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head Engineering Company, Inc. and Ahead Technology Acquisition Corporation, a subsidiary of Precision Echo, Inc. 11.1 - Computation of earnings (loss) per share [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 11] 11.2 - Computation of earnings per share [Form 10-Q, quarter ended December 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 ________________________ * Previously filed. ** Filed herewith. (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 HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE 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, FEBRUARY 22, 1996. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: /s/Mark S. Newman _________________________________ Mark S. Newman Chairman of the Board, President, and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE 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, February 22, 1996 ______________________ Chief Executive Mark S. Newman Officer, Chairman of the Board and Director (Principal Executive Officer) /s/Nancy R. Pitek Controller, February 22, 1996 ______________________ Treasurer Nancy R. Pitek and Secretary (Principal Financial Officer and Principal Accounting Officer) __________*__________ Vice President, February 22, 1996 President of Stuart F. Platt Precision Echo and Director __________*__________ Director and Chairman February 22, 1996 Emeritus Leonard Newman __________*__________ Director February 22, 1996 Theodore Cohn __________*__________ Director February 22, 1996 Donald C. Fraser __________*__________ Director February 22, 1996 Mark N. Kaplan __________*__________ Director February 22, 1996 Jack Rachleff *By /s/Mark S. Newman Mark S. Newman Attorney-in-Fact 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 (*), have been previously filed and certain of the following exhibits, designated with two asterisks (**), are filed herewith. 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] 3.6 - Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] *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 February 14, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . P **10.68 - Amendment, dated April 4, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . P **10.69 - Amendment, dated June 20, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . P **10.70 - Amendment, dated September 28, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . . . . . . . . . . . P **10.71 - Amendment, dated November 7, 1995, to Purchase Order No. CN74325, between Precision Echo and Lockheed Aeronautical Systems Company . . . P 10.72 - Contract No. N39998-94-C-2239, dated July 26, 1993, between the Company and the Navy [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.77] 10.73 - Contract No. N00019-95-C-0057, dated December 16, 1994, between Precision Echo, Inc. and Naval Air Systems Command [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.78] 10.74 - Employment, Non-Competition and Termination Agreement, dated July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 1] 10.75 - Stock Purchase Agreement, dated as of July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No. 1-8533, Exhibit 2] 10.76 - Asset Purchase Agreement, dated October 28, 1994, Acquisition by PE Acquisition Corp., a subsidiary of Precision Echo, Inc. of all of the Assets of Ahead Technology Corporation [Form 10-Q, quarter ended December 31, 1994, File No. 1-8533, Exhibit 1] 10.77 - Amendment to Agreement for Acquisition of Assets, dated July 5, 1995, between Photronics Corp. and Opto Mechanik, Inc. [Form 8-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 1] **10.78 - Contract No. N00421-95-D-1067, dated September 30, 1995, between the Company and the Navy . . . . . P **10.79 - Lease, dated August 17, 1995, between Ahead Technology, Inc. and South San Jose Interests . . . . . **10.80 - Contract No. DAAH01-95-C-0308, dated July 21, 1995, between Photronics Corp. and the Army . . P **10.81 - Lease, dated May 25, 1995, between Technology Applications and Service Company and Sports Arena Village, Ltd., L.P. . . . . . . . . . . . . **10.82 - Contract No. 2025, dated December 20, 1993, between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense . . . . . . . P **10.83 - Amendment to Contract No. 2025, dated August 31, 1995 between Opto Mechanik, Inc. and the Government of Israel, Ministry of Defense . . P **10.84 - 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 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties . . . . . **10.86 - Lease, dated August, 1995, by and between OMI Acquisition Corp. and Fred E. Sutton and Harold S. Sutton d/b/a Sutton Properties . . . . . **10.87 - 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 . . . . . . . . **10.88 - Master Lease, dated August 31, 1995, between OMI Acquisition Corp. and General Electric Capital Corp. **10.89 - Schedule No. 001, dated September 1, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp . . . . . . **10.90 - Schedule No. 002, dated October 20, 1995, to Master Lease between OMI Acquisition Corp. and General Electric Capital Corp. . . . . . . **10.91 - Joint Venture Agreement, dated as of February 6, 1996, by and among DRS/MS, Inc., Universal Sonics Corporation, Ron Hadani, Howard Fidel and Thomas S. Soulos . . . . **10.92 - Partnership Agreement, dated as of February 6, 1996, by and between DRS/MS, Inc. and Universal Sonics Corporation . . . . . . . . . . . **10.93 - Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head Engineering, Company, Inc. and Ahead Technology Acquisition Corporation, a subsidiary of Precision Echo, Inc. . . . . . . . 11.1 - Computation of earnings per share [Form 10-K, Amendment No. 1, July 5, 1995, File No. 1-8533, Exhibit 11] 11.2 - Computation of earnings per share [Form 10-Q, quarter ended December 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 . . . . . . . . . . . . . . . ___________________ * Previously filed. ** Filed herewith. EX-5.1 2 SKADDEN OPINION Exhibit 5.1 February 22, 1995 Diagnostic/Retrieval Systems, Inc. 5 Sylvan Way Parsippany, New Jersey 07054 Re: Diagnostic/Retrieval Systems, Inc. Registration Statement (File No. 33-64641) Ladies and Gentlemen: We have acted as special counsel to Diagnostic/Retrieval Systems, Inc., a Delaware corporation (the "Company"), in connection with the preparation of a registration statement on Form S-1 (File No. 33-64641)(the "Registration Statement") relating to the registration for resale of up to $25,000,000 aggregate principal amount of the Company's 9% Senior Subordinated Convertible Debentures Due 2003 (the "Debentures") and the shares (the "Shares") of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), issuable upon conversion of the Debentures. This opinion is delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (a) the Registration Statement as filed with the Securities and Exchange Commission (the "Commission") on November 30, 1995 under the Act, and Amendment No. 1 thereto filed with the Commission on February 22, 1995 (such Registration Statement, as so amended, being hereafter referred to as the "Registration Statement"); (b) the Indenture dated as of September 22, 1995 between the Company and The Trust Company of New Jersey, as Trustee (the "Indenture") pursuant to which the Debentures were issued, filed as an exhibit to the Registration Statement; (c) certain resolutions of the Board of Directors of the Company and the Pricing Committee of the Board of Directors of the Company, in each case relating to the issuance of the Debentures and related matters; (d) the Restated Certificate of Incorporation of the Company, as presently in effect; and (e) the Amended and Restated By-Laws of the Company as presently in effect. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed Diagnostic/Retrieval Systems, Inc. February 22, 1995 Page 2 necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed by parties other than the Company, we have assumed that such parties had the power, corporate and other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate and other, and execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Mark N. Kaplan, a partner of this firm, is a director of the Company and owner of 1,000 shares of the Class A Common Stock of the Company. Members of our firm are admitted to the bar in the States of Delaware and New York, and we express no opinion as to the laws of any other jurisdiction. Based upon and subject to the foregoing, we are of the opinion that (a) the Debentures are valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by (1) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (2) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity); and (b) the Shares, if and when the Debentures are converted into Shares in accordance with their terms and the terms of the Indenture, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Commission as Exhibit 5 to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the prospectus which constitutes a part of the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Diagnostic/Retrieval Systems, Inc. February 22, 1995 Page 3 This opinion is furnished by us, as your special counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person. Very truly yours, /s/Skadden, Arps, Slate, Meagher & Flom EX-10.11 3 SECOND AMENDMENT TO LEASE SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE is made as of October 17, 1995, by and between Green Valley-Ross, a Washington general partnership ("Landlord"), and Precision Echo, Inc., a Delaware corporation ("Tenant"). WITNESSETH: Recital of Facts: Tenant entered into a Lease Agreement dated July 20, 1988 by and between Tenant and Bay 511 Corporation, a California corporation, and such Lease Agreement is the "Lease". The term of the Lease commenced on August 31, 1988. The Lease was amended by an Amendment to Lease ("First Amendment") dated July 1, 1993, wherein the term of the Lease was extended to August 31, 1996. Landlord, as assignee in interest from Bay 511 Corporation, and Tenant do hereby amend the Lease and the First Amendment to Lease as provided in this Second Amendment to Lease as follows: 1. Term: The extended term of the Lease shall commence on October , 1995. Unless extended further in accordance with paragraph 3 of the Second Amendment to Lease or sooner terminated in accordance with the Lease, the term of the Lease shall end on October 31, 2000. 2. Base Rent: Commencing November 1, 1995, the base rent payable by Tenant to Landlord pursuant to Section 3.1 of the Lease shall be as follows: (i) During the period commencing November 1, 1995 through October 31, 1996, the net annual base rental for the Premises shall be three-hundred and ninety-six thousand dollars ($396,000), payable in advance in equal monthly installments of thirty-three thousand dollars ($33,000) each on the first day of every month during such period. (ii) During the period commencing November 1, 1996 through October 31, 1997, the net annual base rental for the Premises shall be four-hundred and fifteen thousand eight hundred dollars ($415,800), payable in advance in equal monthly installments of thirty-four thousand six hundred and fifty dollars ($34,650) each on the first day of every month during such period. (iii) During the period commencing November 1, 1997 through October 31, 1998, the net annual base rental for the Premises shall be four-hundred forty-eight thousand eight hundred dollars ($448,800), payable in advance in equal monthly installments of thirty-seven thousand four hundred dollars ($37,400) each on the first day of every month during such period. (iv) During the period commencing November 1, 1998 through October 31, 1999, the net annual base rental for the Premises shall be four-hundred ninety five thousand dollars ($495,000), payable in advance in equal monthly installments of forty-one thousand two-hundred fifty dollars ($41,250) each on the first day of every month during such period. (v) During the period commencing November 1, 1999 through October 31, 2000, the net annual base rental for the Premises shall be five-hundred twenty-eight thousand dollars ($528,000), payable in advance in equal monthly installments of forty-four thousand dollars ($44,000) each on the first day of every month during such period. 3. Right to Extend and Rent for Extended Term: Subject to the provisions of this paragraph as well as superseding and replacing Section's 2.2 and 3.3 of the Lease and Paragraph 3 of the First Amendment to Lease, Tenant shall have the right to extend the term of the Lease for a period of five (5) years and shall henceforth be referred to as the "Extended Term". Tenant may exercise such right only by giving Landlord written notice via certified mail of Tenant's exercise of such right no earlier than May 1, 1999 and no later than October 31, 1999, and only if no default by Tenant under the Lease exists when Tenant exercises such right. If Tenant fails to exercise such right in accordance with this paragraph, such right shall terminate. If Tenant exercises such right in accordance with this paragraph, the term of the Lease shall be extended for the Extended Term. The Extended Term shall be on and subject to all of the agreements, covenants and conditions in the Lease, except the base rent shall be increased as provided below. References in the Lease and the First Amendment to Lease shall mean and include the term of the Lease as extended for the Extended Term in accordance with this paragraph. If Tenant exercises the right to extended the term of the Lease for the Extended Term in accordance with this paragraph, Landlord and Tenant each shall, promptly after Tenant exercises such right, execute and deliver to the other a subsequent written amendment to the Lease which sets for the extension of the term of the Lease for the Extended Term as defined, but the term of the Lease shall be extended for the Extended Term whether or not such subsequent amendment is executed. (a) If Tenant exercises the right to extend the term of the Lease for the Extended Term in accordance with paragraph 3 of this Second Amendment to Lease the net annual base rental during the Extended Term shall be increased to the greater of (i) ninety-five percent (95%) of the prevailing fair market rental value of the Premises, including annual increases, on and subject to covenants (except the amount of net annual base rental) in the Lease, based on then current base rent comparables for buildings within the Marriot Business Park in Santa Clara, or (ii) forty-four thousand dollars ($44,000) each month, plus prevailing fair market rental increases. Such fair market analysis or the acceptance of the conditions provided in paragraph 3(a)(ii) above shall be determined no later than March 1, 2000 and acknowledged by written agreement between Landlord and Tenant by such date. If Landlord and Tenant do not agree in writing on such rental for the Extended Term, such fair market rental value shall be determined by appraisal in accordance with Paragraph 4 of this Second Amendment to Lease. Landlord and Tenant each shall, promptly after any determination of the net annual base rental pursuant to this paragraph or Paragraph 4 of this Second Amendment to Lease, execute and deliver to the other a written amendment to the Lease which sets forth the net annual base rental during the Extended Term, but such net annaul base rental shall become effective whether or not such amendment is executed. Such net annual base rental shall be payable in advance in equal monthly installments on the first day of every month during the Extended Term. 4. Appraisal Procedure: If Landlord and Tenant do not agree on the fair market rental value of the Premises by the date set forth in Paragraph 3(a) of this Second Amendment to Lease, as applicable, such fair market rental value shall be determined as follows: Landlord and Tenant each shall appoint one (1) appraiser within fifteen (15) days after a written request for appointment of appraisers has been given by either Landlord or Tenant to the other. If either Landlord or Tenant fails to appoint its appraiser within such period of fifteen (15) days, such appraiser shall be appointed by the Superior Court of the State of California in and for Santa Clara County upon application of the other party. Each such appraiser shall appraise the Premises and submit his or her written report setting forth the appraised fair market rental value to Landlord and Tenant within thirty (30) days after the appointment of both such appraisers (or as soon thereafter as practicable). If the higher appraised value in such two (2) appraisals is not more than one hundred ten percent (110%) of the lower appraised value, the fair market rental value of the Premises shall be the average of the two (2) appraised values. If the higher appraised value is more than one hundred ten percent (110%) of the lower appraised value, Landlord and Tenant shall agree upon and appoint a neutral third appraiser within fifteen (15) days after both of the first two (2) appraisals have been submitted to Landlord and Tenant. If Landlord and Tenant do not agree and fail to appoint such neutral third appraiser within such period of fifteen (15) days, such neutral third appraiser shall be appointed by the Superior Court of the State of California in and for Santa Clara County upon application of either Landlord or Tenant. The neutral third appraiser shall appraise the Premises and submit his or her written report setting forth the appraised fair market rental value to Landlord and Tenant within thirty (30) days after his or her appointment (or as soon thereafter as practicable). The fair market rental value of the Premises shall be the average of the two (2) appraised values in such three (3) appraisals that are closest to each other (unless the differences are equal, in which case the three (3) appraised values shall be averaged). The fair market rental value of the Premises, determined in accordance with this paragraph, shall be conclusive and binding upon Landlord and Tenant. Any proceedings in connection with the determination of the fair market rental value of the Premises shall be conducted in Santa Clara County in accordance with California Code of Civil Procedure sections 1280 and 1294.2 (including section 1283.05) or successor California laws then in effect relating to arbitration. All appraisers appointed by Landlord or Tenant, or both of them, shall be members of the American Institute of Real Estate Appraisers of the National Association of Realtors (or its successor), or real estate professionals qualified by appropriate training or experience, and have at least ten (10) years of experience dealing with commerical real estate. The appraiser shall have no power or authority to amend or modify this Lease in any respect and their jurisdiction is limited accordingly. Landlord and Tenant each shall pay the fee and expenses charged by its appraiser plus one-half of the fee and expenses charged by the neutral third appraiser. If the fair market rental value of the Premises has not been determined in accordance with this paragraph on or before the Lease expiration date, Tenant shall continue to pay the base rent then in effect until the fair market rental value of the Premises has been determined. Within ten (10) days after such determination, Tenant shall pay to Landlord any deficiency and Landlord shall so credit any surplus in the amount of base rent which arose between the effective date in question and such determination. 5. Landlord's Repairs, Residual Obligations and Improvement Reimbursements: Landlord shall, at its sole cost and expense, reimburse Tenant for the following repairs and improvements in the following manner: (a) Upon execution of this Second Amendment to Lease by Landlord and assignment of the Lease from Bay 511 Corporation to Landlord, Landlord shall within five (5) days, reimburse Tenant $21,434.50 as the undistributed residual fund owed to Tenant to make certain repairs and improvements to the HVAC system as provided in Paragraph 5 of the First Amendment to Lease. (b) On or before November 10, 1995, Landlord will reimburse Tenant $33,000 for miscellaneous improvements and expenditures made by Tenant prior to commencing the Extended Term. (c) During the term of the Extended Term, Landlord shall reimburse Tenant $100,000 to cover the cost for (i) the phased replacement of carpeting, (ii) remodel of bathrooms, (iii) retro-fitting the lighting systems, (iv) repair and resurfacing the parking lot, (v) roof repairs and (vi) miscellaneous items. The $100,000 improvement fund will be available for Tenant to use as it deems necessary for the required improvements, subject to Landlord's reasonable approval. Landlord will reimburse Tenant within fifteen (15) days from receipt and approval of Tenants request for reimbursement, which will include copies of receipts from contractors performing the work along with appropriate conditional and unconditional lien releases. 6. Additional Provisions: It is understood that the above stated rent is a net rental per the Lease for the Premises dated July 20, 1988. Tenant shall pay as additional rent all property taxes, assessments, insurance, utilities, repairs and all other maintenance of the Premises, as detailed in the Lease. As provided in the First Amendment to Lease, Tenant shall have the option to be covered by Landlord's "All Risk" insurance policies with such premiums being paid by Tenant upon receipt of Landlord's invoice for same. 7. Representing Brokerage: The parties acknowledge that no real estate brokerage may claim a fee for this transaction other than J.R. Parrish, Inc./Colliers International ("Broker") as provided in a listing agreement entered into by and between Bay 511 Corporation, predecessor in interest to Landlord, and Broker. Tenant represents that no other person is representing Tenant who may claim a commission or finders fee for this transaction. 8. Legal Effect and Conflicts: This Second Amendment to Lease shall be effective as of the date of its execution by Landlord. Any conflicts between the original Lease and this Amendment to Lease for the Premises shall be resolved in such Second Amendments favor. Except as amended by this Second Amendment to Lease, the Lease is unchanged and, as so further amended, the Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this SECOND AMENDMENT TO LEASE as of the date herein written. GREEN VALLEY-ROSS, a Washington general partnership By: Green Valley Corporation, a California Corporation Its: General Partner By: _______________________________________________ Date: ______________________ Its: ______________________________________________ PRECISION ECHO, INC., a Delaware corporation By: ________________________________________________ Its: _______________________________________________ By: ________________________________________________ Its: _______________________________________________ EX-10.79 4 LEASE BET. SOUTH SAN JOSE & AHEAD TECHNOLOGIES Lease between South San Jose Interests, a California Limited Partnership and Ahead Technology, Inc., a Delaware Corporation Section Page No. - ------- -------- Parties ............................................................... 3 Premises .............................................................. 3 Use ................................................................... 3 Term and Rental ....................................................... 3 Security Deposit ...................................................... 4 Late Charges .......................................................... 4 Construction and Possession ........................................... 5 Acceptance of Possession and Covenants to Surrender ................... 5 Uses Prohibited ....................................................... 6 Alterations and Additions ............................................. 6 Maintenance of Premises ............................................... 7 Hazard Insurance ...................................................... 8 Tenant's Use ........................................................ 8 Landlord's Insurance ................................................ 8 Tenant's Insurance .................................................. 8 Waiver .............................................................. 8 Taxes ................................................................. 9 Utilities ............................................................. 9 Abandonment ........................................................... 9 Free From Liens ....................................................... 9 Compliance With Governmental Regulations .............................. 10 Toxic Waste and Environmental Damage .................................. 10 Tenant's Responsibility ............................................. 10 Tenant's Indemnity Regarding Hazardous Materials .................... 10 Landlord's Indemnity Regarding Hazardous Materials .................. 11 Actual Release by Tenant ............................................ 11 Environmental Monitoring ............................................ 12 Indemnity ............................................................. 12 Advertisements and Signs .............................................. 13 Attorney's Fees ....................................................... 13 Tenant's Default ...................................................... 13 Remedies ............................................................ 14 Right to Re-enter ................................................... 15 Abandonment ......................................................... 15 No Termination ...................................................... 15 Surrender of Lease .................................................... 15 Habitual Default ...................................................... 16 Landlord's Default .................................................... 16 Notices ............................................................... 16 Section Page No. - ------- -------- Entry by Landlord .................................................... 16 Destruction of Premises .............................................. 17 Destruction by an Insured Casualty ................................. 17 Destruction by an Uninsured Casualty ............................... 18 Assignment or Sublease ............................................... 18 Consent by Landlord ................................................ 18 Assignment or Subletting Consideration ............................. 19 No Release ......................................................... 19 Effect of Default .................................................. 19 Condemnation ......................................................... 20 Effects of Conveyance ................................................ 20 Subordination ........................................................ 21 Waiver ............................................................... 21 Holding Over ......................................................... 22 Successors and Assigns ............................................... 22 Estoppel Certificates ................................................ 22 Option to Extend the Lease Term ...................................... 22 Grant and Exercise of Option ....................................... 22 Determination of Fair Market Rental ................................ 23 Resolution of a Disagreement over the Fair Market Rental ........... 24 Options .............................................................. 24 Quiet Enjoyment ...................................................... 24 Brokers .............................................................. 25 Landlord's Liability ................................................. 25 Authority of Parties ................................................. 25 Transportation Demand Management Programs ............................ 25 Dispute Resolution ................................................... 25 Lease Guaranty ....................................................... 26 Miscellaneous Provisions ............................................. 26 Rent ............................................................... 26 Performance by Landlord ............................................ 26 Interest ........................................................... 26 Rights and Remedies ................................................ 26 Survival of Indemnities ............................................ 26 Severability ....................................................... 26 Choice of Law ...................................................... 26 Time ............................................................... 26 Entire Agreement ................................................... 26 Representations .................................................... 27 Headings ........................................................... 27 Exhibits ........................................................... 27 Exhibit "A" - Premises ............................................... 28 Exhibit "B" - Tenant Improvements .................................... 29 Exhibit "C" - Lease Guaranty ......................................... 30 Exhibit "D" - Permitted Chemicals .................................... 35 Page ii 1. PARTIES: THIS LEASE, is entered into on this ____ day of July, 1995, between South San Jose Interests, a California Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and Ahead Technology, Inc., a Delaware Corporation, whose address is 6410 Via Del Oro, San Jose, California, 95119, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of San Jose, County of Santa Clara, State of California, and more particularly described as follows, to-wit: That certain real property identified as APN 706-09-051, commonly known and designated as 6410 Via Del Oro, consisting of 32,000 rentable square feet ("Building"), and the adjacent lot identified as APN 706-09-050, as outlined in red on Exhibit "A". 3. USE: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Office, research and development, marketing, light manufacturing, storage and other incidental uses. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any Laws. 4. TERM AND RENTAL: The term ("Lease Term") shall be for sixty (60) months, commencing, as adjusted pursuant to paragraph 7, on the 1st day of September, 1995 ("Commencement Date"), and ending on the 31st day of August, 2000, ("Expiration Date"). In addition to all other sums payable by Tenant under this Lease, Tenant shall pay as base monthly rent ("Base Monthly Rent") for the Premises the following amounts: Months 01-10 $13,200.00 per month Months 11-30 $17,600.00 per month Months 31-60 $20,160.00 per month Base Monthly Rent shall be due on or before the first day of each calendar month during Lease Term. All sums payable by Tenant under this Lease shall be paid in lawful monthy of the United States of America, without offset or deduction, and shall be paid to Landlord at the address specified in paragraph 1 of this Lease or at such place or places as may be designated from time to time by Landlord. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Concurrently with Tenant's execution of this Lease, Tenant shall pay to Landlord the sum of Thirteen Thousand Two Hundred Dollars ($13,200.00) as prepaid rent for the first month of the Lease. 5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease, Tenant has deposited with Landlord the sum of Twenty Thousand and No/100 Dollars ($20,000.00) as a security deposit. If Tenant defaults with respect to any provisions of this Lease, including but not limited to the provisions relating to payment of Base Monthly Rent or other charges, Landlord may, to the extent reasonably necessary to remedy Tenant's default, use all or any part of said deposit for the payment of Base Monthly Rent or other charges in default or the payment of any other payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount hereinabove stated and shall pay to Landlord such other sums as shall be necessary to reimburse Landlord for any sums paid by Landlord. If Tenant shall default more than four (4) times in any twelve (12) month period, irrespective of whether or not such default is cured, then the security deposit shall, within ten (10) days after demand by Landlord be increased by Tenant to an amount equal to two (2) times the aforesaid amount. Said deposit shall be returned to Tenant within thirty (30) days after the Expiration Date and surrender of the Premises to Landlord, less any amount deducted in accordance with this paragraph, together with Landlord's written notice itemizing the amounts and purposes for such retention. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, administrative, processing, accounting charges, and late charges, which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage or trust deed covering the Premises. Accordingly, if any installment of Base Monthly Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee when due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount which late charge shall be due and payable on the same date that the overdue amount in question was due. Landlord agrees to waive said late charge in the event all amounts set forth in any notice served upon Tenant by Landlord to pay rent or quit, or any delinquent rent due in connection with the overdue amount are paid in full within five business (5) days after Landlord's written notice to Tenant of non-payment or within five business (5) days after Landlord's service upon Tenant of such notice to quit or pay rent. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge Page 4 by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge has not been waived hereunder for three (3) consecutive installments of Base Monthly Rent, then subject to written notice from Landlord within sixty (60) days following the occurrence, rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. 7. CONSTRUCTION AND POSSESSION: As a material part of this Lease, Tenant agrees to make improvements to the interior of the Premises ("Tenant Improvements") as generally shown on the preliminary space plan, attached as Exhibit "B". The Tenant Improvements shall be constructed in accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. Tenant shall be responsible and pay all costs associated with the construction of the Tenant Improvements with the exception of costs necessary to bring the Premises, in their current condition, (i) into compliance with all required existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances, including, but not limited to, ADA and Title 24; and (ii) into good working order and repair, including HVAC, plumbing and electrical systems and the parking lot, roof membrane and landscaping. The aforementioned costs (i) and (ii) shall be borne by Landlord. Landlord shall have the right to approve Tenant's selection of the architect and contractors associated with design and construction of Tenant Improvements, which approval shall not be unreasonably withheld. If Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to Tenant by the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom; but in that event the Commencement Date and Expiration Date of the Lease and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession. Notwithstanding the foregoing, if Landlord cannot deliver possession of the said Premises to Tenant on or before October 1, 1995, Tenant, upon written notice to Landlord, shall be entitled to terminate this Lease without further liability to Landlord or Tenant. The delay in the commencement of rent and/or the termination of the Lease provided herein shall be the sole and exclusive remedy of Tenant with respect by the failure by Landlord to deliver possession of the Premises. 8. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: On the Commencement Date, Tenant shall accept the Premises as being in good and sanitary order, condition and repair and accepts the Premises and the other improvements in their present condition. Tenant further agrees on Expiration Date, or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, reasonable wear and tear excepted. "Good condition" shall mean that the interior walls, floors, suspended ceilings, and carpeting within the Premises will be cleaned to the same condition as existed at the commencement Page 5 of the Lease, normal wear and tear excepted. Tenant agrees, at its sole cost, to remove all of Tenant's phone and data cabling from the suspended ceiling and repair or replace broken ceiling tiles, and relevel the ceiling if required. Tenant on or before the Expiration Date or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property and fixtures not so removed shall be deemed to be abandoned by Tenant. If Landlord shall so desire and has notified Tenant pursuant to Lease paragraph 10 below, then Tenant shall remove such Alterations as Landlord may require and shall repair and restore said Premises or such part or parts thereof before the Expiration Date at Tenant's sole cost and expense. Such repair and restoration shall include causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal to extent such compliance is necessitated by the repair and restoration work. If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by this paragraph, Tenant shall indemnify, defend, and hold harmless Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. 9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed, any waste upon the said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the Premises or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful or objectionable purpose, or place any loads upon the floor, walls, or ceiling which endanger the structure, or use any machinery or apparatus which will in any manner vibrate or shake the Premises causing damage to the structure of the Premises, or place any harmful liquids, waste materials, or hazardous materials in the drainage system of, or upon or in the soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature or any waste materials, refuse, scrap or debris shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper without Landlord's prior approval, which approval may be withheld in its sole discretion. 10. ALTERATIONS AND ADDITIONS: Tenant shall not make, or suffer to be made, any alteration or addition to the said Premises ("Alterations") other than the Tenant Improvements, or any part thereof, without (i) the written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld, and (ii) delivering to Landlord the proposed architectural and structural plans for all such Alterations. Landlord shall indicate to Tenant in writing within ten (10) business days following receipt of Tenant's request, whether or not Landlord will require Tenant to remove such Alteration at the Expiration Date. After having obtained Landlord's consent, Tenant agrees that it shall not proceed to make such Alterations until (i) Tenant has obtained all required governmental approvals and permits, and (ii) Tenant has provided Landlord reasonable security, in form reasonably approved by Landlord, to protect Landlord against mechanics' lien claims. Tenant further agrees to provide Landlord (i) written notice of the anticipated start date and actual start date of the work, and (ii) a complete set of half-size (15" X 21") vellum as-built drawings. All Alterations Page 6 shall be constructed in compliance with applicable buildings codes and laws. Any Alterations, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord, but shall nevertheless be subject to removal by Tenant as provided in paragraph 8 above. Alterations which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. All Alterations shall be maintained, replaced or repaired by Tenant at Tenant's sole cost and expense. 11. MAINTENANCE OF PREMISES: Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and when necessary, the foundation, exterior load bearing walls and roof structure of the Building. Tenant shall, at its sole cost, keep and maintain, repair and replace, said Premises and appurtenances and every part hereof, including but not limited to, roof membrane, glazing, sidewalks, parking areas, telephone, plumbing, electrical and air conditioning and heating equipment ("HVAC") systems, and all the Tenant Improvements in good and sanitary order, condition, and repair. Tenant shall provide Landlord with a copy of a service contract between Tenant and a licensed HVAC contractor which contract shall provide for quarterly maintenance of all HVAC equipment at the Premises. Tenant shall pay the cost of all HVAC repairs or replacements which are either excluded from such service contract or any existing equipment warranties. All wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. Tenant shall also be responsible, at its sole cost and expense for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if (i) Tenant contracts with a licensed roof contractor who is reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the roof membrane at least every six (6) months, with the first inspection due the 6th month after the Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all reasonable preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide to Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. Tenant agrees, at its expense, to water, maintain and replace, when reasonably necessary, any shubbery and landscaping. Notwithstanding the foregoing, in the event Tenant's maintenance or repair obligations hereunder would require Tenant to pay for a capital repair or replacement costing in excess of Five Thousand and No/100 Dollars ($5,000.00), Tenant shall only be required to pay (i) the initial $5,000.00; and (ii) that portion of the cost over the initial $5,000.00 equal to the product of such total cost multiplied by a fraction, the numerator of which is the number of years remaining in the Lease Term, the denominator of which is the useful life (in years) of the replacement. Page 7 12. HAZARD INSURANCE: A. Tenant's Use: Tenant shall not use, or permit said Premises, or any part thereof, to be used, for any purpose other than that for which the said Premises are hereby leased without Landlord's prior written approval; and no use shall be made or permitted to be made of the said Premises, nor acts done, which will cause an increase in premiums (unless prior approval is obtained from Landlord) or a cancellation of any insurance policy covering said Premises, or any part thereof, nor shall Tenant sell or permit to be kept, used or sold, in or about said Premises, any article which may cause an increase in premiums or cancellation of any insurance policy covering said Premises, without Landlord's prior written approval. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said Premises and appurtenances. B. Landlord's Insurance: Landlord agrees to purchase and keep in force fire, extended coverage, owner's liability, and 12 month rental loss insurance. The amount of the said insurance shall not exceed the replacement cost of the Building (not including any Tenant Improvements or Alterations paid for by Tenant) as determined by Landlord's insurance company's appraisers. The Tenant agrees to pay to the Landlord as additional rent, on demand, the full cost of said insurance, to the extent said cost applies to insurance provided during the Lease Term, as evidenced by insurance billings to the Landlord, and in the event of damage covered by said insurance, the amount of any deductible under such policy. Payment shall be due to Landlord within ten (10) days after written invoice to Tenant. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the commencement and termination dates of this Lease. C. Tenant's Insurance: Tenant, at its sole cost, agrees to insure its personal property, Tenant Improvements paid for by Tenant, and Alterations for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises with combined limits for bodily injury and property damage of not less than $1,000,000.00 per occurrence and a general aggregate limit of not less than $5,000,000.00. Tenant shall name Landlord and Landlord's lender as an additional insured, shall deliver a copy of the policies and renewal certificates to Landlord. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation, termination, or reduction in coverage. D. Waiver: Landlord and Tenant hereby waive any and all rights each may have against the other on account of any loss or damage occasioned to the Landlord or the Tenant as the case may be, or to the Premises or its contents, and which may arise from any risk covered by their respective insurance policies (or which would have been covered had such insurance policies been maintained in accordance with this Lease), as set forth above. The parties shall use their reasonable efforts to obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against the Landlord or the Tenant, as the case may be. Page 8 13. TAXES: Tenant shall be liable for, and shall pay prior to delinquency, all taxes and assessments levied against personal property and trade or business fixtures, and agrees to pay, as additional rental, all real estate taxes and assessment installments (special or general) or other impositions or charges which may be levied on the Premises, upon the occupancy of the Premises and including any substitute or additional charges which may be imposed during, or applicable to the Lease Term including real estate tax increases due to a sale or transfer of the Premises, as they appear on the City and County tax bills during the Lease Term, and as they become due. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the Commencement and Expiration Dates. If, at any time during the Lease Term a tax, excise on rents, business license tax, or any other tax, however described, is levied or assessed against Landlord, as a subsutitute or addition in whole or in part for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge his pro rata share of such tax or excise on rents or other tax before it becomes delinquent, except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon the Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that the Tenant cannot pay and discharge his pro rata share of such tax on behalf of the Landlord, then at the sole election of the Landlord, the Landlord may increase the rental charged hereunder by the exact amount of such tax and Tenant shall pay such increase as additional rent hereunder. If by virtue of any application or proceeding brought by or on behalf of Landlord, there results a reduction in the assessed value of the Building during the Lease Term, Tenant agrees to reimburse Landlord its reasonable out of pocket costs incurred by Landlord in connection with such application or proceeding. 14. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, heat, light, power, telephone and other utilities supplied to the Premises. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or failure to furnish any utilities to the Premises and Tenant shall not be entitled to abatement or reduction of any portion of the Base Monthly Rent so long as any failure to provide and furnish the utilities to the Premises is due to a cause beyond the Landlord's reasonable control. 15. ABANDONMENT: Tenant shall not abandon the Premises at any time during the Lease Term; and if Tenant shall abandon or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 16. FREE FROM LIENS: Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant or claimed to have been performed for Tenant. In the event Tenant fails to discharge, stay or bond any such lien within thirty (30) days after receiving notice of the filing, Landlord shall be entitled to discharge such lien at Tenant's expense and all resulting costs incurred by Landlord, including attorney's fees shall be due from Tenant as additional rent. Page 9 17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to the said Premises, and shall faithfully observe in the use of the Premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord by a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Landlord and Tenant. 18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: A. Tenant's Responsibility: Without the prior written consent of Landlord, Tenant shall not bring, use, or permit upon the Premises (other than those which shall be allowed in reasonable necessary quantities to conduct Tenant's business as described on Exhibit "D"), or generate, create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code as the same may be amended from time to time ("Hazardous Materials"). In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. In the event Landlord consents to Tenant's use of Hazardous Materials on the Premises, Tenant represents and warrants that Tenant will (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal laws, ordinances or regulations and will provide Landlord a copy of any such reports or agency inspections, (ii) obtain and provide Landlord copies of all necessary permits required for the use and handling Hazardous Materials on the Premises, (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards, (iv) surrender the Premises free from any Hazardous Materials arising from Tenant's bringing, using, permitting, generating, emitting or disposing of Hazardous Materials, and (v) properly close the facility with regard to Hazardous Materials including the removal or decontamination of any process piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials and obtain a closure certificate from the local administering agency prior to the Expiration Date. B. Tenant's Indemnity Regarding Hazardous Materials: Tenant shall comply, at its sole cost, with all laws pertaining to, and shall indemnify and hold Landlord harmless from any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from such bringing, using, permitting, generating, emitting or disposing of Hazardous Materials. Tenant's Page 10 indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims. C. Landlord's Indemnity Regarding Hazardous Materials: Landlord shall indemnify and hold Tenant harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant related to the removal, investigation, monitoring or remediation of Hazardous Materials which are present or which come to be present on the Premises except to the extent the presence of such Hazardous Materials is caused by Tenant or by Tenant's failure to prevent a third party from dumping Hazardous Materials through the surface of the Premises. Landlord's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims. In no event shall Landlord be liable for any consequential damages suffered or incurred by Tenant as a result of any such contamination. The forgoing indemnity by Landlord to Tenant shall not apply to any mortgagee or its assignee which takes title to the Premises pursuant to a deed in lieu of foreclosure, foreclosure or otherwise. D. Actual Release by Tenant: Tenant agrees to notify Landlord of any lawsuits which relate to, or orders which relate to the remedying of, the actual release of Hazardous Materials on or into the soils or groundwater at or under the Premises. Tenant shall also provide to Landlord all notices required by Section 25359.7(b) of the Health and Safety Code and all other notices required by law to be given to Landlord in connection with Hazardous Materials. Without limiting the foregoing, Tenant shall also deliver to Landlord, within twenty (20) days after receipt thereof, any written notices from any governmental agency alleging a material violation of, or material failure to comply with, any federal, state or local laws, regulations, ordinances or orders, the violation of which of failure to comply with, poses a foreseeable and material risk of contamination of the groundwater or injury to humans (other than injury solely to Tenant, its agents and employees within the Improvements on the Property). Page 11 In the event of any release on or into the Premises or into the soil or groundwater under the Premises of any Hazardous Materials used, treated, stored or disposed of by Tenant, Tenant agrees to comply, at its sole cost and expense, with all laws, regulations, ordinances and orders of and federal, state or local agency relating to the monitoring or remediation of such Hazardous Materials. In the event of any such release of Hazardous Materials, Tenant agrees to meet and confer with Landlord and its Lender to attempt to eliminate and mitigate any financial exposure to such Lender and resultant exposure to Landlord under California Code of Civil Procedure section 736(b) as a result of such release and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical uses to which the Property has and continues to be used, the risks to public health posed by the release, the then available technology and the costs of remediation, cleanup and monitoring, consistent with all applicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under paragraph 20.B of this Lease to indemnify and hold Landlord harmless from any claims liabilities, costs or expenses incurred or suffered by Landlord as provided in paragraph 20.B of this Lease. Tenant shall provide Landlord prompt written notice of Tenant's monitoring, cleanup and remedial steps. In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant's obligation to Landlord under this Paragraph concerning the Level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to the provisions of paragraph 44 of this Lease. E. Environmental Monitoring: Landlord and its agents shall have the right, at Landlord's sole cost and expense, to inspect, investigate, sample and/or monitor the Premises, including any air, soil, water, groundwater or other sampling or any other testing, digging, drilling or analysis to determine whether Tenant is complying with the terms of this paragraph 18. Landlord shall give Tenant no less than five (5) days advance written notice of the proposed time for environmental monitoring and shall provide reasonable opportunity for Tenant to observe the monitoring and take splits of any samples taken by Landlord. Such monitoring shall be done in a time and manner minimizing any interference with Tenant's beneficial use of the Premises. If Landlord discovers that Tenant is not in compliance with the terms of this paragraph 18, any such costs incurred by Landlord, including attorneys' and consultants' fees shall be due and payable by Tenant to Landlord within five days following Landlord's written demand therefore. 19. INDEMNITY: As a material part of the consideration to be rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause arising at any time to the fullest extent permitted by law, and Tenant shall indemnify and hold Landlord exempt and harmless from any damage or injury to any Page 12 person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises and/or Building by Tenant, its employees, contractors, agents and invitees or from the failure of Tenant to keep the Premises in good condition and repair, as herein provided, except to the extent due to the active negligence or willful misconduct of Landlord. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, its employees, contractors, agents and invitees, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. Notwithstanding anything to the contrary in the Lease, (i) Tenant shall neither release Landlord from, nor indemnify Landlord with respect to the negligence or willful misconduct of Landlord, or its agents, employees, contractors or invitees, and (ii) Landlord shall indemnify and hold harmless Tenant from all damages, liabilities, judgments, actions, attorneys' fees, consultants' fees, cost and expenses arising from the negligence or willful misconduct of Landlord and its employees, agents, contractors or invitees. 20. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the said Premises any unusual or extraordinary signs, or any signs not approved by the city or other governing authority. The Tenant will not place, or permit to be placed, upon the Premises, any signs, advertisements or notices without the written consent of the Landlord as to type, size, design, lettering, coloring and location, and such consent will not be unreasonably withheld. Any sign so placed on the Premises shall be removed by Tenant, at its expense, prior to the Expiration Date or promptly following the earlier termination of the lease and Tenant shall repair, at its sole cost and expense, any damage or injury to the Premises caused thereby, and if not so removed by Tenant then Landlord may have same so removed at Tenant's expense. 21. ATTORNEY'S FEES: In case a suit or alternative form of dispute resolution should be brought for the possession of the Premises, for the recovery of any sum due hereunder, or because of the breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee including the expense of expert witnesses, depositions and court testimony as part of its costs which shall be deemed to have accrued on the commencement of such action. In addition, the prevailing party shall be entitled to recover all costs and costs and expenses including reasonable attorney's fees incurred by the prevailing party in enforcing any judgment or award against the other party. The foregoing provision relating to post-judgment costs is intended to be severable from all other provisions of this Lease. 22. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: a) Any failure by Tenant to pay any rent under this Lease, where such failure continues after applicable notice and cure periods; b) The abandonment of the Premises by Tenant; (c) A failure by Tenant to observe and perform any other provision of this Lease to be observed or performed by Tenant, where such failure continues for Page 13 thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion; d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed after the filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged, stayed or bonded against within thirty (30) days. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. Any notice given by Landlord to Tenant pursuant to California Code of Civil Procedure Section 1161 with respect to any failure by Tenant to pay rent under this Lease on or before the date the rent is due shall provide Tenant with a period of no less than ten (10) days to pay such rent or quit. A. Remedies: In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this lease then Landlord may recover from Tenant: a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss for the same period that Tenant proves could have been reasonably avoided; plus c) the worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds that amount of such rental loss that Tenant proves could be reasonably avoided; plus d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, and e) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. The term "rent", as used herein, shall be deemed to be and to mean the minimum monthly installments of Base Monthly Rent and all other sums required to be paid by Tenant pursuant to the terms of this Lease, all other such sums being deemed to be additional rent due hereunder. As used in (a) and (b) above, the "worth at the time of award" is to be computed by allowing interest at the rate of the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (c) above, the "worth at the time of award" is to be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. Page 14 B. Right to Re-enter: In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant and disposed of by Landlord in any manner permitted by law. C. Abandonment: In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in paragraph 22.B above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in paragraph 22.A above, then the provisions of California Civil Code Section 1951.4, (Landlord may continue the lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has a right to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied; first, to the payment of any indebtedness other than Base Monthly Rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of Base Monthly Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Base Monthly Rent as the same may become due and payable hereunder. Landlord shall have no obligation to relet the Premises following a default if Landlord has other available space within the Building. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. D. No Termination: No re-entry or taking possession of the Premises by Landlord pursuant to 22.B or 2.2C of this Article 22 shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Premises. Instead, at the option of Landlord, Tenant's surrender may terminate all Page 15 or any existing sublease or subtenancies, or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 24. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in paragraph 22, the parties hereto agree that if the Tenant shall have defaulted in the performance of any (but not necessarily the same) term or condition of this Lease for three or more times during any twelve month period during the Lease Term hereof, then such conduct shall, at the election of the Landlord, represent a separate event of default which cannot be cured by the Tenant. Tenant acknowledges that the purpose of this provision is to prevent repetitive defaults by the Tenant under the Lease, which work a hardship upon the Landlord, and deprive the Landlord of the timely performance by the Tenant hereunder. 25. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days or such other reasonable opportunity to cure or to commence to cure such failure prior to any claim for breach or for damages resulting from such failure. In addition, upon any such failure by Landlord, Tenant shall give notice by registered or certified mail to any person or entity with a security interest in the Premises ("Mortgagee") that has provided Tenant with notice of its interest in the Premises, and shall provide such Mortgagee a reasonable opportunity to cure such failure, including such time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effectuate a cure. Tenant agrees that each of the Mortgagees to whom this Lease has been assigned is an expressed third party beneficiary hereof. Tenant shall not make any prepayment of rent more than one (1) month in advance without the prior written consent of such Mortgagee. Tenant waives any right under California Civil Code Section 1950.7 or any other present or future law to the collection of any payment or deposit from such Mortgagee or any purchaser at a foreclosure sale of such Mortgagee's interest unless such Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. 26. NOTICES: All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, return receipt requested, or by personal delivery addressed to the party to be notified at the address for such party specified in paragraph 1 of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days prior to notice to the notifying party. 27. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to enter into and upon said Premises at all reasonable times and with reasonable notice, subject to any security regulations of Tenant for the purposes of (i) inspecting the same, (ii) maintaining the Premises, (iii) making repairs, alterations or additions to the Premises which Landlord is otherwise entitled to make under this Lease, or (iv) performing any obligations of the Landlord under the Lease including Page 16 remediation of hazardous materials if determined to be the responsibility of Landlord, without any abatement or reduction of rent or without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned; except to the extent that Landlord's occupancy on the Premises materially affects Tenant's orderly, reasonable use of the Premises, then Tenant shall be entitled to a proportionate reduction of Base Monthly Rent, such proportionate reduction to be based upon the extent to which Landlord's entry and presence shall interfere with the business carried on by Tenant in the Premises, in the reasonable judgment of Landlord and Tenant. Tenant shall permit Landlord and his agents, at any time within one hundred eighty (180) days prior to the Expiration Date (or at any time during the Lease if Tenant is in default hereunder), to place upon the Premises "For Lease" signs and exhibit the Premises to real estate brokers and prospective tenants at reasonable hours. Notwithstanding the foregoing, Landlord (i) shall not enter the Premises without first giving twenty-four (24) hours notice to Tenant of such entry except in the case of emergency, (ii) shall be accompanied by an employee of Tenant at all times while in the Premises, (iii) shall comply with Tenant's security procedures applicable to the Premises, and (iv) shall not unreasonably interfere with Tenant's use of the Premises. 28. DESTRUCTION OF PREMISES: A. Destruction by an Insured Casualty: In the event of a partial destruction of the Premises by a casualty for which Landlord has received insurance proceeds sufficient to repair the damage or destruction during the Lease Term from any cause, Landlord shall forthwith repair the same to substantially the same condition as immediately before the casualty, to the extent of such proceeds, provided such repairs can be made within one hundred eighty (180) days from the date of casualty, and such partial destruction shall in no way annul or void this Lease, except that Tenant shall be entitled to a proportionate reduction of Base Monthly Rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the Premises, in the reasonable judgment of Landlord and Tenant. For purposes of this paragraph "partial destruction" shall mean destruction of no greater than one-third (1/3) of the replacement cost of the Premises, including the replacement cost of the Tenant Improvements paid for by Landlord. In the event the Premises (i) are more than partially destroyed, or (ii) the repairs cannot be made in 180 days form the date of casualty, Landlord or Tenant may elect to terminate this Lease by providing written notice to the other within thirty (30) days of the casualty. Landlord shall not be required to restore Alterations or replace Tenant's fixtures or personal property. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California and any other similarly enacted statute are waived by Tenant and the provisions of this paragraph 28 shall govern in the case of such destruction. Page 17 B. Destruction by an Uninsured Casualty: In the event of a total or partial destruction of the Premises by a casualty for which Landlord has not, through no fault of Landlord, received insurance proceeds sufficient to repair the damage or destruction during the Lease Term, the Lease shall automatically terminate unless (i) Landlord elects to rebuild and provides written notification to Tenant of such election within thirty (30) days of the destruction, and (ii) the damage can be repaired within one hundred eighty (180) days from the date of destruction. In the event Landlord elects to rebuild, Tenant shall be entitled to a proportionate reduction of Base Monthly Rent while repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the Premises, in the reasonable judgment of Landlord and Tenant. 29. ASSIGNMENT OF SUBLEASE: A. Consent by Landlord: In the event Tenant desires to assign this Lease or any interest therein including, without limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or any part therof, Tenant shall deliver to Landlord executed counterparts of any such agreement and of all ancillary agreements with the proposed assignee or subtenant, financial statements, and any additional information as reasonably required by Landlord to determine whether it will consent to the proposed assignment or sublease. The notice shall give the name and current address of the proposed assignee/subtenant, proposed use of the Premises, rental rate and current financial statement; and upon request to Tenant, Landlord shall be given additional information as reasonably required by Landlord to determine whether it will consent to the proposed assignment or sublease. Landlord shall then have a period of thirty (30) days following receipt of the foregoing agreement, statements and additional information within which to notify Tenant in writing that Landlord elects (i) to permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice, or (ii) to refuse consent. If Landlord should fail to notify Tenant in writing of such election within said thirty (30) day period, Landlord shall be deemed to have elected option (i) above. If Landlord exercises its option to terminate this Lease in part in the event Tenant desires to sublet or assign part of the Premises, then (i) this Lease shall end and expire, with respect to such part of the Premises, on the date upon which the proposed sublease was to commence, and (ii) from and after such date, the Base Monthly Rent and Tenant's allocable share of all other costs and charges shall be adjusted, based upon the proportion that the rentable area of the Premises remaining bears to the total rentable area of the Premises. If Landlord does not exercise its option to terminate this Lease, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld, provided and upon condition that: (i) the proposed assignee or subtenant is engaged in a business that is limited to the use expressly permitted under the Lease; (ii) the proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the financial obligation of this Lease, and Landlord has been furnished with reasonable proof thereof; (iii) the proposed assignment or sublease shall be in form reasonably satisfactory to Landlord; (iv) Tenant shall reimburse Landlord Page 18 on demand for any costs that may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent; and (v) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to, and approval by Landlord, which approval shall not be unreasonably withheld. In the event all or any one of the foregoing conditions are not satisfied, Landlord may, in its sole discretion, withhold its consent to the proposed assignment of sublease. B. Assignment or Subletting Consideration: Any rent or other economic consideration realized by Tenant under any such sublease and assignment in excess of the rent payable hereunder, after the net unamortized cost of the Tenant Improvements for which Tenant has itself paid, and reasonable subletting and assignment costs, shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration shall constitute an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease, constitute a material inducement for the Landlord to enter into the Lease, and are agreed as between the parties to be commercially reasonable. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. C. No Release: Any assignment or sublease shall be made only if and shall not be effective until the assignee or subtenant shall execute, acknowledge and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee or subtenant shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed and shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent by Landlord from any subtenant or assignee, Tenant and any guarantor shall and will remain fully liable for the payment of the rent and additional rent due, and to become due hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any license, subtenant, assignee or any other person claiming under or through any subtenant or assignee that shall be in violation of any of the terms and conditions of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant shall further indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. D. Effect of Default: In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Page 19 Tenant may collect such rents unless a default occurs as described in paragraph 22 and 24 above. The termination of this Lease due to Tenant's default shall not automatically terminate any assignment or sublease then in existence; at the election of Landlord, such assignment or sublease shall survive the termination of this Lease and, upon such election, the assignee or subtenant shall attorn to Landlord and Landlord shall undertake the obligations of the Tenant under the sublease or assignment; provided the Landlord shall not be liable for prepaid rent, security deposits or other defaults of the Tenant to the subtenant or assignee, or any acts or omissions of Tenant, its agents, employees, contractors or invitees. 30. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall as to the part so taken, terminate as of the day before title shall vest in the condemnor or purchaser ("Vesting Date"), and the Base Monthly Rent payable hereunder shall be adjusted so that the Tenant shall be required to pay for the remainder of the Lease Term only such portion of such Base Monthly Rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Landlord shall have the option to terminate this Lease as of the Vesting Date. If all of the premises, or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall thereupon terminate on the Vesting Date. If as a result of any taking or sale in lieu thereof, the Premises are no longer reasonably suitable for Tenant's intended use, Tenant, upon written notice to Landlord, shall be entitled to terminate this Lease within thirty (30) days of the date that notice of such condemnation is received by Tenant. If a part or all of the Premises be taken, all compensation awarded upon such taking shall go to the Landlord and the Tenant shall have no claim thereto but Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for damage to or taking of any Alterations or for Tenant's moving costs. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130 and any other similarly enacted statute are waived by Tenant and the provisions of this Paragraph 30 shall govern in the case of such destruction. Notwithstanding the foregoing, Tenant shall be entitled to receive by a separate award condemnation proceeds, the value of the condemned improvements which Tenant has a right to remove from the Premises and Tenant's moving costs. 31. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the owner for the time being of the Premises so that, in the event of any sale or other conveyance of the Premises, or in the event of a master lease of the Premises, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of the "Landlord" hereunder to be performed thereafter, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the master tenant of the Premises, that the purchaser or master tenant of the Premises has assumed and agreed to carry out any and all covenants and obligations of the Landlord hereunder to be performed thereafter. Such transferor shall transfer and Page 20 deliver Tenant's security deposit to the purchaser at any such sale or the master tenant of the Premises, and thereupon such transferor shall be discharged from any further liability in reference thereto. Notwithstanding the foregoing, this provision shall not apply to environmental liabilities arising during the time of ownership of any party acting as Landlord. 32. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of trust, or other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Tenant agrees to promptly execute and deliver any documents which may be required to effectuate such subordination. Notwithstanding such subordination but subject to the terms and provisions of this Lease, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and shall pay the rent and observe and perform all of the provisions of this Lease. At the request of any lender, Tenant agrees to execute and deliver any reasonable modifications of this Lease which do not materially adversely affect Tenant's rights hereunder. Landlord shall cause the existing lender, Principal Mutual Life Insurance Company, to furnish to Tenant, within thirty (30) days of the date of both parties' execution of this Lease, with a written agreement providing for (i) recognition by the lender of all of the terms and conditions of this Lease; and (ii) continuation of this lease upon foreclosure of existing lender's security interest in the Premises. In the event that Landlord is unable to provide such agreement, Tenant's sole remedy shall be termination of the Lease, which election shall be made within fourteen (14) days following the expiration of such 30-day period. 33. WAIVER: The waiver by Landlord of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed to be other than payment on account of the amount due. No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver thereof by Landlord. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date (only written notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises). Landlord's consent to or approval of any act by Tenant which require Landlord's consent or approvals shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Page 21 34. HOLDING OVER: Any holding over after the termination or Expiration Date, shall be construed to be a tenancy from month to month, terminable on thirty (30) days written notice from either party, and Tenant shall pay Base Monthly Rent to Landlord at a rate equal to the greater of (i) one hundred fifty percent (150%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date or (ii) one hundred fifty percent (150%) of the Fair Market Rental (as defined in paragraph 37) plus all other amounts payable by Tenant under this Lease. Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the Lease Term and any options to extend or renew, which provisions shall be of no further force and effect following the expiration of the applicable exercise period. Tenant shall indemnify, defend, and hold Landlord harmless from all loss or liability (including, without limitation, any loss or liability resulted from any claim against Landlord made by any succeeding tenant) founded on or resulting from Tenant's failure to timely surrender the Premises to Landlord and losses to Landlord due to lost opportunities to lease the Premises to succeeding tenants. 35. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions of paragraph 29, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 36. ESTOPPEL CERTIFICATES: Tenant shall at any time during the Lease Term, within ten (10) days following written notice from Landlord, execute and deliver to Landlord a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which the rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if they are claimed; and (iv) such other information as Landlord may reasonably request. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that: (i) this Lease is in full force and effect, without modification except as may be represented by Landlord; (ii) there are not uncured defaults in Landlord's performance. Tenant also agrees to provide the most current three (3) years of audited financial statements within five (5) days of a request by Landlord for Landlord's use in financing the Premises with commercial lenders. 37. OPTION TO EXTEND THE LEASE TERM: A. Grant and Exercise of Option: Landlord hereby grants to Tenant, upon and subject to the terms and conditions set forth in this paragraph, two (2) options (the "Options") to extend the Lease Term for an additional term (the "Option Term"), each Option Term shall be for a period of thirty-six (36) months. Each such Option shall be exercised, if at all, by written notice to Landlord no earlier than the date that is fifteen (15) months prior to the Expiration Date (which as used in this Paragraph 37.A in connection with the second Option, shall mean the date of Expiration of the first Page 22 Option Term), but no later than the date that is nine (9) months prior to the Expiration Date. If Tenant exercises the Option, each of the terms, covenants and conditions of this Lease except this paragraph shall apply during the Option Term as though the expiration date of the Option Term was the date originally set forth herein as the Expiration Date, provided that the Base Monthly Rent to be paid by Tenant during the Option Term shall be the greater of (i) the Base Monthly Rent applicable to the period immediately prior to the commencement of the Option Term, or (ii) 95% of the then Fair Market Rental, as hereinafter defined, for the Premises for the Option Term. Anything contained herein to the contrary notwithstanding, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the expiration date of this Lease shall be and remain the Expiration Date. As used herein, the term "Fair Market Rental" for the Premises shall mean the rental and all other monetary payments including any escalations and adjustments thereto (including without limitation Consumer Price Indexing) then being obtained for new leases of space comparable in age and quality to the Premises in the locality of the Building that Landlord could obtain during the Option Term from a third party desiring to lease the Premises for the Option Term based upon the current use and other potential uses of the Premises. Fair Market Rental shall further take into account (i) that Tenant is in occupancy of the Premises and making functional use of the space in its then existing condition, and (ii) that no brokerage commission is payable. B. Determination of Fair Market Rental: If Tenant exercises the Option, Landlord shall send to Tenant a notice setting forth the Fair Market Rental for the Premises for the Option Term, on or before the date that is twelve (12) months prior to the Expiration Date. If Tenant disputes Landlord's determination of the Fair Market Rental for the Option Term, Tenant shall, within (30) days after the date of Landlord's notice setting forth the Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either (i) elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date, or (ii) disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in paragraph 37.C below. If Tenant does not send to Landlord a notice as provided herein, Landlord's determination of the Fair Market Rental shall be the basis for determining the Base Monthly Rent to be paid by Tenant hereunder during the Option Term. If Tenant elects to resolve the disagreement as provided in paragraph 37.C below and such procedures shall not have been concluded prior to the commencement date of the Option Term, Tenant shall pay as Base Monthly Rent to Landlord the Fair Market Rental as determined by Landlord in the manner provided above. If the amount of Fair Market Rental as finally determined pursuant to paragraph 37.C below is greater than Landlord's determination, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 37.C below within 30 days after the determination. If the Fair Market Rental as finally determined in paragraph 37.C below is less than Landlord's determination, the Page 23 difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 37.C below shall be credited against the next installments of rent due from Tenant to Landlord hereunder. C. Resolution of a Disagreement over the Fair Market Rental: Any disagreement regarding the Fair Market Rental shall be resolved as follows: 1. Within thirty (30) days after Tenant's response to Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant shall meet no less than two (2) times, at a mutually agreeable time and place, to attempt to resolve any such disagreement. 2. If within the thirty (30) day period referred to in (1) above, Landlord and Tenant can not reach agreement as to the Fair Market Rental, they shall each select one appraiser to determine the Fair Market Rental. Each such appraiser shall arrive at a determination of the Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the thirty (30) day consultation period described in (1) above. 3. If only one appraisal is submitted within the requisite time period, it shall be deemed to be the Fair Market Rental. If both appraisals are submitted within such time period, and if the two appraisals so submitted differ by less than ten percent (10%) of the higher of the two, the average of the two shall be the Fair Market Rental. If the two appraisals differ by more than ten percent (10%) of the higher of the two, then the two appraisers shall immediately select a third appraiser who shall within thirty (30) days after his or her selection make a determination of the Fair Market Rental and submit such determination to Landlord and Tenant. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be the Fair Market Rental. 4. All appraisers specified pursuant to this paragraph shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising office and industrial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser. 38. OPTIONS: All Options provided Tenant in this Lease are personal and granted to Tenant and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord's sole discretion. In the event that Tenant hereunder has any multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. 39. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease and except as otherwise provided in this Lease, Tenant shall quietly have Page 24 and hold the Premises for the Lease Term and any extentions thereof. 40. BROKERS: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than CPS Commercial Property Services and Tenant agrees to indemnify and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any other broker or finder claiming through Tenant. 41. LANDLORD'S LIABILITY: If Tenant should recover a money judgment against Landlord arising in connection with this Lease, the judgment for any item other than Landlord's Indemnity Obligation shall be satisfied only out of the greater of (i) Landlord's interest in the Premises including the improvements and real property, or (ii) Four Hundred Thousand Dollars ($400,000.00). Neither Landlord or any of its partners, officers, directors, agents, trustees, shareholders or employees shall be liable personally for any deficiency. Further, Tenant expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 42. AUTHORITY OF PARTIES: Tenant represents and warrants that it is duly formed and in good standing and is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. At Landlord's request, Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of the Lease. 43. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency or municipality require Landlord to institute TDM (Transportation Demand Management) facilities and/or program, Tenant hereby agrees that the cost of TDM imposed facilities required on the Premises, including but not limited to employee showers, lockers, cafeteria, or lunchroom facilities, shall be included as Tenant Improvement Costs and any ongoing costs or expenses associated with a TDM program, such as an on-site TDM coordinator, which are required for the Premises and not provided by Tenant shall be provided by Landlord with such costs being included as additional rent and reimbursed to Landlord by Tenant. 44. DISPUTE RESOLUTION: Except for the failure by Tenant to timely pay Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising out of, in connection with, or in relation to the interpretation, performance or breach of this Lease, including any claim based on contract, tort, or statute, shall be resolved at the request of any party to this Lease through a two-step dispute resolution process administered by JAMS or another judicial and mediation service mutually acceptable to the parties involving first mediation, followed, if necessary, by final and binding arbitration administered by and in accordance with the then existing rules and practice of the judicial Page 25 and mediation service selected, and judgment upon any award rendered by the arbitrator(s) may be entered by any State or Federal Court having jurisdiction thereof. 45. LEASE GUARANTY: A material provision of the Lease and a material inducement of Landlord to enter into this Lease is the guaranty of this Lease by Precision Echo, Inc., a Delaware Corporation, ("Guarantor") which is attached hereto as Exhibit "C" and made a part thereof. 46. MISCELLANEOUS PROVISIONS: A. Rent: All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as "additional rent", shall be deemed to be rent. B. Performance by Landlord: If Tenant fails to perform any obligation required under this Lease or by laws or governmental regulation, Landlord in its sole discretion may, without notice and without releasing Tenant from its obligations hereunder or waiving any rights or remedies, perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance including interest as provided in paragraph 46.D below within 10 days following Landlord's written notice for payment. C. Interest: All rent due hereunder, if not paid when due, shall bear interest at the maximum rate permitted under California law accruing from the date due until the date paid to Landlord. D. Rights and Remedies: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights and remedies in law and in equity. E. Survival of Indemnities: All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive the expiration or sooner termination of the Lease. F. Severability: If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. G. Choice of Law: This Lease shall be governed by and construed in accordance with California law. Venue shall be Santa Clara County. H. Time: Time is of the essence hereunder. I. Entire Agreement: This instrument contains all of the agreements and conditions Page 26 made between the parties hereto and may not be modified orally or in any other manner other than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. J. Representations: Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations, warranties or promises with respect to the demised Premises or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose. K. Headings: The headings or titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. L. Exhibits: All exhibits referred to are attached to this Lease and incorporated by reference. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. Landlord: South San Jose Interests, Tenant: Ahead Technology, Inc. a California Limited Partnership a Delaware Corporation By:________________________________ By:________________________________ Its:_______________________________ Its:_______________________________ Page 27 EXHIBIT "A" - Premises Page 28 EXHIBIT "B" - Tenant Improvements Page 29 EXHIBIT "C" - Lease Guaranty This Guaranty of Lease ("Guaranty") is made as of the ___________ day of July by Precision Echo, Inc., a Delaware Corporation ("Guarantor") in favor of Landlord, and recites as follows: WHEREAS, as an inducement for Landlord to enter into the Lease, Guarantor desires to guarantee the full performance of all obligations of Tenant under the Lease upon the terms set forth below. NOW THEREFORE, in consideration of the execution of the Lease by Landlord, Guarantor unconditionally guarantee and agree as follows: 1. Guaranty. Guarantor, continually, directly and unconditionally hereby guarantee the full performance by Tenant of each and every term, covenant, condition and obligation of the Lease to be performed by Tenant (the foregoing obligations are hereinafter sometimes collectively referred to as the "Guaranteed Obligations"). The Guaranteed Obligations shall include, without limitation, the payment of Base Rent, Additional Rent and all other sums becoming due under the Lease and the compliance with all the provisions of the Lease which relate to Hazardous Materials. 2. Continuing Guaranty. This Guaranty is a continuing one and shall terminate only upon the full and complete performance by Tenant of all of the Guaranteed Obligations. Guarantor's liability under this Guaranty with respect to the full and unconditional performance of the Guaranteed Obligations shall continue following the termination of the Lease Term to the extent any of the Guaranteed Obligations have not otherwise been performed. Guarantor may not revoke the continuing nature of this Guaranty. In the event that Landlord should seek to enforce any of its rights provided in this Guaranty, and demand payment or performance from Guarantor, such demand and compliance thereto shall not release, extinguish, exonerate or, in any way, affect or diminish Guarantor's continuing obligations hereunder. 3. Lease Modifications. This Guaranty shall continue in full force and effect as to any and all renewals, modifications, amendments or extensions of the Lease, whether or not Guarantor shall have received any notice of or consented to such renewals, modifications, amendments or extensions. No renewal, modification, amendment or extension of the Lease shall in any manner release, discharge or diminish the obligations of Guarantor hereunder. This paragraph modifies the provision of California Civil Code Section 2819. 4. Assignment by Landlord. Landlord may, without notice, assign, transfer, hypothecate, encumber or otherwise dispose of, in whole or in part, any of Landlord's rights, claims or interests in the Lease, the Premises or this Guaranty. No assignment, hypothecation, encumbrance, disposition or other transfer of the Lease, the Premises or this Guaranty shall operate to extinguish or diminish in any way, the obligations of Guarantor hereunder. Page 30 5. Assignment by Tenant. This Guaranty shall continue and remain unconditionally unaffected by an assignment of the Lease by Tenant, any sublet by Tenant of the Premises, or any change in the entity comprising Tenant. Upon any assignment of the Lease or any sublet, the Guarantor shall continue to remain liable and obligated for the full performance by Tenant's successor of the Guaranteed Obligations. "Tenant" as used in this Guaranty shall include all successors and assigns of Tenant. 6. Addition or Release of Security. This Guaranty shall remain in full force and effect notwithstanding the receipt by Landlord of any additional security, whether from Guarantor, Tenant or a third party, securing the performance of the Guaranteed Obligations. The release by Landlord of any security held for the performance of any of the Guaranteed Obligations shall not release, extinguish or, in any way, affect or diminish the obligations of Guarantor hereunder. 7. Losses Due to Lease Default. Landlord may terminate the Lease upon default by Tenant of any term, covenant or condition of the Lease. Such termination, however shall not extinguish, release or, in any way, affect or diminish the obligations of Guarantor hereunder. In no event shall Landlord be obligated to lease the Premises to Guarantor after such termination. Upon termination of the Lease, as a result of Tenant's default thereunder, this Guaranty shall extend to the payment to Landlord of all damages payable by Tenant. Landlord shall permit Guarantor to use the Premises during the Lease Term, provided (i) Tenant has abandoned the Premises and is in default under the Lease, (ii) Guarantor has cured Tenant's default, (iii) Guarantor abides by all the terms and conditions of the Lease, and (iv) such use by Guarantor is does not conflict with the Tenant's rights under the Lease. 8. Actions of Landlord. This Guaranty shall not be released, extinguished, modified or, in any way, affected or diminished by failure, on the part of Landlord, to enforce any or all of the rights or remedies of Landlord under the Lease, or by Landlord's grant of any indulgences or extensions of time to Tenant of the performance of any of the Guaranteed Obligations. This Guaranty shall remain in full force and effect notwithstanding the failure of Landlord to insist, in any one or more instances, upon a strict performance or observance of the Guaranteed Obligations or upon the exercise of any of Landlord's rights under the Lease. Receipt by Landlord of Base Rent or other performance from Tenant, after breach by Tenant, with knowledge of such breach, shall not be deemed a waiver of such breach. Any reference herein to any liability of Tenant shall, at the same time, refer to obligations of Guarantor hereunder. 9. Ability to Proceed Directly Against Guarantor. Landlord may, at Landlord's option, proceed immediately and directly against Guarantor, jointly or severally, in order to enforce the performance of the Guaranteed Obligations under the Lease. Landlord shall not be required, in order to enforce its rights hereunder upon the default of Tenant, to first institute suit, proceedings, or otherwise exhaust its legal remedies against Tenant. With respect to defaults by Tenant for which Page 31 Landlord elects to proceed against Guarantor, Landlord shall provide Guarantor with written notice of such default prior to proceeding against Guarantor hereunder. 10. Guarantor's Additional Covenants. Until all of the Guaranteed obligations are fully performed and observed, Guarantor covenant that they: (i) shall have no right of subrogation against Tenant by reason of any payments or acts of performance by Guarantor in compliance with the obligations of Guarantor hereunder; (ii) shall have no right to enforce any remedy which Guarantor now or hereafter shall have against Tenant by reason of any one or more payments or acts of performance by Guarantor in compliance with the obligations of Guarantor hereunder; and (iii) shall subordinate any liability or indebtedness of Tenant, now or hereafter held by Guarantor, to the obligations of Tenant to Landlord under the Lease, during the period that Tenant is in default under the Lease. 11. Guarantor's Waivers. Guarantor hereby waive: (i) all statues of limitations as a defense to any action brought against any or all Guarantor, by Landlord, to enforce this Guaranty with respect to Tenant's obligations to pay Base Rent, Additional Rent and other sums becoming due under the Lease to the fullest extent permitted by law; (ii) all defenses based upon any legal disability of Tenant or any discharge or limitation of liability of Tenant, to Landlord, whether consensual or arising by operation of law or any bankruptcy, insolvency or debtor-relief proceeding or from any other cause; and (iii) all rights to be exonerated hereunder pursuant to the provisions of California Civil Code Section 2819 and/or 2845 and/or 2850 and pursuant to any other statute or rule of law of similar import. 12. Status of Tenant. Guarantor represent and warrant that as of the date of execution and delivery of this Lease Guaranty, (i) Tenant is under no disability in connection with the execution and delivery of the Lease and (ii) there are no defenses to Tenant's full performance and payment of the obligations required by the Lease. 13. Guarantor Remain Liable to Landlord. Tenant, or any persons or entities comprising Tenant, may be released from Tenant's obligations under the Lease, with notice to Guarantor and Guarantor's consent, which consent shall be deemed given unless Guarantor objects within ten (10) business days of receipt of notice, and Guarantor shall nevertheless remain liable to Landlord under this Guaranty. 14. Enforcement of Guaranty Upon Default. The enforcement of this Guaranty upon the default of Tenant shall not constitute an assignment to Guarantor, by Landlord, of any rights or claims which Landlord may have against Tenant. the provisions of paragraph 10 above notwithstanding, provided Tenant's default has been cured by Guarantor and Guarantor continues to perform its obligations to Landlord under this Lease Guaranty, Landlord shall not restrict Guarantor's right to seek damages from Tenant. Page 32 unconditional and independent of those of Tenant under the Lease. Guarantor shall punctually perform their obligations hereunder upon demand by Landlord. This Guaranty shall be binding upon the Guarantor, their respective successors and assigns. 16. Other Guarantor. This Guaranty shall remain in full force and effect, notwithstanding that other guarantors from time to time may guarantee or otherwise become responsible for the performance of any of the terms, covenants and conditions of the Lease. 17. Right of Set-Off. In enforcing this Guaranty, Landlord reserves the right to set-off any claims or rights Guarantor may have against Landlord, whether or not such claims or rights arise out of Lease or otherwise. Failure of Landlord to so set-off shall not constitute a waiver of any future rights of set-off that Landlord may exercise. 18. Rights Cumulative. All rights of Landlord under this Guaranty are cumulative and are in addition to any other rights which Landlord may otherwise have. 19. Provisions Severable. The provisions of this Guaranty are severable, and if any provision herein in invalid, the balance of this Guaranty shall remain in force and effect to the fullest extent permitted by law. 20. Condemnation. In the event that the Premises, for any reason, are condemned by a public entity, Guarantor shall have rights or claims to any condemnation awards recovered by Landlord or Tenant therefrom. 21. Estoppel Certificate. Upon reasonable request and notice from Landlord, Guarantor shall deliver to Landlord and to any prospective purchaser, mortgagee and/or beneficiary under a deed of trust, or other lender designated by Landlord, an estopped certificate, executed and acknowledged by Guarantor, to the effect that this Guaranty is in full force and effect and has not been amended or terminated. Guarantor shall also certify such other matters relating to the Lease, the Premises or this Guaranty as may be reasonably requested by a lender making a loan to Landlord or a purchase of the Premises from Landlord. 22. Bankruptcy of Tenant. This Guaranty shall remain and continue in full force and effect, notwithstanding: (i) the commencement or continuation of any case, action, or proceeding by, against or concerning Tenant, under any federal or state bankruptcy, insolvency, or other debtor's relief law, including, without limitation: (x) a case under Title 11 of the United States Code concerning Tenant, whether under Chapter 7, 11 or 13 of such Title or under any other Chapter, or (y) a case, action or proceeding seeking Tenant's financial reorganization or an arrangement with any of Tenant's creditors; (ii) the voluntary appointment of a receiver, trustee, keeper or other person who takes possession of substantially all of Tenant's assets or on any asset used in Tenant's business on the Premises, regardless of whether such appointment occurs as result of Page 33 insolvency or other cause; or (iii) the execution of an assignment for the benefit of creditors of substantially all assets of Tenant available by law for the satisfaction of judgment creditors. 23. No Condition Precedent. This Guaranty shall not be subject to any condition precedent to the effectiveness hereof. 24. Attorney's Fees. In the event any action or proceeding should be commenced by Landlord against Guarantor to enforce any of the terms, covenants or conditions of this Guaranty, Landlord shall be entitled to recover from Guarantor hereunder, in any such action or proceeding in which it shall prevail, all reasonable attorneys' fees, costs and expenses. 25. Notice Provision. Any notice to be delivered hereunder shall be in writing and shall be deemed delivered upon personal service or upon seventy-two (72) hours after deposited in the U.S. Postal Service, postage prepaid, registered or certified, return receipt requested, addressed as follows: Precision Echo, Inc. 3105 Patrick Henry Drive Santa Clara, California 95054 26. Modifications in Writing. This Guaranty may not be changed, waived, discharged or terminated orally or by course of conduct, but rather only by an instrument in writing signed by the party against whom enforcement of the charge, waiver, discharge or termination in sought. 27. Choice of Law. The parties agree that the terms of the Lease and this Guaranty of Lease were negotiated in the County of Santa Clara, State of California. This Guaranty of Lease shall be governed by and construed in accordance with the laws of the State of California. Guarantor hereby submits to the legal jurisdiction of the State of California and to the service of process of any court of the State of California. The parties agree that all disputes shall be determined by resort to the courts of California of competent jurisdiction, with venue in Santa Clara County. 28. Descriptive Headings. Descriptive headings are for reference purposes only and shall not affect any meaning, construction or interpretation of this Guaranty. IN WITNESS WHEREOF, the undersigned Guarantor has executed this agreement as of 7/28/95, 1995. GUARANTOR: Precision Echo, Inc. (sig) VP Finance By:_____________________________ Its:_____________________________ Page 34 EXHIBIT "D"-Permitted Chemicals To include the list submitted to Sobrato SKC Page 35 EX-10.81 5 OFFICE BUILDING LEASE OFFICE BUILDING LEASE 1. PARTIES. This Lease, dated, for reference purposes only, May 25, 1995, is made by and between SPORTS ARENA VILLAGE, LTD., A LIMITED PARTNERSHIP (herein called "Landlord") and TECHNOLOGY APPLICATIONS & SERVICE COMPANY, a Delaware corporation (herein called "Tenant"). 2. PREMISES. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord that certain office space (herein called "Premises") indicated on Exhibit "A" attached hereto and hereby reference thereto made a part hereof, said Premises being agreed, for the purpose of this Lease, to have an area of approximately 1,543 rentable square feet and being situtated on the first (1st) floor of that certain Building known as 4055 Hancock Street, Suite 125, San Diego, California. Said Lease is subject to the terms, covenants and conditions herein set forth and the Tenant covenants as a material part of the consideraton for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of said performance. 3. TERM. The term of this Lease shall be for three (3) years, commencing on the 1st day of August, 1995 and ending on the 31st day of July, 1998. 4. POSSESSION. 4.a. If the Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to the Tenant at the commencement of the term hereof, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the expiration date of the above term be in any way extended but in that event, all rent shall be abated during the period between the commencement of said term and the time when Landlord delivers possession. SEE Page 1(a). 4.b. In the event that Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the termination date hereinabove provided. 5. RENT. Tenant agrees to pay to Landlord as rental, without prior notice or demand, for the Premises the sum of: One Thousand Six Hundred Ninety-Seven and 30/100 ($1,697.30) Dollars, on or before the first day of the first full calendar month of the term hereof and a like sum on or before the first day of each and every successive calendar month thereafter during the term hereof, except that the first month's rent shall be paid upon the execution hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment herein, based upon a thirty (30) day month. Said rental shall be paid to Landlord, without deduction or offset in lawful money of the United States of America, which shall be legal tender at the time of payment at the Office of the Building, or to such other person or at such other place as Landlord may from time to time designate in writing. 6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of One Thousand Six Hundred Ninety-Seven and 30/100 ($1,697.30) Dollars. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults and the same is not cured within ???????????? with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. 7. ?????????? (PAGE 1--OFF. BLDG.) 4. POSSESSION (Continued) However, if Landlord cannot deliver the Premises by sixty (60) days after the date specified in Section 3 above, then Tenant may cancel this Lease without penalty unless such delays are caused (a) by factors beyond the Landlord's reasonable control such as acts of God, material shortages, labor strikes, Landlord's inability to obtain tenant improvement building permits, and/or force majeure and/or (b) any act or omission of the Tenant in the submission and/or approval of plans, specifications, or other information to the Landlord. Upon full execution of the Lease, Tenant may coordinate with Landlord's construction manager for the purposes of installing communication and computer cabling, etc. 1A 8. USE. Tenant shall use the Premises for general office purposes or small equipment repair and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause cancellation of any insurance policy covering said Building or any part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. COMPLIANCE WITH LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between the Landlord and Tenant. 10. ALTERATIONS AND ADDITIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the Premises or any part thereof without the written consent of Landlord first had and obtained and any alterations, additions or improvements to or of said Premises, including, but not limited to, wall covering, paneling and built-in cabinet work, but excepting movable furniture and trade fixtures, shall on the expiration of the term become a part of the realty and belong to the Landlord and shall be surrendered with the Premises. In the event Landlord consents to the making of any alterations, additions or improvements to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense, and any contractor or person selected by Tenant to make the same must first be approved of in writing by the Landlord. Upon the expiration or sooner termination of the term hereof, Tenant shall, upon written demand by Landlord, given at least thirty (30) days prior to the end of the term, at Tenant's sole cost and expense, forthwith and with all due diligence remove any alterations, additions, or improvements made by Tenant, designated by Landlord to be removed, and Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair any damage to the Premises caused by such removal. 11. REPAIRS. 11.a. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as being in good, sanitary order, condition and repair.* Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenants fire and other casualty and ordinary wear and tear excepted. Tenant shall upon the expiration or sooner termination of this Lease hereof surrender the Premises to the Landlord in good condition, ordinary wear and tear and damage from causes beyond the reasonable control of Tenant excepted. Except as specifically provided in an addendum, if any, to this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically herein set forth. - ----------- *Subject to a punch list review and repair. 11.b. Notwithstanding the provisions of Article 11.a. hereinabove, Landlord shall repair and maintain the structural portions of the Building, including the basic plumbing, air conditioning, heating, and electrical systems, installed or furnished by Landlord, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any ??????? repairs or to perform any maintanance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Article 22 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 12. LIENS. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Landlord may require, at Landlord's sole option, that Tenant shall provide to Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half (1 1/2) times any and all estimated cost of any improvements, additions, or alterations in the Premises, to insure Landlord against any liability for mechanics' and materialmen's liens and to insure completion of the work. (PAGE 2--OFF. BLDG.) 13. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily or by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the said Premises or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person (the employees, agents, servants and invitees of Tenant excepted) to occupy or use the said Premises, or any portion thereof, without the written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld, and a consent to one assignment, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. Any such assignment or subletting without such consent shall be void, and shall, at the option of the Landlord, constitute a default under this Lease. Tenant reserves right to assign to affiliate company provided such affiliate company is of equal or greater financial capability. 14. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Premises for the conduct of its business or from any activity, work, or other thing done, permitted or suffered by the Tenant in or about the Building and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of the Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from all and against all cost, attorney's fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, in any case, action or proceeding be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel reasonable satisfactory to Landlord. Tenant as a material part of the consideration to Landlord hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises, from any cause other than Landlord's negligence, and Tenant hereby waives all claims in respect thereof against Landlord. Landlord or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or damage to any property by theft or otherwise, nor for any injury to or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Landlord, its agents, servants or employees. Landlord or its agents shall not be liable for interference with the light or other incorporeal hereditaments, loss of business by Tenant, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. 15. SUBROGATION. As long as their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. 16. LIABILITY INSURANCE. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. The limit of said insurance shall not, however, limit the liability of the Tenant hereunder. Tenant may carry said insurance under a blanket policy, providing, however, said insurance by Tenant shall have a Landlord's protective liability endorsement attached thereto. If Tenant shall fail to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, but at the expense of Tenant. Insurance required hereunder, shall be in companies rate A+ AAA or better in "Best's Insurance Guide". Tenant shall deliver to Landlord prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancellable or subject to reduction of coverage except after ten (10) days' prior written notice to Landlord. 17. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during reasonable hours* of generally recognized business days, to be determined by Landlord at his sole discretion, and subject to the rules and regulations of the Building of which the Premises are a part, electricity for normal lighting and fractional horsepower office machines, heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises, and janitorial service. Landlord shall also maintain and keep lighted the common stairs, common entries and toilet rooms in the Building of which the Premises are a part. Landlord shall not be liable for, and Tenant shall not be entitled to, any reduction of rental by reason of Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of - ----------------- * Reasonable hours defined as Monday through Friday, 7:00 a.m. to 6:00 p.m. Other periods Tenant will be allowed to purchase at a reasonable rate. (PAGE 2--OFF. BLDG.) Landlord. Landlord shall not be liable under any circumstances for a loss of or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, and the cost of operation and maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, without written consent of Landlord, use any apparatus or device in the Premises, including, but without limitation thereto, electronic data processing machines, punch card machines, and machines using in excess of 220 volts, which will in any way increase the amount of electricity usually furnished or supplied for the use of the Premises as general office space; nor connect with electric current except through existing electrical outlets in the Premises, any apparatus or device, for the purpose of using electric current. If Tenant shall require water or electric current in excess of that usually furnished or supplied for the use of the Premises as general office space, Tenant shall first procure the written consent of Landlord, which Landlord may refuse, to the use thereof and Landlord may cause a water meter or electrical current meter to be installed in the Premises, so as to measure the amount of water and electric current consumed for any such use. The cost of any such meters and of installation, maintenance and repair thereof shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand therefor by Landlord for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, such excess cost for such water and electric current will be established by an estimate made by a utility company or electrical engineer. 18. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon all Tenant's leasehold improvements, equipment, furniture, fixtures and personal property located in the Premises; except that which has been paid for by Landlord, and is the standard of the Building. In the event any or all of the Tenant's leasehold improvements, equipment, furniture, fixtures and personal property shall be assessed and taxed with the Building. Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. 19. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations that Landlord shall from time to time promulgate. Landlord reserves the rights from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any said rules by any other tenants or occupants. 20. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof, with the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a rental in the amount of the last monthly rental, plus all other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy. 21. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the right to enter the Premises, inspect the same, supply jantiorial service and any other service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part that Landlord may deem necessary or desirable, without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and further providing that the business of the Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages or for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occassioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults, safes and files, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Tenant except for any failure to exercise due care for Tenant's property. Any entry to the Premises obtained by Landlord by any of said means, or otherwise shall not under any circumstances be construed or deemed to be a forceable or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. 22. RECONSTRUCTION. In the event the Premises or the Building of which the Premises are a part are damaged by fire or other perils covered by extended coverage insurance, Landlord agrees to forthwith repair the same; and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall materially interfere with the business carried on by the Tenant in the Premises. If the damage is due to the fault or neglect of Tenant or its employees, there shall be no abatement of rent. In the event the Premises or the Building of which the Premises are a part are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance, then Landlord shall forthwith repair the same, provided the extent of the destruction be less than ten (10%) per cent of the then full replacement cost of the Premises or the Building of which the Premises are a part. In the event the destruction of the Premises or the Building is to an extent greater than ten (10%) per cent of the full replacement cost, then Landlord shall have the option; (1) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately reduced as hereinabove in this Article provided; or (2) give notice to Tenant at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate on the date so specified in such notice and the Rent, reduced by a proportionate amount, based upon the extent, if any, to which such damage materially interfered with the business carried on by the Tenant in the Premises, shall be paid up to date of said such termination. Notwithstanding anything to the contrary contained in this Article, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article occurs during the last twelve (12) months of the term of this Lease or any extension thereof. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor covering, partitions, or any other property installed in the Premises by Tenant. The Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the premises, Tenant's personal property or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. 23. DEFAULT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant. 23.a. The vacating or abandonment of the Premises by Tenant. 23.b. The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Landlord to Tenant. 23.c. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Tenant, other than described in Article 23.b. above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 23.d. The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. 24. REMEDIES IN DEFAULT. In the event of any such material default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach: 24.a. Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including, but not limited to, the cost of recovering possession of the premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; that portion of the leasing commission paid by Landlord and applicable to the unexpired term of this lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of ten (10%) per cent per annum. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (a) taking possession of the Premises and recovering from Tenant the amount specified in this paragraph, or (b) proceeding under the provisions of the following Article 24.b. 24.b. Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent (PAGE 3--OFF. BLDG.) as it becomes due hereunder. 24.c. Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decision of the State in which the Premises are located. 25. EMINENT DOMAIN. If more than twenty-five (25%) per cent of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, either party hereto shall have the right, at its option, to terminate this Lease, and Landlord shall be entitled to any and all income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such public or quasi-public use or purpose, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. If either less than or more than twenty-five (25%) per cent of the Premises is taken, and neither party elects to terminate as herein provided, the rental thereafter to be paid shall be equitably reduced. If any part of the Building other than the Premises may be so taken or appropriated, Landlord shall have the right at its option to terminate this Lease and shall be entitled to the entire award as above provided. 26. OFFSET STATEMENT. Tenant shall at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchas??? or encumbrancer of all or any portion of the real property of which the Premises are a part. 27. PARKING. Tenant shall have the right to use in common with other tenants or occupants of the Building the parking facilities of the Building, if any, subject to the monthly rates, rules and regulations, and any other charges of Landlord for such parking facilities which may be established or altered by Landlord at any time or from time to time during the term hereof. Tenant's prorata share of parking is six (6) free, non-reserved spaces. 28. AUTHORITY OF PARTIES. 28.a. Corporate Authority. If Tenant is a corporation, the corporation represents and warrants that the individual executing the Lease is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 28.b. Limited Partnerships. If the Landlord herein is a limited partnership, it is understood and agreed that any claims by Tenant on Landlord shall be limited to the assets of the limited partnership, and furthermore, Tenant expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 29. GENERAL PROVISIONS. (i) Plats and Riders. Clauses, plats and riders, if any, signed by the Landlord and the Tenant and endorsed on or affixed to this Lease are a part hereof. (ii) Waiver. The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of the acceptance of such rent. (iii) Notices. All notices and demands which may or are to be required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by the Landlord to the Tenant shall be sent by United States Mail, postage prepaid, addressed to the Tenant at the Premises, or to such other place as Tenant may from time to time designate in a notice to the Landlord. All notices and demands by the Tenant to the Landlord shall be sent by United States Mail, postage prepaid, addressed to the Landlord at the office of the Building, or to such other person or place as the Landlord may from time to time designate in a notice to the Tenant. (iv) Joint Obligation. If there be more than one Tenant the obligations hereunder imposed upon Tenants shall be joint and several. (v) Marginal Headings. The marginal headings and Article titles to the Articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (vi) Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (vii) Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (viii) Recordation. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the prior written consent of the other party. (ix) Quiet Possession. Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder. Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. (x) Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Tenant shall not be received by Landlord or Landlord's designee with ten (10) days after written notice that said amount is past due, then Tenant shall pay to Landlord a late charge equal to six (6%) per cent of such overdue amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of the late payment by Tenant. Acceptance of such late charges by the Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. (xi) Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter convered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease ?????? amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (xii) Inability to Perform. Notwithstanding the provisions of Paragraph 4, Page 1A, this Lease and the obligations of the Tenant hereunder shall not be affected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Landlord. (xiii) Attorneys' Fees. In the event of any action or proceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorneys' fees. (xiv) Sale of Premises by Landlord. In the event of any sale of the Building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. (xv) Subordination, Attornment. Upon request of the Landlord, Tenant will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the land and Building of which the Premises are a part, and upon any buildings hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord covering the premises, the Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. The provisions of this Article to the contrary notwithstanding, and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. (xvi) Name. Tenant shall not use the name of the Building or of the development in which the Building is situated for any purpose other than as an address of the business to be conducted by the Tenant in the premises. (xvii) Separability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (xviii) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (xix) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located. (xx) Signs and Auctions. Tenant shall not place any sign upon the Premises or Building or conduct any auction thereon without Landlord's prior written consent. (PAGE 4--OFF. BLDG.) 30. BROKERS. Tenant warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease excepting only CB Commercial Real Estate Group, Inc. and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 31. DEFAULT BY LANDLORD: Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering Premises, whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. In no event shall Tenant have the right to terminate this Lease as a result of Landlord's default, and Tenant's remedies shall be limited to damages and/or an injunction. 32. BUILDING PLANNING: Landlord shall have the right at any time, without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building and the Project and to change the name, number, or designation by which the Building or the Project is commonly known. In the event Landlord determines that the efficient leasing or operation of the Building or the Project requires relocation of Tenant's Premises to another part of the Building or the Project, Landlord shall have the right, upon not less than sixty (60) days' prior written notice to Tenant, to substitute other premises within the Building or the Project for the Premises defined in this Lease, provided that such substitute premises shall be at least as large as the Premises defined in this Lease. In such event, Tenant shall vacate the Premises defined in this Lease and occupy such substitute premises under all of the terms and conditions of this Lease no later than the date stated in Landlord's notice. Landlord shall bear all reasonable direct expenses of relocating Tenant's furnishings, trade fixtures, and equipment to substitute premises including, without limitation, the cost of installation of Tenant's then existing telephone system in the substitute premises. The parties hereto have executed this Lease at the place and on the dates specified immediately adjacent to their respective signatures. If this Lease has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Lease or the transactions relating thereto. SPORTS ARENA VILLAGE, LTD., A LIMITED PARTNERSHIP By (Sig.) ---------------------------------------- Address c/o The Wheatcroft Company By (Sig.) ---------------------------- ---------------------------------------- 404 Camino Del Rio South, Suite 106 "LANDLORD" - ------------------------------------ San Diego, CA 92108 TECHNOLOGY APPLICATIONS & SERVICE COMPANY, ------------------------------------------ A DELAWARE CORPORATION By --------------------------------------- BY (Sig.) Address 4055 Hancock Street, Suite 125 --------------------------------------- ------------------------------- David Knott, Controller San Diego, CA 92110 "TENANT" (PAGE 5--OFF. BLDG.) RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the Building without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. All approved signs or lettering on doors shall be printed, painted affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises; provided, however, that Landlord may furnish and install a Building standard window covering at all exterior windows. Tenant shall not without prior written consent of Landlord cause or otherwise sunscreen any window. 2. The sidewalks, halls, passages, exits, entrances, elevators and stairwells shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress and egress from their respective Premises. 3. Tenant shall not alter any lock or install any new or additional locks or any bolts on any doors or windows of the Premises. 4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees shall have caused it. 5. Tenant shall not overload the floor of the Premises or in any way deface the Premises or any part thereof. 6. No furniture, freight or equipment of any kind shall be brought into the Building without the prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribed the weight, size and position of all safes and other heavy equipment brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such site or property from any cause and all damage done to the Building by moving or maintaining any such site of other property shall be repaired at the expense of Tenant. 7. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building. 8. No cooking shall be done or permitted by any Tenant on the Premises, nor shall the Premises be used for the storage of merchandise, for washing clothes, for lodging, or for any improper, objectionable or immoral purposes. 9. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Landlord. 10. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the consent of Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 11. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. the following day, access to the Building, or to the halls, corridors, elevators or stairways in the Building, or to the Premises may be refused unless the person seeking access is known to the person or employees of the Building in charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, the Landlord reserves the right to prevent access to the Building during the continuance of the same by closing of the doors or otherwise for the safety of the tenants and protection of property in the Building and the Building. 12. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 13. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of the Landlord. 14. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Premises are a part. 15. Tenant shall not disturb, solicit, or canvas any occupant of the Building and shall cooperate to prevent same. 16. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 17. Landlord shall have the right to control and operate the public portions of the Building, and the public facilities, and heating and air conditioning, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit or the tenants generally. 18. All entrance doors in the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed except for normal ingress and egress from the Premises. (PAGE 6--OFF. BLDG.) ADDENDUM TO THAT CERTAIN OFFICE BUILDING LEASE DATED MAY 25, 1995, BY AND BETWEEN SPORTS ARENA VILLAGE, LTD., A LIMITED PARTNERSHIP, AS LANDLORD, AND TECHNOLOGOY APPLICATIONS & SERVICE COMPANY, A DELAWARE CORPORATION, AS TENANT. 33. TENANT IMPROVEMENTS The Landlord shall provide, at the Landlord's expense, turnkey tenant improvements subject to the attached Exhibit "A" space plan. Said improvements shall utilize building standard materials and finishes. Any additional tenant improvement work shall be performed by the Landlord at the Tenant's sole cost and expense. Paint, wallcovering, and carpet color selections shall be made by the Tenant from an offering provided by the Landlord. All tenant improvement work shall be performed by the Landlord's contractor. The costs associated with Landlord provided space planning, working drawings, and necessary City of San Diego tenant improvement building permits shall be paid for by the Landlord. - ---------------------------------- --------------------------------------- LANDLORD'S INITIALS TENANT'S INITIALS EXHIBIT "A" SPACE PLAN insert diagram SUITE 125 1,543 rentable square feet (Not to full 1/8" = 1' scale due to FAX reduction) INITIAL INITIAL SUPPLEMENT TO OFFICE BUILDING LEASE This supplement is entered into as of the 25th day of May, 1995, by and between SPORTS ARENA VILLAGE LTD., (herein called "Landlord") and Technology Applications & Service Company (herein called "Tenant"), as a Supplement to that certain Office Building Lease between Landlord and Tenant dated May 25, 1995 with respect to space in the Sports Arena Village Office Building. Said Office Building Lease shall hereinafter be called the "Lease", and all terms referenced herein shall have the same meaning as specified in the Lease. WHEREFORE, the parties hereto hereby agree as follows: 1. DEFINITION OF REAL ESTATE TAXES 2. GROUND LEASE The parties acknowledge and understand that Landlord is the Lessee under that certain Lease Agreement with the City of San Diego as Lessor covering the underlying ground on which the office building is constructed, and the improvements constructed thereon, pursuant to that certain Lease Agreement dated December 28, 1973, filed on January 2, 1974 in the Office of the City Clerk as document number 745923 between the City of San Diego and James R. Simpson, as amended by that certain First Amendment to Lease Agreement between the City of San Diego and Lion Property Company dated November 17, 1976 (hereinafter collectively referred to as the "City Lease"). The term of the City Lease expires on December 31st in the year 2029. Landlord hereby represents and warrants that the Office Building Lease and this Supplement do not violate any provisions of the City Lease and are not in conflict with any of the provisions of the City Lease. As long as Tenant is not in default under any of the provisions of the Office Building Lease and this Supplement, Landlord shall perform all obligations as Lessee under the City Lease so that Tenant shall have quiet enjoyment pursuant to the terms of the Shopping Center Lease. 3. RIGHTS AND OBLIGATIONS UNDER CITY LEASE If for any reason, the City Lease is terminated prior to the expiration of its scheduled term, whether by reason of default, cancellation, surrender or for any other reason, so long as Tenant under the Office Building Lease is not in default, City shall honor the rights of Tenant under said Office Building Lease. 3. (Continued) Tenant shall throughout the term of the Office Building Lease, and any extensions thereof, promptly and diligently perform all of Tenant's obligations thereunder, with the City of San Diego, as Lessor under the City Lease, being a third party beneficiary of those obligations with the right to enforce said obligations against Tenant. If at any time the City of San Diego or its nominee shall acquire the interests of the Lessee under the City Lease, Tenant shall attorn to the City of San Diego or its nominee as the Landlord under the Office Building Lease. 4. INSURANCE All insurance policies required to be maintained by Tenant shall (1) contain an endorsement requiring not less than thirty (30) days prior written notice from the insurance company to Tenant, Landlord, Landlord's lender, and the City of San Diego before cancellation or change in the coverage, scope or amount of the policy, and (2) contain provisions naming the Landlord, the Landlord's lender, and the City of San Diego as additional insured, as their interests may appear. 5. DAMAGE TO PREMISES In the event of any fire or other damage to the Premises, Tenant shall give written notice thereof to Landlord within one (1) week after the occurrence of such damage. 6. RATIFICATION Except as expressly set forth in this Supplement, all terms and provisions of the Office Building Lease referenced above are hereby ratified, confirmed and in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. TECHNOLOGY APPLICATIONS & SERVICE COMPANY TENANT: By:________________________________________________________ SPORTS ARENA VILLAGE, LTD., A LIMITED PARTNERSHIP LANDLORD: By:________________________________________________________ EX-10.84 6 LEASE AGREEMENT THIS LEASE AGREEMENT dated August ____, 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES, a Florida general partnership, with its principal office at P. O. Box 060250, Palm Bay, Florida 32906, hereinafter called the Lessor, and OMI ACQUISITION CORP., a Delaware corporation, with its principal office at 270 Motor Parkway, P. O. Box 11368, Hauppauge, New York 11788, hereinafter called the Lessee. W I T N E S S E T H: The Lessor hereby leases to the Lessee and Lessee hereby leases from the Lessor, the following described property, sometimes hereinafter referred to as the leased premises, to wit: Space designated as a portion of the Woodlake Commerce Park Building 2330, Suite 2 comprising approximately 35,510 square feet, as shown on Exhibit "A" attached hereto and made a part hereof, being located at the following address: 2330 Commerce Park Drive, N.E., City of Palm Bay, County of Brevard, State of Florida, in "as is" condition, subject only to the Lessor's demolition obligation in Paragraph 2 below. 1. TERM: Lessee to have and to hold above described premises for a term of ten (10) year(s) commencing on the 15th day of August, 1995, on the terms and conditions as set forth herein. 2. USE AND POSSESSION: It is understood that the leased premises are to be used for the design, development and production of high technology products, and for such other uses which comply with all applicable regulations regarding the use and operation of the business located in the leased premises, and for no other purpose without prior written consent of Lessor. Lessor represents that as of the date of this lease, the premises can lawfully be used for such purpose. Lessee shall not use the leased premises for any unlawful purpose or so as to constitute a nuisance. Lessee shall be responsible for all improvements, permitting, design work and any other items necessary to complete the leased premises for its occupancy, except that Lessor agrees to perform any demolition work within the 8,820 square feet designated and currently being used as office space, as requested by Lessee pursuant to plans to be submitted to local permitting agencies by Lessee for making improvements to the leased premises prior to occupancy. Lessee shall accept possession of the leased premises upon completion of such demolition work by Lessor. Lessor shall complete the demolition work by August 15, 1995. The Lessee, at the expiration of the term, shall deliver up the leased premises in good repair and condition, damages beyond the control of the Lessee, reasonable use, ordinary decay, fire and casualty damages, Lessor's repair obligations, wear and tear excepted. 3. RENT: Lessee covenants and agrees to pay, together with any and all sales and use taxes levied upon the use and occupancy of the leased premises, as set forth in Paragraph 6, on August 15, 1995 and September 15, 1995, to Lessor in advance, a base rent of $3,675.00, plus 6% sales tax in the amount of S220.50, for a total monthly rent of $3,895.50. This represents the phased move in rent contemplated by the parties. Thereafter Lessee hereby covenants and agrees to pay, together with any and all sales and use taxes levied upon the use and occupancy of the leased premises, as set forth in Paragraph Six, during the term hereof, to the Lessor, in advance and beginning on October 15, 1995 and on the fifteenth day of each and every month thereafter for the next twelve month period, a base rent of $14,795.83, plus 6% tax in the amount or S887.75, for a total monthly rent of S15,683.58. 4. RENT PAYMENT: Rent will be paid to Lessor at P. O. Box 060250, Palm Bay, Florida 32906-0250. The obligation to pay rent under Paragraph Three shall be in addition to "additional rent" as provided for in this Lease. 5. RENT ADJUSTMENT: On January 1st of each year, beginning January 1, 1997, the monthly rental provided in Paragraph Three, or as previously adjusted, shall be increased by the "rent adjustment," which shall be a cumulative 4%. 6. SALES AND USE TAX: The Lessee hereby covenants and agrees to pay monthly, as additional rent, any sales, use or other tax, excluding State and/or Federal Income Tax, now or hereafter imposed upon rents by the United States of America, the State, or any political subdivisions thereof, to the Lessor, notwithstanding the fact that such statute, ordinance or enactment imposing the same may endeavor to impose the tax on the Lessor. 7. NOTICES: For purpose of notice or demand, the respective parties shall be served by certified or registered mail, return receipt reguested, addressed to the Lessee or to the Lessor at their respective principal office addresses as set forth herein. Additional notice to Lessee shall be to Robert Russo, Vice-President and General Manager, Photronics, Inc., 270 Motor Parkway, Hauppauge, New York 11788, until otherwise advised by Lessee. 8. ORDINANCES AND REGULATIONS: The Lessee hereby covenants and agrees to comply with all the rules and regulations of the Board of Fire Underwriters, Officers or Boards of the City, County or State having jurisdiction over the leased premises, and with all ordinances and regulations or governmental authorities wherein the leased premises are located, at Lessee's sole cost and expense, but only insofar as any of such rules, ordinances and regulations pertain to the specific manner in which the Lessee shall use the leased premises; the obligation to comply in every other case, and also all cases where such rules, regulations and ordinances require repairs, alterations, changes or additions to 2 the building (including the leased premises) or building equipment, or any part of either, being hereby expressly assumed by Lessor, and Lessor convenants and agrees promptly and duly to comply with all such rules, regulations and ordinances with which Lessee has not herein expressly agreed to comply. 9. SIGNS: The Lessee will not place any signs or other advertising matter or material on the exterior, or on the interior where possible to be seen from the exterior, of the leased premises or of the building in which the leased premises are located, without the prior written consent of the Lessor. Any lettering or signs placed on the interior of said building shall be for directional purposes only, and such signs and lettering shall be of a type, kind, character and description to be approved by Lessor. All signs shall be consistent with the common character of signs within the commerce park where the leased premises are located. If Lessor fails to provide Lessee with notice that any proposed signs are approved within thirty (30) days of receipt by Lessor of a request for signs, such inaction shall constitute consent by Lessor. However, notwithstanding any consent by Lessor, any signs, and the installation thereof, must comply with any applicable regulations regarding signs. 10. SERVICES: Lessor shall provide a reasonable amount of free parking for Lessee's employees on Lessor's parking area adjacent to the building in which the leased premise are situated. Lessor shall provide Lessee with the following designated parking spaces: (a) Six (6) reserved visitor spaces; (b) Two (2) reserved handicap spaces; and (c) Eight (8) reserved executive spaces. 11. ALTERATIONS: (a) The parties acknowledge that Lessee will be making alterations and improvements prior to occupancy under the terms of this Lease, and Lessor approves of the architectural plans attached hereto. If Lessee, after due diligence, is unable to obtain a building permit to perform said alterations and improvements pursuant to said plan, or with reasonable modifications thereto, or after completion of the work, is unable to obtain a certificate of occupancy for reasons unrelated to the work performed pursuant to said plans, then Lessee may terminate this Lease. This right to terminate applies only to the initial alterations and improvements to the leased premises pursuant to the plans attached hereto. (b) Lessee, by occupancy and possession hereunder, accepts the leased premises as being in good repair and condition. Lessee shall maintain the leased premises and every part thereof in good condition, damages by causes beyond the control of the Lessee, reasonable use, ordinary decay and wear and tear, fire and casualty and Lessor repair obligations excepted. Lessee shall not make or suffer to be made any alterations, additions or improvements to or of the leased premises or any part thereof 3 without prior written consent of Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. If Lessor fails to provide Lessee with notice of whether such alterations, additions or improvements are approved within thirty (30) days of receipt by Lessor of a request for same, such inaction shall constitute approval by Lessor. In the event Lessor consents to the proposed alterations, additions, or improvements, the same shall be at Lessee's sole cost and expense, and Lessee shall hold the Lessor harmless on account of the cost thereof. Any such alterations shall be made at such times in such manner as not to unreasonably interfere with the occupation, use and enjoyment of the remainder of the building by the other tenants thereof. (c) If required by Lessor, any alterations shall be removed by Lessee upon the termination or sooner expiration of the term of this Lease and Lessee shall repair damage to the premises caused by such removal, all at Lessee's cost and expense. All alterations, additions and improvements shall comply with any and all regulations of all regulatory agencies having jurisdiction thereof. 12. QUIET ENJOYMENT: The Lessor covenants and agrees that Lessee, on paying said monthly rent and performing the covenants herein, shall and may peaceably and quietly hold and enjoy the said leased premises and common areas, including but not limited to parking areas, sidewalks, entrances, exits, lobbies, restrooms, and lounges for the term aforesaid. 13. LESSOR'S RIGHT TO INSPECT AND DISPLAY: The Lessor shall have the right, during normal business hours of Lessee on twenty-four (24) hours notice, to enter the leased premises for the purpose of examining or inspecting same and of making such repairs or alterations therein as the Lessor shall deem necessary. Any such repair will be made so as to minimize interference with Lessee's business. The notice and hour requirements shall be excused in the event of an emergency. The Lessor shall also have the right to enter the leased premises at all reasonable hours for the purpose of displaying said premises to prospective tenants within ninety days prior to termination of this Lease. The parties acknowledge that Lessee may be performing work for the United States of America that require security clearances for entry to certain areas of the leased premises. Lessor agrees to comply with any reasonable requirements necessary for Lessor to obtain access to these areas, it being agreed that Lessor shall not be deprived access because of such fact. 14. DESTRUCTION OF PREMISES: (a) If the leased premises are totally destroyed by fire or other casualties, or partially damaged so as to materially affect the ability of Lessee to carry on its business, both the Lessor and Lessee shall have the option of terminating this Lease or any renewal thereof, upon giving written notice at any time 4 within thirty days from the date of such destruction, and if the Lease be so terminated, all rent shall cease as of the date of such destruction and any prepaid rent shall be refunded. (b) If such leased premises are partially damaged by fire or other casualty, or totally destroyed thereby and neither party elects to terminate this Lease within the provisions of Paragraph (a) above or (c) below, then the Lessor agrees, at Lessor's sole cost and expense, to restore the leased premises to a kind and quality substantially similar to that immediately prior to such destruction or damage. Said restoration shall be commenced within a reasonable time and completed without delay on the part of the Lessor, and in any event shall be accomplished within one hundred eighty (180) days from the date of the fire or other casualty. In such case, all rents paid in advance shall be proportioned as of the date of damage or destruction and all rent thereafter accruing shall be equitable and proportionately suspended and adjusted pending completion of rebuilding, restoration or repair, except that in the event the destruction or damage is so extensive as to make it unfeasible for the Lessee to conduct Lessee's business on the leased premises, the rent shall be completely abated until the leased premises are restored by the Lessor or until the Lessee resumes use and occupancy of the leased premises for the conduct of business, whichever shall first occur. The Lessor shall not be liable for any inconvenience or interruption of business of the Lessee occasioned by fire or other casualty. (c) If the Lessor undertakes to restore, rebuild or repair the premises, and such restoration, rebuilding or repair is not accomplished within one hundred eighty (180) days, the Lessee shall have the right to terminate this Lease by written notice to the Lessor within thirty (30) days after expiration of said one hundred eighty (180) day period. (d) Lessor shall not be liable to carry fire, casualty or extended damage insurance on the person or property of the Lessee or any person or property which may now or hereafter be placed in the leased premises. 15. CONDEMNATION: If during the term of this Lease or any renewal thereof, the whole of the leased premises, or such portion thereof as will materially affect the use of the leased premises for the purpose leased, be condemned by public authority for public use, then, in either event, the term hereby granted shall cease and come to an end as of the date the Lessee is required to vacate the leased premises by either Lessor or the condemnor. Upon such occurrence, the rent shall be proportioned as of such date and any prepaid rent shall be returned to the Lessee. The Lessor shall be entitled to the entire award for such taking except for any statutory claim on the Lessee for injury, damage or destruction of Lessee's business accomplished by such taking. If a portion of the leased premises is taken or condemned by public authority for public use so as not to materially affect the 5 ability of the Lessee to use its remaining portion of the leased premises for the purposes leased, this Lease will not be terminated but shall continue. In such case, the rent shall be equitably and fairly reduced or abated for the remainder of the term in proportion to the amount of the leased premises taken. In no event shall the Lessor be liable to the Lessee for any business interruption, diminution in use or for the value of any unexpired term of this Lease. 16. ASSIGNMENT AND SUBLEASE: The Lessee covenants and agrees not to encumber or assign this Lease or sublet all or any part of the leased premises without the written consent of the Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. Lessee shall provide Lessor with written notice of any proposed assignment or sublease at least thirty (30) days prior to any proposed effective date of assignment or sublease. If Lessor fails to provide Lessee with notice of whether such assignment or sublease is approved within thirty (30) days of receipt by Lessor of such request, such inaction by Lessor shall constitute consent. Notwithstanding the foregoing, Lessee has the right to assign or sublet this Lease as long as the guarantee executed by Diagnostic Retrieval Systems, Inc. remains in full force and effect and said company has a financial worth at least comparable to that on the date this Lease and Guarantee are executed. Any such assignment shall in no way relieve the Lessee from any obligations hereunder for the payment of rents or the performance of the conditions, covenants and provisions of this Lease. In no event shall Lessee assign or sublet the leased premises for any terms, conditions and covenants other than those contained herein, except that Lessee may assign or sublet to another person for different rent or a different use as long as such use complies with all applicable regulations regarding the use and operation of businesses located in the leased premises. In no event shall this Lease be assigned or be assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges hereunder be an asset of Lessee under any bankruptcy, insolvency or reorganization proceedings. Lessor shall not be liable nor shall the leased premises be subject to any mechanics, materialmans, or other type liens and Lessee shall keep the premises and property in which the leased premises are situated free from any such liens caused by acts of Lessee and shall indemnify Lessor against and satisfy any such liens which may obtain because of acts of Lessee notwithstanding the foregoing provision. 17. HOLDOVER: It is further covenanted and agreed that if the Lessee, any assignee or sublessee shall continue to occupy the leased premises after the termination of this Lease without prior written consent of the Lessor, such tenancy shall be Tenancy at Sufferance. Acceptance by the Lessor of rent after such termination shall not constitute a renewal of this Lease or consent to such occupancy nor shall it waive Lessor's right of reentry or any other right contained herein. 6 18. SUBORDINATION: Subject to the last sentence of this paragraph, this Lease shall be subject and subordinated at all times to the liens of any mortgages or deeds of trust in any amount or amounts whatsoever now existing or hereafter encumbering the leased premises, without the necessity of having further instruments executed by the Lessee to effect such subordination. Notwithstanding the foregoing, Lessee covenants and agrees to execute and deliver upon demand, such further instruments evidencing such subordination of this Lease to such liens of any such mortgages or deeds of trust as may be requested by Lessor. Lessor shall provide a non-disturbance agreement from the mortgagee holding the mortgage on the leased premises on or before November 15, 1995. So long as the Lessee hereunder shall pay the rent reserved and comply with, abide by and discharge the terms, conditions, covenants, and obligations on its part, to be kept and performed herein and shall attorn to any successor in title, notwithstanding the foregoing, the peaceable possession of the Lessee in and to the leased premises for the term of this Lease shall not be disturbed, in the event of the foreclosure of any such mortgage or deed of trust, by the purchaser at such foreclosure sale or such purchaser's successor in title. 19. INDEMNIFICATION: The Lessor shall not be liable for any damage or injury to any person or property whether it be the person or property of the Lessee, the Lessee's employees, agents, guests, invitees or otherwise by reason of Lessee's occupancy of the leased premises or because of fire, flood, windstorm, Acts of God or for any other reason unless caused by the intentional acts or gross negligence of Lessor. The Lessee agrees to indemnify and save harmless the Lessor, its agents, employees and contractors from and against any and all loss, damage, claim, demand, liability or expense by reason of damage to person or property which may arise or be claimed to have arisen as a result of the occupancy or use of said leased premises by the Lessee or by reason thereof or in connection therewith, or in any way arising on account of any injury or damage caused to any person or property on or in the leased premises providing, however, that Lessee shall not indemnify as to the loss or damage due to fault of Lessor. 20. CONSTRUCTION OF LANGUAGE: The terms lease, lease agreement or agreement shall be inclusive of each other, also to include renewals, extensions or modifications of this Lease. Words of any gender used in this Lease shall be held to include any other gender, and in the singular shall be held to include the plural and the plural to include the singular, when the sense requires. The paragraph headings and titles are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 7 21. DEFAULT: In the event the Lessee shall default in the payment of rent, those sums designated as additional rent or any other sums payable by the Lessee herein, and such default shall continue for a period of ten days from the date of written notice by Lessor to Lessee, or if the Lessee shall default in the performance of any other covenants or agreements of this Lease and such default shall continue for thirty days after written notice thereof (or if the default cannot be cured within thirty (30) days, that Lessee failed to diligently proceed to cure), or if the Lessee should become bankrupt or insolvent or any debtor proceedings be taken by or against the Lessee, then and in addition to any and all other legal remedies and rights, the Lessor may terminate this Lease and retake possession of the leased premises, or enter the leased premises and re-let the same without termination, in which later event the Lessee covenants and agrees to pay any deficiency after Lessee is credited with the rent thereby obtained less all repairs and expenses (including the expenses of obtaining possession), or the Lessor may resort to any two or more of such remedies or rights, and any other remedies provided by law except acceleration, and adoption of one or more such remedies or rights shall not necessarily prevent the enforcement of others concurrently or thereafter. Lessor shall be entitled to its landlord's lien provided by law. Lessor agrees to mitigate damages, if possible. The Lessee also covenants and agrees to pay reasonable attorney's fees and costs and expenses of the Lessor, including court costs, if the Lessor employs an attorney to collect rent or enforce other rights of the Lessor herein in event of any breach as aforesaid and the same shall be payable regardless of whether collection or enforcement is effected by suit or otherwise. In the event any litigation arises under this Agreement, the prevailing party shall be entitled to attorney's fees and costs, including attorney's fees for any appeal. 22. SUCCESSORS AND ASSIGNS: This Lease shall bind and inure to the benefit of the successors, assigns, heirs, executors, administrators and legal representatives of the parties hereto. 23. NON-WAIVER: No waiver of any covenant or condition of this Lease by either party shall be deemed to imply or constitute a further waiver of the same covenant or condition or any other covenant or condition of this Lease. 24. OPTION TO RENEW: Lessee is hereby granted an option to renew this lease for one additional term of five (5) years. Lessee shall, not less than ninety days prior to the end of the term hereof, by written notice to the Lessor, notify Lessor of its intention to exercise this option to renew. Failure of Lessee to serve such written notice of exercise of option on the Lessor shall terminate this option. Upon exercise of said option to renew, the lease term shall be extended for an additional five (5) years upon all of the terms and conditions of this lease, subject to any rent adjustments of Paragraph 5. However, there shall be no additional options to renew. 8 25. SECURITY DEPOSIT: The Lessee, concurrently with -the execution of this Lease, has deposited with the Lessor the sum of $20,000.00, the receipt being hereby acknowledged, which sum shall be retained by Lessor as security for the payment by the Lessee of the rent herein agreed to be paid and for the faithful performance of the covenants of this Lease. If at any time the Lessee shall be in default following notice and the expiration of any applicable grace period in any of the provisions of this Lease, the Lessor shall have the right to use said deposit, or so much thereof as may be necessary in payment of any rent in default aforesaid and/or in payment of any expense incurred by the Lessor in and about the curing of any default by said Lessee, and/or in payment of any damages incurred by the Lessor by reason of such default of the Lessee, or at the Lessor's option, the same may be retained by the Lessor in liquidation of part of the damages suffered by the Lessor by reason of the default of the Lessee. In the event that said deposit shall not be utilized for any such purpose, then such deposit shall be applied to the rent last due for the term of this Lease or any renewal term thereof. Said deposit shall not bear interest. 26. ADDITIONAL CHARGES: The Lessee shall pay to Lessor as additional rent on a monthly basis its pro rata share of all costs and expenses related to operating, managing, equipping, insuring, lighting, repairing, cleaning, decorating, preserving, altering, replacing, maintaining and enhancing building 1 and building 2 of the commerce park in which the leased property is located along with parking areas and other areas within the commerce park in which the buildings are located. Such costs and expenses shall include but not be 1imited to: pest extermination; inspection of equipment; inspection and repair of fire sprinkler and alarm service; removal of dirt and debris; planting, replanting and replacing flowers; landscaping; irrigation and supplies; all costs and expenses associated with maintaining lighting facilities and storm drainage and retention systems, whether on or off premises; electric service, sewage treatment plant and domestic water well, pump and similar costs; audit costs; all premiums for liability, loss of rents, property damage, fire and worker's compensation insurance; wages; unemployment taxes; social security taxes; personal property taxes; management fees; legal fees; solid waste charges; windows; maintenance, lining, bumpering, top coating and repairing all impervious surfaces; rental of machinery necessary to implement any of the foregoing services; and bank charges, along with real property taxes and assessments. Notwithstanding, Lessee shall not be obligated to pay any portion of capital items with the exception of parking lot expansion if hereafter required in writing by Lessee. Nothing contained herein shall be deemed or construed to modify or negate Lessor's obligations under that memorandum dated _______________. The only repair obligation of the Lessor is the exterior of the roof of the building and the structural portions of the building and leased premises, as long as such repair is not necessitated by the action of the Lessee, its employees, agents or contractors. 9 Current estimated monthly charges are as follows: (a) Woodlake Commerce Park CAM $ 103.57 (inc. 6% sales tax) (b) Building CAM $1811.01 (inc. 6% sales tax (c) Real Property taxes $1707.44 Copies of the proposed budget for the upcoming year are appended hereto. Lessee's pro rata percentage for the leased premises for determining Building CAM and Real Property taxes is 21.6%. This represents the Lessee's pro rata share determined by lease space of 35,510 square feet and tota1 building square feet of 164,500 square feet. Lessee's pro rata percentage for the Woodlake Commerce Park CAM is 4.52736%. This percentage is determined as follows: (i) the percentage of land comprising buildings 1 and 2 of Woodlake Commerce Park owned by Lessor in the entire Woodlake Commerce Park (20.96%) multiplied by (ii) the pro rata portion of CAM expenses (21.6%) (20.96%) x (21.6%) - 4.52736%. 28. IMPACT FEE: It is understood that there is currently on record with the City of Palm Bay projected water and sewer uses with regard to the demised premises. Leasor has previously paid to the City of Palm Bay an impact fee based upon such projected usage. Lessor has been advised by the City of Palm Bay that Lessee's proposed use wi11 not require the additional payment of impact fees. However, should the actual usage of water and sewer by Lessee hereunder increase over and above the projected usage, and should the City of Palm Bay assess an additional impact fee against the Lessor as a result of such increased usage, Lessee shall be and become responsible for any increased impact fee. Such increase shall be due and payable as additiona1 rent hereunder and shall be paid by Lessee to Lessor within twenty (20) days after submission of invoice for said amount. 29. PAST DUE RENT: If Lessee shall fail to pay any rents, additional rents or other charges characterized herein as additiona1 rent when the same become due and payable, such unpaid amounts shal1 bear interest from the due date thereof to the date of payment at the rata of five percent (5%} until paid. The provisions herein for late payment service charges shall not be construed to extend the dates for payment of any sums required to be paid by Lessee hereunder or to relieve Lessee of its obligation to pay all such sums at the time or times herein stipulated. Notwithstanding the imposition of any charges pursuant to this section, Lessee shall be in default under this Lease if any or all payments required to be made by Lessee are not made at the time therein stipulated and neither the demand nor collection by Lessor 10 of such late payment service charges shall be construed as a cure for such default on the part of the Lessee. Lessor permits a ten (10) day grace period. 30. This information is being provided as required by Florida Statute 404.056: RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. 31. VENUE. In the event any litigation arises out of this Agreement, venue shall be in a court of competent jurisdiction in Brevard County, Florida. 32. SEVERABILITY. In the event that any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Agreement shall be valid and be enforced by the fullest extent permitted by law. 33. REPAIRS AND MAINTENANCE: Lessor shall not be liable to Lessee for any repairs necessitated by some act or neglect of Lessee or any Permittee, or any contractor, agent, employee, invitee of any of the aforesaid or, for any damage to merchandise, trade fixtures, or personal property of Lessee in the leased premises caused by water leakage from the roof, water lines, sprinklers or heating and air conditioning equipment. Lessee shall be liable for all repairs and replacements, ordinary and extraordinary, other than those for which Lessor is responsible, and shall maintain in the leased premises in good order and repair, clean, sanitary and safe, including the replacement and maintenance of equipment, fixtures, improvements, floor covering, the exterior and interior portions of all doors, door locks, security gates and windows, plumbing and sewage facilities, heating and air conditioning equipment, walls, ceilings, and all plate glass. Lessee shall, as part of its maintenance and repair obligations hereunder, enter into a service contract with a local, approved contractor for service, maintenance and repair of all heating, ventilation and air conditioning equipment within and servicing the leased premises, which shall provide for servicing by such contractor no less often than quarterly. A copy of such contract shall be delivered to the Lessor annually. If Lessee refuses or neglects to make repairs and/or maintain the leased promises, or any part thereof, in a manner reasonably satisfactory to Lessor, Lessor shall have the right, upon giving Lessee 11 reasonable written notice of its election to do so, to make repair or perform such maintenance on behalf of and for the account of Lessee. In such event, such work shall be paid for by Lessee as additional rental promptly upon receipt of a bill therefor. Lessee further agrees to paint the interior of the leased premises when necessary in order to maintain at all times a clean and sightly appearance. Nothing herein shall imply any duty on Lessor to do any work which Lessor is not specifically and expressly required to perform under this Lease or which, under any provisions of this Lease, Lessee may be required to perform; and, the performing thereof by Lessor shall not constitute a waiver of Lessee's default in failing to perform the same. Lessee acknowledges that the foregoing provisions of this paragraph shall apply and become effective from and after the date Lessee or its agents or contractors enter the leased premises or undertake activities permitted hereunder. Lessee shall indemnify Lessor against, and hold it harmless from, any claims, demands, or actions against Lessor or its agents, employees or contractors for losses or damages incurred by Lessor or its agents, employees or contractors arising out of or in any way connected with Lessee's failure to perform its obligations or observe any covenants under this paragraph. 34. HAZARDOUS SUBSTANCES: The term "Hazardous Substances" as used in this Lease shall include, without limitation: flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. Lessee shall not cause or permit to occur any violation of any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under or about the premises arising from Lessee's use or occupancy therein, nor shall Lessee cause or permit the use, generation, release, manufacture, refinement, production, processing, storage or disposal of any Hazardous Substance which violates any federal, state or local law, ordinance or regulation now or hereafter enacted related to environmental conditions without Lessor's prior written consent, which consent may be withdrawn, conditioned, or modified by Lessor in its sole and absolute discretion. Lessee shall indemnify, defend and hold Lessor, its respective officers, directors, beneficiaries, shareholders, partners, agents, and employees harmless from all fines, suits, procedures, claims, clean-up and actions of every kind, and all costs associated therewith, including attorney's and consultant's fees, arising out of, or in any way connected with, any deposit, spill, discharge or other release of Hazardous Substances by Lessee, at or from the premises, or which arises at any time from Lessee's use or occupancy of the premises, or from Lessee's 12 failure to comply with or satisfy government required action on the matter. Lessee's obligations and liabilities under this paragraph shall survive the termination of this Lease. 35. CONFIDENTIALITY: Lessee shall not disclose the terms of this agreement to any person except on a need to know basis. IN WITNESS WHEREOF, Lessee and Lessor have caused this instrument to be executed as of the date first above written, by their respective officers or parties thereunto duly authorized. Signed, sealed and delivered Lessee: OMI ACQUISITION CORP. in the presence of: (Sig) (Sig) - ----------------------------- By -------------------------- Secretary (Sig) - ----------------------------- Title ----------------------- Attest ---------------------- Secretary (Corporate Seal) Signed, sealed and delivered in the presence of: Lessor: SUTTON PROPERTIES (Sig) - ---------------------------- (Sig) (Sig) - ---------------------------- ----------------------------- Authorized Agent for Sutton Properties 13 GUARANTEE In order to induce Lessor to execute the foregoing Lease (the "Lease") covering 35,510 square feet of space set forth in the foregoing Lease, and dated August , 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES and OMI ACQUISITION CORP., to which this Guarantee is an integral part thereof, the undersigned hereby guarantees the payment and performance of and agrees to pay and perform as a primary obligor all liabilities, obligations and duties (including, but not limited to, payment of rent) imposed upon Lessee under the terms of the Lease, as if the undersigned had executed the Lease as Lessee thereunder as it relates only to the payment of rent, any sums identified as additional rent, any obligations, duties and liabilities under Paragraph 34 of the Lease and any fines, attorney's fees and any other expenses or costs incurred by Lessor for code violations and code violation proceedings initiated by any regulatory agency for code violations alleged to exist in operation and maintenance of Lessee's business and maintenance of the leased premises by Lessee. The undersigned hereby waives notice of acceptance of this guarantee and all other notices in connection herewith or in connection with the liabilities, obligations and duties guaranteed hereby, including notices of default by Lessee under the Lease, and waives diligence, presentment and suit on the part of Lessor in the enforcement of any liability, obligation or duty guaranteed hereby. The undersigned further agrees that Lessor shall not be first required to enforce against Lessee or any other person any liability, obligation or duty guaranteed hereby before seeking enforcement thereof against the undersigned. Suit may be brought and maintained against the undersigned by Lessor to enforce any liability, obligation or duty guaranteed hereby without joinder of Lessee or any other person. The liability of the undersigned shall not be affected by any indulgence, compromise, settlement or termination of the Lease to the extent that Lessee thereafter continues to be liable thereunder. Lessor and Lessee, without notice to or consent by the undersigned, may at any time and from time to time enter into such modifications, extensions, amendments or other covenants respecting the Lease as they may deem appropriate and the undersigned shall not be released thereby, but shall continue to be fully liable to the extent provided for herein for the payment and performance of all liabilities, obligations and duties of Lessee under the Lease as so modified, extended or amended. It is understood that other agreements similar to this agreement may be executed by other persons with respect to the Lease. This agreement shall be cumulative of any such other agreements and the liabilities and obligations of the undersigned hereunder shall in no event be affected or diminished by reason of such other agreements. In the event that Lessor secures other agreements similar to this agreement, or secures the signature of more than one guarantor to this agreement, or both, the undersigned agrees that Lessor, in Lessor's sole discretion, may bring suit against all guarantors of the Lease jointly and severally against any one or more of them, may compound or settle with any one or more of such guarantors for such consideration as Lessor shall deem proper, and may release one or more of such guarantors from any liability, obligation or duty guaranteed hereby. The undersigned further agrees that no such action shall impair the rights of Lessor to enforce the Lease against any remaining guarantor(s). The undersigned agrees that if Lessor shall employ counsel to present, enforce or defend any or all of the Lessor's rights or remedies hereunder, or defend any action brought by the undersigned, undersigned shall pay any reasonable attorney's fees and expenses incurred by Lessor in such connection. EXECUTED this ____ day of _____________, 199__, to be effective as of the date of the Lease. GUARANTOR: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. __________________________________ By: ______________________________ Its: __________________________________ __________________________________ Attest: Secretary (Corporate Seal) EX-10.85 7 LEASE AGREEMENT THIS LEASE AGREEMENT dated August __, 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES, a Florida general partnership, with its principal office at P. O. Box 060250, Palm Bay, Florida 32906, hereinafter called the Lessor, and OMI ACQUISITION CORP., a Delaware corporation, with its principal office at 270 Motor Parkway, P. O. Box 11368, Hauppauge, New York 11788, hereinafter called the Lessee. W I T N E S S E T H: The Lessor hereby leases to the Lessee and Lessee hereby leases from the Lessor, the following described property, sometimes hereinafter referred to as the leased premises, to wit: Space designated as a portion of the Woodlake Commerce Park Building 2330, Suite 2 comprising approximately 4,000 square feet to be added to Suite 2 as shown on Exhibit "A" hereto or which may be designated by another suite number upon completion, being located at the following address: 2330 Commerce Park Drive, N.E., City of Palm Bay, County of Brevard, State of Florida. 1. TERM: Lessee to have and to hold above described premises commencing on the 15th day of November, 1995, and terminating on August 14, 2005, on the terms and conditions as set forth herein. 2. USE AND POSSESSION: It is understood that the leased premises are to be used for the design, development and production of high technology products, and for such other uses which comply with all applicable regulations regarding the use and operation of the business located in the leased premises, and for no other purpose without prior written consent of Lessor. Lessor represents that as of the date of this lease, the premises can lawfully be used for such purpose. Lessee shall not use the leased premises for any unlawful purpose or so as to constitute a nuisance. Lessor shall commence construction of such space immediately upon execution of this Lease and approval by Lessor and Lessee of architectural plans prepared by Holeman/Suman Architects and shall substantially complete the same and obtain a certificate of occupancy for the leased premises by November 15, 1995. Lessor shall provide Lessee with a turnkey space. Lessee shall accept possession of the leased premises upon issuance of a certificate of occupancy for the leased premises and substantial completion of such leased premises. Lessor will warrant workmanship and materials for a period of one year after certificate of occupancy. The Lessee, at the expiration of the term, shall deliver up the leased premises in good repair and condition, damages beyond the control of the Lessee, reasonable use, ordinary decay, fire and casualty damages, Lessor's repair obligations, wear and tear excepted. 3. RENT: Lessee hereby covenants and agrees to pay, together with any and all sales and use taxes levied upon the use and occupancy of the leased premises, as set forth in Paragraph Six, during the term hereof, to the Lessor, in advance and beginning on November 15, 1995, or later if Lessor's work has not been substantially completed or a certificate of occupancy has not been obtained, and on the first day of each and every month until paid in full as set forth herein. Monthly rent under this Lease shall be established based upon the total project costs to Lessor. These costs shall include, but not be limited to, engineering and other professional fees, all permitting fees, any impact fees, construction costs, surveys, site work and plans. Said costs will not exceed the sum of $200,000.00. Lessor shall provide satisfactory evidence to Lessee of the amount of costs incurred and shall keep Lessee advised on a periodic basis as to the amount incurred to date. It is acknowledged and agreed that Lessor will finance all such costs using a ten (10) year amortization. The rent hereunder shall be equal to the monthly payments, including interest at the interest rate charged to Lessor by Lessor's lender, plus any sales and use taxes referred to above. Upon the satisfaction of the loan, i.e., ten year amortization at the interest rate charged to Lessor by Lessor's lender, Lessee shall not be obligated to pay rent for the leased space. This termination of rent will not affect the obligation of Lessee to continue to pay any "additional rent" as provided for elsewhere in this Lease. 4. RENT PAYMENT: Rent will be paid to Lessor at P. O. Box 060250, Palm Bay, Florida 32906-0250. The obligation to pay rent under Paragraph Three shall be in addition to "additional rent" as provided for in this Lease. 5. RENT ADJUSTMENT: deleted 6. SALES AND USE TAX: The Lessee hereby covenants and agrees to pay monthly, as additional rent, any sales, use or other tax, excluding State and/or Federal Income Tax, now or hereafter imposed upon rents by the United States of America, the State, or any political subdivisions thereof, to the Lessor, notwithstanding the fact that such statute, ordinance or enactment imposing the same may endeavor to impose the tax on the Lessor. 7. NOTICES: For purpose of notice or demand, the respective parties shall be served by certified or registered mail, return receipt requested, addressed to the Lessee or to the Lessor at their respective principal office addresses as set forth herein. Additional notice to Lessee shall be to Robert Russo, Vice-President and General Manager, Photronics, Inc., 270 Motor Parkway, Hauppauge, New York 11788, until otherwise advised by Lessee. 2 8. ORDINANCES AND REGULATIONS: The Lessee hereby covenants and agrees to comply with all the rules and regulations of the Board of Fire Underwriters, Officers or Boards of the City, County or State having jurisdiction over the leased premises, and with all ordinances and regulations or governmental authorities wherein the leased premises are located, at Lessee's sole cost and expense, but only insofar as any of such rules, ordinances and regulations pertain to the specific manner in which the Lessee shall use the leased premises; the obligation to comply in every other case, and also all cases where such rules, regulations and ordinances require repairs, alterations, changes or additions to the building (including the leased premises) or building equipment, or any part of either, being hereby expressly assumed by Lessor, and Lessor covenants and agrees promptly and duly to comply with all such rules, regulations and ordinances with which Lessee has not herein expressly agreed to comply. 9. SIGNS: The Lessee will not place any signs or other advertising matter or material on the exterior, or on the interior where possible to be seen from the exterior, of the leased premises or of the building in which the leased premises are located, without the prior written consent of the Lessor. Any lettering or signs placed on the interior of said building shall be for directional purposes only, and such signs and lettering shall be of a type, kind, character and description to be approved by Lessor. All signs shall be consistent with the common character of signs within the commerce park where the leased premises are located. If Lessor fails to provide Lessee with notice that any proposed signs are approved within thirty (30) days of receipt by Lessor of a request for signs, such inaction shall constitute consent by Lessor. However, notwithstanding any consent by Lessor, any signs, and the installation thereof, must comply with any applicable regulations regarding signs. 10. SERVICES: Lessor shall provide a reasonable amount of free parking for Lessee's employees on Lessor's parking area adjacent to the building in which the leased premise are situated. 11. ALTERATIONS: (a) Lessee, by occupancy and possession hereunder, accepts the leased premises as being in good repair and condition. Lessee shall maintain the leased premises and every part thereof in good condition, damages by causes beyond the control of the Lessee, reasonable use, ordinary decay and wear and tear, fire and casualty and Lessor repair obligations excepted. Lessee shall not make or suffer to be made any alterations, additions or improvements to or of the leased premises or any part thereof without prior written consent of Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. If Lessor fails to provide Lessee with notice of whether such alterations, additions or improvements are approved within thirty (30) days of receipt by Lessor of a request for same, such inaction shall constitute approval by Lessor. In the event Lessor consents to the proposed alterations, additions, or improvements, 3 the same shall be at Lessee's sole cost and expense, and Lessee shall hold the Lessor harmless on account of the cost thereof. Any such alterations shall be made at such times in such manner as not to unreasonably interfere with the occupation, use and enjoyment of the remainder of the building by the other tenants thereof. (b) If required by Lessor, any alterations shall be removed by Lessee upon the termination or sooner expiration of the term of this Lease and Lessee shall repair damage to the premises caused by such removal, all at Lessee's cost and expense. All alterations, additions and improvements shall comply with any and all regulations of all regulatory agencies having jurisdiction thereof. 12. QUIET ENJOYMENT: The Lessor covenants and agrees that Lessee, on paying said monthly rent and performing the covenants herein, shall and may peaceably and quietly hold and enjoy the said leased premises and common areas, including but not limited to parking areas, sidewalks, entrances, exits, lobbies, restrooms, and lounges for the term aforesaid. 13. LESSOR'S RIGHT TO INSPECT AND DISPLAY: The Lessor shall have the right, during normal business hours of Lessee on twenty-four (24) hours notice, to enter the leased premises for the purpose of examining or inspecting same and of making such repairs or alterations therein as the Lessor shall deem necessary. Any such repair will be made so as to minimize interference with Lessee's business. The notice and hour requirements shall be excused in the event of an emergency. The Lessor shall also have the right to enter the leased premises at all reasonable hours for the purpose of displaying said premises to prospective tenants within ninety days prior to termination of this Lease. The parties acknowledge that Lessee may be performing work for the United States of America that require security clearances for entry to certain areas of the leased premises. Lessor agrees to comply with any reasonable requirements necessary for Lessor to obtain access to these areas, it being agreed that Lessor shall not be deprived access because of such fact. 14. DESTRUCTION OF PREMISES: (a) If the leased premises are totally destroyed by fire or other casualties, or partially damaged so as to materially affect the ability of Lessee to carry on its business, both the Lessor and Lessee shall have the option of terminating this Lease or any renewal thereof, upon giving written notice at any time within thirty days from the date of such destruction, and if the Lease be so terminated, all rent shall cease as of the date of such destruction and any prepaid rent shall be refunded. (b) If such leased premises are partially damaged by fire or other casualty, or totally destroyed thereby and neither 4 party elects to terminate this Lease within the provisions of Paragraph (a) above or (c) below, then the Lessor agrees, at Lessor's sole cost and expense, to restore the leased premises to a kind and quality substantially similar to that immediately prior to such destruction or damage. Said restoration shall be commenced within a reasonable time and completed without delay on the part of the Lessor, and in any event shall be accomplished within one hundred eighty (180) days from the date of the fire or other casualty. In such case, all rents paid in advance shall be proportioned as of the date of damage or destruction and all rent thereafter accruing shall be equitable and proportionately suspended and adjusted pending completion of rebuilding, restoration or repair, except that in the event the destruction or damage is so extensive as to make it unfeasible for the Lessee to conduct Lessee's business on the leased premises, the rent shall be completely abated until the leased premises are restored by the Lessor or until the Lessee resumes use and occupancy of the leased premises for the conduct of business, whichever shall first occur. The Lessor shall not be liable for any inconvenience or interruption of business of the Lessee occasioned by fire or other casualty. (c) If the Lessor undertakes to restore, rebuild or repair the premises, and such restoration, rebuilding or repair is not accomplished within one hundred eighty (180) days, the Lessee shall have the right to terminate this Lease by written notice to the Lessor within thirty (30) days after expiration of said one hundred eighty (180) day period. (d) Lessor shall not be liable to carry fire, casualty or extended damage insurance on the person or property of the Lessee or any person or property which may now or hereafter be placed in the leased premises. 15. CONDEMNATION: If during the term of this Lease or any renewal thereof, the whole of the leased premises, or such portion thereof as will materially affect the use of the leased premises for the purpose leased, be condemned by public authority for public use, then, in either event, the term hereby granted shall cease and come to an end as of the date the Lessee is required to vacate the leased premises by either Lessor or the condemnor. Upon such occurrence, the rent shall be proportioned as of such date and any prepaid rent shall be returned to the Lessee. The Lessor shall be entitled to the entire award for such taking except for any statutory claim on the Lessee for injury, damage or destruction of Lessee's business accomplished by such taking. If a portion of the leased premises is taken or condemned by public authority for public use so as not to materially effect the ability of the Lessee to use its remaining portion of the leased premises for the purposes leased, this Lease will not be terminated but shall continue. In such case, the rent shall be equitably and fairly reduced or abated for the remainder of the term in proportion to the amount of the leased premises taken. In 5 no event shall the Lessor be liable to the Lessee for any business interruption, diminution in use or for the value of any unexpired term of this Lease. 16. ASSIGNMENT AND SUBLEASE: The Lessee covenants and agrees not to encumber or assign this Lease or sublet all or any part of the leased premises without the written consent of the Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. Lessee shall provide Lessor with written notice of any proposed assignment or sublease at least thirty (30) days prior to any proposed effective date of assignment or sublease. If Lessor fails to provide Lessee with notice of whether such assignment or sublease is approved within thirty (30) days of receipt by Lessor of such request, such inaction by Lessor shall constitute consent. Notwithstanding the foregoing, Lessee has the right to assign or sublet this Lease as long as the guarantee executed by Diagnostic Retrieval Systems, Inc. remains in full force and effect and said company has a financial worth at least comparable to that on the date this Lease and Guarantee are executed. Any such assignment shall in no way relieve the Lessee from any obligations hereunder for the payment of rents or the performance of the conditions, covenants and provisions of this Lease. In no event shall Lessee assign or sublet the leased premises for any terms, conditions and covenants other than those contained herein, except that Lessee may assign or sublet to another person for different rent or a different use as long as such use complies with all applicable regulations regarding the use and operation of businesses located in the leased premises. In no event shall this Lease be assigned or be assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges hereunder be an asset of Lessee under any bankruptcy, insolvency or reorganization proceedings. Lessor shall not be liable nor shall the leased premises be subject to any mechanics, materialmans, or other type liens and Lessee shall keep the premises and property in which the leased premises are situated free from any such liens caused by acts of Lessee and shall indemnify Lessor against and satisfy any such liens which may obtain because of acts of Lessee notwithstanding the foregoing provision. 17. HOLDOVER: It is further covenanted and agreed that if the Lessee, any assignee or sublessee shall continue to occupy the leased premises after the termination of this Lease without prior written consent of the Lessor, such tenancy shall be Tenancy at Sufferance. Acceptance by the Lessor of rent after such termination shall not constitute a renewal of this Lease or consent to such occupancy nor shall it waive Lessor's right of reentry or any other right contained herein. 18. SUBORDINATION: Subject to the last sentence of this paragraph, this Lease shall be subject and subordinated at all 6 times to the liens of any mortgages or deeds of trust in any amount or amounts whatsoever now existing or hereafter encumbering the leased premises, without the necessity of having further instruments executed by the Lessee to effect such subordination. Lessor shall provide a non-disturbance agreement from the mortgagee holding the mortgage on the leased premises on or before November 15, 1995. Notwithstanding the foregoing, Lessee covenants and agrees to execute and deliver upon demand, such further instruments evidencing such subordination of this Lease to such liens of any such mortgages or deeds of trust as may be requested by Lessor. So long as the Lessee hereunder shall pay the rent reserved and comply with, abide by and discharge the terms, conditions, covenants, and obligations on its part, to be kept and performed herein and shall attorn to any successor in title, notwithstanding the foregoing, the peaceable possession of the Lessee in and to the leased premises for the term of this Lease shall not be disturbed, in the event of the foreclosure of any such mortgage or deed of trust, by the purchaser at such foreclosure sale or such purchaser's successor in title. l9. INDEMNIFICATION: The Lessor shall not be liable for any damage or injury to any person or property whether it be the person or property of the Lessee, the Lessee's employees, agents, guests, invitees or otherwise by reason of Lessee's occupancy of the leased premises or because of fire, flood, windstorm, Acts of God or for any other reason unless caused by the intentional acts or gross negligence of Lessor. The Lessee agrees to indemnify and save harmless the Lessor, its agents, employees and contractors from and against any and all loss, damage, claim, demand, liability or expense by reason of damage to person or property which may arise or be claimed to have arisen as a result of the occupancy or use of said leased premises by the Lessee or by reason thereof or in connection therewith, or in any way arising on account of any injury or damage caused to any person or property on or in the leased premises providing, however, that Lessee shall not indemnify as to the loss or damage due to fault of Lessor. 20. CONSTRUCTION OF LANGUAGE: The terms lease, lease agreement or agreement shall be inclusive of each other, also to include renewals, extensions or modifications of this Lease. Words of any gender used in this Lease shall be held to include any other gender, and in the singular shall be held to include the plural and the plural to include the singular, when the sense requires. The paragraph headings and titles are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 21. DEFAULT: In the event the Lessee shall default in the payment of rent, those sums designated as additional rent or any other sums payable by the Lessee herein, and such default shall continue for a period of ten days from the date of written notice by Lessor to Lessee, or if the Lessee shall default in the 7 performance of any other covenants or agreements of this Lease and such default shall continue for thirty days after written notice thereof (or if the default cannot be cured within thirty (30) days, that Lessee failed to diligently proceed to cure), or if the Lessee should become bankrupt or insolvent or any debtor proceedings be taken by or against the Lessee, then and in addition to any and all other legal remedies and rights, the Lessor may terminate this Lease and retake possession of the leased premises, or enter the leased premises and re-let the same without termination, in which later event the Lessee covenants and agrees to pay any deficiency after Lessee is credited with the rent thereby obtained less all repairs and expenses (including the expenses of obtaining possession), or the Lessor may resort to any two or more of such remedies or rights, and any other remedies provided by law except acceleration, and adoption of one or more such remedies or rights shall not necessarily prevent the enforcement of others concurrently or thereafter. Lessor shall be entitled to its landlord's lien provided by law. Lessor agrees to mitigate damages, if possible. The Lessee also covenants and agrees to pay reasonable attorney's fees and costs and expenses of the Lessor, including court costs, if the Lessor employs an attorney to collect rent or enforce other rights of the Lessor herein in event of any breach as aforesaid and the same shall be payable regardless of whether collection or enforcement is effected by suit or otherwise. In the event any litigation arises under this Agreement, the prevailing party shall be entitled to attorney's fees and costs, including attorney's fees for any appeal. 22. SUCCESSORS AND ASSIGNS: This Lease shall bind and inure to the benefit of the successors, assigns, heirs, executors, administrators and legal representatives of the parties hereto. 23. NON-WAIVER: No waiver of any covenant or condition of this Lease by either party shall be deemed to imply or constitute a further waiver of the same covenant or condition or any other covenant or condition of this Lease. 24. OPTION TO RENEW: Lessee is hereby granted an option to renew this lease for one additional term of five (5) years. Lessee shall, not less than ninety (90) days prior to the end of the term hereof, by written notice to the Lessor, notify Lessor of its intention to exercise this option to renew. Failure of Lessee to serve such written notice of exercise of option on the Lessor shall terminate this option. Upon exercise of said option to renew, the lease term shall be extended for an additional five (5) years upon all of the terms and conditions of this lease. However, there shall be no additional options to renew. 25. SECURITY DEPOSIT: The Lessee, concurrently with the execution of this Lease, has deposited with the Lessor the sum of $ - O -, the receipt being hereby acknowledged, which sum shall be 8 retained by Lessor as security for the payment by the Lessee of the rent herein agreed to be paid and for the faithful performance of the covenants of this Lease. If at any time the Lessee shall be in default following notice and the expiration of any applicable grace period in any of the provisions of this Lease, the Lessor shall have the right to use said deposit, or so much thereof as may be necessary in payment of any rent in default aforesaid and/or in payment of any expense incurred by the Lessor in and about the curing of any default by said Lessee, and/or in payment of any damages incurred by the Lessor by reason of such default of the Lessee, or at the Lessor's option, the same may be retained by the Lessor in liquidation of part of the damages suffered by the Lessor by reason of the default of the Lessee. In the event that said deposit shall not be utilized for any such purpose, then such deposit shall be applied to the rent last due for the term of this Lease or any renewal term thereof. Said deposit shall not bear interest. 26. ADDITIONAL CHARGES: The Lessee shall pay to Lessor as additional rent on a monthly basis its pro rata share of all costs and expenses related to operating, managing, equipping, insuring, lighting, repairing, cleaning, decorating, preserving, altering, replacing, maintaining and enhancing building 1 and building 2 of the commerce park in which the leased property is located along with parking areas and other areas within the commerce park in which the buildings are located. Such costs and expenses shall include but not be limited to: pest extermination; inspection of equipment; inspection and repair of fire sprinkler and alarm service; removal of dirt and debris; planting, replanting and replacing flowers; landscaping; irrigation and supplies; all costs and expenses associated with maintaining lighting facilities and storm drainage and retention systems, whether on or off premises; electric service, sewage treatment plant and domestic water well, pump and similar costs; audit costs; all premiums for liability, loss of rents, property damage, fire and worker's compensation insurance; wages; unemployment taxes; social security taxes; personal property taxes; management fees; legal fees; solid waste charges; windows; maintenance, lining, bumpering, top coating and repairing all impervious surfaces; rental of machinery necessary to implement any of the foregoing services; and bank charges, along with real property taxes and assessments. Notwithstanding, Lessee shall not be obligated to pay any portion of capital items with the exception of parking lot expansion if hereafter required in writing by Lessee. Nothing contained herein shall be deemed or construed to modify or negate Lessor's obligations under that memorandum dated ___________________. The only repair obligation of the Lessor is the exterior of the roof of the building and the structural portions of the building and leased premises, as long as such repair is not necessitated by the action of the Lessee, its employees, agents or contractors. 9 Current estimated monthly charges are as follows: (a) Woodlake Commerce Park CAM $ 11.33 (inc. 6% sales tax) (b) Building CAM $199.00 (inc. 6% sales tax) (c) Real Property taxes $187.67 Copies of the proposed budget for the upcoming year are appended hereto. Lessee's pro rata percentage for the leased premises for determining Building CAM and Real Property taxes is 2.4%. This represents the Lessee's pro rata share determined by lease space of 4,000 square feet and total building square feet of 168,500 square feet. Lessee's pro rata percentage for the Woodlake Commerce Park CAM is .5%. This percentage is determined as follows: (i) the percentage of land comprising buildings 1 and 2 of Woodlake Commerce Park owned by Lessor in the entire Woodlake Commerce Park (20.96%) multiplied by (ii) the pro rata portion of CAM expenses (2.4%) (20.96%) x (2.4%) =.5%. 28. IMPACT FEE: It is understood that there is currently on record with the City of Palm Bay projected water and sewer uses with regard to the demised premises. Lessor has previously paid to the City of Palm Bay an impact fee based upon such projected usage. Lessor has been advised by the City of Palm Bay that Lessee's proposed use will not require the additional payment of impact fees. However, should the actual usage of water and sewer by Lessee hereunder increase over and above the projected usage, and should the City of Palm Bay assess an additional impact fee against the Lessor as a result of such increased usage, Lessee shall be and become responsible for any increased impact fee. Such increase shall be due and payable as additional rent hereunder and shall be paid by Lessee to Lessor within twenty (20) days after submission of invoice for said amount. 29. PAST DUE RENTS: If Lessee shall fail to pay any rents, additional rents or other charges characterized herein as additional rent when the same become due and payable, such unpaid amounts shall bear interest from the due date thereof to the date of payment at the rate of five percent (5%) until paid. The provisions herein for late payment service charges shall not be construed to extend the date for payment of any sums required to be paid by Lessee hereunder or to relieve Lessee of its obligation to pay all such sums at the time or times herein stipulated. Notwithstanding the imposition of any charges pursuant to this section, Lessee shall be in default under this Lease if any or all payments required to be made by Lessee are not made at the time therein stipulated and neither the demand nor collection by Lessor of such late payment service charges shall be construed as a cure for such default on the part of the Lessee. 10 Lessor permits a ten (10) day grace period. 30. This information is being provided as required by Florida Statute 404.056: RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. 31. VENUE. In the event any litigation arises out of this Agreement, venue shall be in a court of competent jurisdiction in Brevard County, Florida. 32. SEVERABILITY. In the event that any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Agreement shall be valid and be enforced by the fullest extent permitted by law. 33. REPAIRS AND MAINTENANCE: Lessor shall not be liable to Lessee for any repairs necessitated by some act or neglect of Lessee or any Permittee, or any contractor, agent, employee, invitee of any of the aforesaid or, for any damage to merchandise, trade fixtures, or personal property of Lessee in the leased premises caused by water leakage from the roof, water lines, sprinklers or heating and air conditioning equipment. Lessee shall be liable for all repairs and replacements, ordinary and extraordinary, other than those for which Lessor is responsible, and shall maintain in the leased premises in good order and repair, clean, sanitary and safe, including the replacement and maintenance of equipment, fixtures, improvements, floor covering, the exterior and interior portions of all doors, door locks, security gates and windows, plumbing and sewage facilities, heating and air conditioning equipment, walls, ceilings, and all plate glass. Lessee shall, as part of its maintenance and repair obligations hereunder, enter into a service contract with a local, approved contractor for service, maintenance and repair of all heating, ventilation and air conditioning equipment within and servicing the leased premises, which shall provide for servicing by such contractor no less often than quarterly. A copy of such contract shall be delivered to the Lessor annually. If Lessee refuses or neglects to make repairs and/or maintain the leased premises, or any part thereof, in a manner reasonably satisfactory to Lessor, Lessor shall have the right, upon giving Lessee 11 reasonable written notice of its election to do so, to make repair or perform such maintenance on behalf of and for the account of Lessee. In such event, such work shall be paid for by Lessee as additional rental promptly upon receipt of a bill therefor. Lessee further agrees to paint the interior of the leased premises when necessary in order to maintain at all times a clean and sightly appearance. Nothing herein shall imply any duty on Lessor to do any work which Lessor is not specifically and expressly required to perform under this Lease or which, under any provisions of this Lease, Lessee may be required to perform; and, the performing thereof by Lessor shall not constitute a waiver of Lessee's default in failing to perform the same. Lessee acknowledges that the foregoing provisions of this paragraph shall apply and become effective from and after the date Lessee or its agents or contractors enter the leased premises or undertake activities permitted hereunder. Lessee shall indemnify Lessor against, and hold it harmless from, any claims, demands, or actions against Lessor or its agents, employees or contractors for losses or damages incurred by Lessor or its agents, employees or contractors arising out of or in any way connected with Lessee's failure to perform its obligations or observe any covenants under this paragraph. 34. HAZARDOUS SUBSTANCES: The term "Hazardous Substances" as used in this Lease shall include, without limitation: flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. Lessee shall not cause or permit to occur any violation of any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under or about the premises arising from Lessee's use or occupancy therein, nor shall Lessee cause or permit the use, generation, release, manufacture, refinement, production, processing, storage or disposal of any Hazardous Substance which violates any federal, state or local law, ordinance or regulation now or hereafter enacted related to environmental conditions without Lessor's prior written consent, which consent may be withdrawn, conditioned, or modified by Lessor in its sole and absolute discretion. Lessee shall indemnify, defend and hold Lessor, its respective officers, directors, beneficiaries, shareholders,, partners, agents, and employees harmless from all fines, suits, procedures, claims, clean-up and actions of every kind, and all costs associated therewith, including attorney's and consultant's fees, arising out of, or in any way connected with, any deposit, spill, discharge or other release of Hazardous Substances by Lessee, at or from the premises, or which arises at any time from 12 Lessee's use or occupancy of the premises, or from Lessee's failure to comply with or satisfy government required action on the matter. Lessee's obligations and liabilities under this paragraph shall survive the termination of this Lease. 35. CONFIDENTIALITY: Lessee shall not disclose the terms of this agreement to any person except on a need to know basis. 36. NOTE: Lessee and Guarantor under the Lease will execute a note to Lessor evidencing the obligation under Paragraph 3 of the Lease. Said note shall be subject to the terms of this Lease and shall provide that no payment shall be required to be made thereunder if the Lessee would be excused from making rental payments under this lease. IN WITNESS WHEREOF, Lessee and Lessor have caused this instrument to be executed as of the date first above written, by their respective officers or parties "hereunto duly authorized. Signed, sealed and delivered Lessee: OMI ACQUISITION CORP. in the presence of: ___________________________________ By__________________________________ ___________________________________ Title_______________________________ Attest______________________________ Secretary (Corporate Seal) Signed, sealed and delivered in the presence of: __________________________________ Lessor: SUTTON PROPERTIES __________________________________ _____________________________________ Authorized Agent for Sutton Properties 13 GUARANTEE In order to induce Lessor to execute the foregoing Lease (the "Lease") covering space set forth in the foregoing Lease and dated _____________________, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES and OMI ACQUISITION CORP., to which this Guarantee is an integral part thereof, the undersigned hereby guarantees the payment and performance of and agrees to pay and perform as a primary obligor all liabilities, obligations and duties (including, but not limited to, payment of rent) imposed upon Lessee under the terms of the Lease, as if the undersigned had executed the Lease as Lessee thereunder as it relates only to the payment of rent, any sums identified as additional rent, any obligations, duties and liabilities under Paragraph 34 of the Lease and any fines, attorney's fees and any other expenses or costs incurred by Lessor for code violations and code violation proceedings initiated by any regulatory agency for code violations alleged to exist in operation and maintenance of Lessee's business and maintenance of the leased premises by Lessee. The undersigned hereby waives notice of acceptance of this guarantee and all other notices in connection herewith or in connection with the liabilities, obligations and duties guaranteed hereby, including notices of default by Lessee under the Lease, and waives diligence, presentment and suit on the part of Lessor in the enforcement of any liability, obligation or duty guaranteed hereby. The undersigned further agrees that Lessor shall not be first required to enforce against Lessee or any other person any liability, obligation or duty guaranteed hereby before seeking enforcement thereof against the undersigned. Suit may be brought and maintained against the undersigned by Lessor to enforce any liability, obligation or duty guaranteed hereby without joinder of Lessee or any other person. The liability of the undersigned shall not be affected by any indulgence, compromise, settlement or termination of the Lease to the extent that Lessee thereafter continues to be liable thereunder. Lessor and Lessee, without notice to or consent by the undersigned, may at any time and from time to time enter into such modifications, extensions, amendments or other covenants respecting the Lease as they may deem appropriate and the undersigned shall not be released thereby, but shall continue to be fully liable to the extent provided for herein for the payment and performance of all liabilities, obligations and duties of Lessee under the Lease as so modified, extended or amended. It is understood that other agreements similar to this agreement may be executed by other persons with respect to the Lease. This agreement shall be cumulative of any such other agreements and the liabilities and obligations of the undersigned hereunder shall in no event be affected or diminished by reason of such other agreements. In the event that Lessor secures other agreements similar to this agreement, or secures the signature of more than one guarantor to this agreement, or both, the undersigned agrees that Lessor, in Lessor's sole discretion, may bring suit against all guarantors of the Lease jointly and severally against any one or more of them, may compound or settle with any one or more of such guarantors for such consideration as Lessor shall deem proper, and may release one or more of such guarantors from any liability, obligation or duty guaranteed hereby. The undersigned further agrees that no such action shall impair the rights of Lessor to enforce the Lease against any remaining guarantor(s). The undersigned agrees that if Lessor shall employ counsel to present, enforce or defend any or all of the Lessor's rights or remedies hereunder, or defend any action brought by the undersigned, undersigned shall pay any reasonable attorney's fees and expenses incurred by Lessor in such connection. EXECUTED this ____ day of _________, 199 , to be effective as of the date of the Lease. GUARANTOR: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. _____________________________________ By:______________________________ Its: _____________________________________ _________________________________ Attest: Secretary (Corporate Seal) . GUARANTEE In order to induce Lessor to execute the foregoing Lease (the "Lease") covering 4,000 square feet of space set forth in the foregoing Lease, and dated August __, 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES and OMI ACQUISITION CORP., to which this Guarantee is an integral part thereof, the undersigned hereby guarantees the payment and performance of and agrees to pay and perform as a primary obligor all liabilities, obligations and duties (including, but not limited to, payment of rent) imposed upon Lessee under the terms of the Lease, as if the undersigned had executed the Lease as Lessee thereunder as it relates only to the payment of rent, any sums identified as additional rent, any obligations, duties and liabilities under Paragraph 34 of the Lease and any fines, attorney's fees and any other expenses or costs incurred by Lessor for code violations and code violation proceedings initiated by any regulatory agency for code violations alleged to exist in operation and maintenance of Lessee's business and maintenance of the leased premises by Lessee. The undersigned hereby waives notice of acceptance of this guarantee and all other notices in connection herewith or in connection with the liabilities, obligations and duties guaranteed hereby, including notices of default by Lessee under the Lease, and waives diligence, presentment and suit on the part of Lessor in the enforcement of any liability, obligation or duty guaranteed hereby. The undersigned further agrees that Lessor shall not be first required to enforce against Lessee or any other person any liability, obligation or duty guaranteed hereby before seeking enforcement thereof against the undersigned. Suit may be brought and maintained against the undersigned by Lessor to enforce any liability, obligation or duty guaranteed hereby without joinder of Lessee or any other person. The liability of the undersigned shall not be affected by any indulgence, compromise, settlement or termination of the Lease to the extent that Lessee thereafter continues to be liable thereunder. Lessor and Lessee, without notice to or consent by the undersigned, may at any time and from time to time enter into such modifications, extensions, amendments or other covenants respecting the Lease as they may deem appropriate and the undersigned shall not be released thereby, but shall continue to be fully liable to the extent provided for herein for the payment and performance of all liabilities, obligations and duties of Lessee under the Lease as so modified, extended or amended. It is understood that other agreements similar to this agreement may be executed by other persons with respect to the Lease. This agreement shall be cumulative of any such other agreements and the liabilities and obligations of the undersigned hereunder shall in no event be affected or diminished by reason of such other agreements. In the event that Lessor secures other agreements similar to this agreement, or secures the signature of more than one guarantor to this agreement, or both, the undersigned agrees that Lessor, in Lessor's sole discretion, may bring suit against all guarantors of the Lease jointly and severally against any one or more of them, may compound or settle with any one or more of such guarantors for such consideration as Lessor shall deem proper, and may release one or more of such guarantors from any liability, obligation or duty guaranteed hereby. The undersigned further agrees that no such action shall impair the rights of Lessor to enforce the Lease against any remaining guarantor(s). The undersigned agrees that if Lessor shall employ counsel to present, enforce or defend any or all of the Lessor's rights or remedies hereunder or defend any action brought by the undersigned, undersigned shall pay any reasonable attorney's fees and expenses incurred by Lessor in such connection. EXECUTED this _____ day of _________, 199 _ , to be effective as of the date of the Lease. GUARANTOR: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. ____________________________________ By: ______________________________ Its: ____________________________________ __________________________________ Attest: Secretary (Corporate Seal) EX-10.86 8 LEASE AGREEMENT THIS LEASE AGREEMENT dated August __, 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES, a Florida general partnership, with its principal office at P. O. Box 060250, Palm Bay, Florida 32906, hereinafter called the Lessor, and OMI ACQUISITION CORP., a Delaware corporation, with its principal office at 270 Motor Parkway, P. O. Box 11368, Hauppauge, New York 11788, hereinafter called the Lessee. W I T N E S S E T H: The Lessor hereby leases to the Lessee and Lessee hereby leases from the Lessor, the following described property, sometimes hereinafter referred to as the leased premises, to wit: Space designated as a portion of the Woodlake Commerce Park Building 2330, Suite 8 comprising approximately 14,400 square feet, as shown on Exhibit "A" attached hereto and made a part hereof, being located at the following address: 2330 Commerce Park Drive, N.E., City of Palm Bay, County of Brevard, State of Florida, in "as is" condition. 1. TERM: Lessee to have and to hold above described premises for a term of ten (10) year(s) commencing on the 15th day of August, 1995, on the terms and conditions as set forth herein. 2. USE AND POSSESSION: It is understood that the leased premises are to be used for the design, development and production of high technology products, and for such other uses which comply with all applicable regulations regarding the use and operation of the business located in the leased premises, and for no other purpose without prior written consent of Lessor. Lessor represents that as of the date of this lease, the premises can lawfully be used for such purpose. Lessee shall not use the leased premises for any unlawful purpose or so as to constitute a nuisance. Lessee shall be responsible for all improvements, permitting, design work and any other items necessary to complete the leased premises for its occupancy. The Lessee, at the expiration of the term, shall deliver up the leased premises in good repair and condition, damages beyond the control of the Lessee, reasonable use, ordinary decay, fire and casualty damages, Lessor's repair obligations, wear and tear excepted. 3. RENT: Lessee covenants and agrees to pay, together with any and all sales and use taxes levied upon the use and occupancy of the leased premises, as set forth in Paragraph 6, beginning September 1, 1995 in advance, a base rent of $6,000.00, plus 6% sales tax in the amount of $360.00, for a total monthly rent of $6,360.00. Lessee shall have possession of the leased premises upon execution of this Lease. 4. RENT PAYMENT: Rent will be paid to Lessor at P. O. Box 060250, Palm Bay, Florida 32906-0250. The obligation to pay rent under Paragraph Three shall be in addition to "additional rent" as provided for in this Lease. 5. RENT ADJUSTMENT: On January 1st of each year, beginning January 1, 1997, the monthly rental provided in Paragraph Three, or as previously adjusted, shall be increased by the "rent adjustment," which shall be a cumulative 4%. 6. SALES AND USE TAX: The Lessee hereby covenants and agrees to pay monthly, as additional rent, any sales, use or other tax, excluding State and/or Federal Income Tax, now or hereafter imposed upon rents by the United States of America, the State, or any political subdivisions thereof, to the Lessor, notwithstanding the fact that such statute, ordinance or enactment imposing the same may endeavor to impose the tax on the Lessor. 7. NOTICES: For purpose of notice or demand, the respective parties shall be served by certified or registered mail, return receipt requested, addressed to the Lessee or to the Lessor at their respective principal office addresses as set forth herein. Additional notice to Lessee shall be to Robert Russo, Vice-President and General Manager, Photronics, Inc., 270 Motor Parkway, Hauppauge, New York 11788, until otherwise advised by Lessee. 8. ORDINANCES AND REGULATIONS: The Lessee hereby covenants and agrees to comply with all the rules and regulations of the Board of Fire Underwriters, Officers or Boards of the City, County or State having jurisdiction over the leased premises, and with all ordinances and regulations or govermental authorities wherein the leased premises are located, at Lessee's sole cost and expense, but only insofar as any of such rules, ordinances and regulations pertain to the specific manner in which the Lessee shall use the leased premises; the obligation to comply in every other case, and also all cases where such rules, regulations and ordinances require repairs, alterations, changes or additions to the building (including the leased premises) or building equipment, or any part of either, being hereby expressly assumed by Lessor, and Lessor covenants and agrees promptly and duly to comply with all such rules, regulations and ordinances with which Lessee has not herein expressly agreed to comply. 9. SIGNS: The Lessee will not place any signs or other advertising matter or material on the exterior, or on the interior where possible to be seen from the exterior, of the leased premises or of the building in which the leased premises are located, without the prior written consent of the Lessor. Any lettering or signs placed on the interior of said building shall be for directional purposes only, and such signs and lettering shall be of a type, kind, character and description to be approved by Lessor. All signs shall be consistent with the common character of signs within the commerce park where the leased 2 premises are located. If Lessor fails to provide Lessee with notice that any proposed signs are approved within thirty (30) days of receipt by Lessor of a request for signs, such inaction shall constitute consent by Lessor. However, notwithstanding any consent by Lessor, any signs, and the installation thereof, must comply with any applicable regulations regarding signs. 10. SERVICES: Lessor shall provide a reasonable amount of free parking for Lessee's employees on Lessor's parking area adjacent to the building in which the leased premise are situated. 11. ALTERATIONS: (a) The parties acknowledge that Lessee will be making alterations and improvements prior to occupancy under the terms of this Lease, and Lessor approves of the architectural plans attached hereto. If Lessee, after due diligence, is unable to obtain a building permit to perform said alterations and improvements pursuant to said plan, or with reasonable modifications thereto, or after completion of the work, is unable to obtain a certificate of occupancy for reasons unrelated to the work performed pursuant to said plans, then Lessee may terminate this Lease. This right to terminate applies only to the initial alterations and improvements to the leased premises pursuant to the plans attached hereto. (b) Lessee, by occupancy and possession hereunder, accepts the leased premises as being in good repair and condition. Lessee shall maintain the leased premises and every part thereof in good condition, damages by causes beyond the control of the Lessee, reasonable use, ordinary decay and wear and tear, fire and casualty and Lessor repair obligations excepted. Lessee shall not make or suffer to be made any alterations, additions or improvements to or of the leased premises or any part thereof without prior written consent of Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. If Lessor fails to provide Lessee with notice of whether such alterations, additions or improvements are approved within thirty (30) days of receipt by Lessor of a request for same, such inaction shall constitute approval by Lessor. In the event Lessor consents to the proposed alterations, additions, or improvements, the same shall be at Lessee's sole cost and expense, and Lessee shall hold the Lessor harmless on account of the cost thereof. Any such alterations shall be made at such times in such manner as not to unreasonably interfere with the occupation, use and enjoyment of the remainder of the building by the other tenants thereof. (c) If required by Lessor, any alterations shall be removed by Lessee upon the termination or sooner expiration of the term of this Lease and Lessee shall repair damage to the premises caused by such removal, all at Lessee's cost and expense. All alterations, additions and improvements shall comply with any and all regulations of all regulatory agencies having jurisdiction thereof. 3 12. QUIET ENJOYMENT: The Lessor covenants and agrees that Lessee, on paying said monthly rent and performing the covenants herein, shall and may peaceably and quietly hold and enjoy the said leased premises and common areas, including but not limited to parking areas, sidewalks, entrances, exits, lobbies, restrooms, and lounges for the term aforesaid. 13. LESSOR'S RIGHT TO INSPECT AND DISPLAY: The Lessor shall have the right, during normal business hours of Lessee on twenty-four (24) hours notice, to enter the leased premises for the purpose of examining or inspecting same and of making such repairs or alterations therein as the Lessor shall deem necessary. Any such repair will be made so as to minimize interference with Lessee's business. The notice and hour requirements shall be excused in the event of an emergency. The Lessor shall also have the right to enter the leased premises at all reasonable hours for the purpose of displaying said premises to prospective tenants within ninety days prior to termination of this Lease. The parties acknowledge that Lessee may be performing work for the United States of America that require security clearances for entry to certain areas of the leased premises. Lessor agrees to comply with any reasonable requirements necessary for Lessor to obtain access to these areas, it being agreed that Lessor shall not be deprived access because of such fact. 14. DESTRUCTION OF PREMISES: (a) If the leased premises are totally destroyed by fire or other casualties, or partially damaged so as to materially affect the ability of Lessee to carry on its business, both the Lessor and Lessee shall have the option of terminating this Lease or any renewal thereof, upon giving written notice at any time within thirty days from the date of such destruction, and if the Lease be so terminated, all rent shall cease as of the date of such destruction and any prepaid rent shall be refunded. (b) If such leased are partially damaged by fire or other casualty, or totally destroyed thereby and neither party elects to terminate this Lease within the provisions of Paragraph (a) above or (c) below, then the Lessor agrees, at Lessor's sole cost and expense, to restore the leased premises to a kind and quality substantially similar to that immediately prior to such destruction or damage. Said restoration shall be commenced within a reasonable time and completed without delay on the part of the Lessor, and in any event shall be accomplished within one hundred eighty (180) days from the date of the fire or other casualty. In such case, all rents paid in advance shall be proportioned as of the date of damage or destruction and all rent thereafter accruing shall be equitable and proportionately suspended and adjusted pending completion of rebuilding, restoration or repair, except that in the event the destruction or damage is so extensive as to make it unfeasible for the Lessee to conduct Lessee's business on the leased premises the rent shall be completely abated until the leased premises are restored by the 4 Lessor or until the Lessee resumes use and occupancy of the leased premises for the conduct of business, whichever shall first occur. The Lessor shall not be liable for any inconvenience or interruption of business of the Lessee occasioned by fire or other casualty. (c) If the Lessor undertakes to restore, rebuild or repair the premises, and such restoration, rebuilding or repair is not accomplished within one hundred eighty (180) days, the Lessee shall have the right to terminate this Lease by written notice to the Lessor within thirty (30) days after expiration of said one hundred eighty (180) day period. (d) Lessor shall not be liable to carry fire, casualty or extended damage insurance on the person or property of the Lessee or any person or property which may now or hereafter be placed in the leased premises. 15. CONDEMNATION: If during the term of this Lease or any renewal thereof, the whole of the leased premises, or such portion thereof as will materially affect the use of the leased premises for the purpose leased, be condemned by public authority for public use, then, in either event, the term hereby granted shall cease and come to an end as of the date the Lessee is required to vacate the leased premises by either Lessor or the condemnor. Upon such occurrence, the rent shall be proportioned as of such date and any prepaid rent shall be returned to the Lessee. The Lessor shall be entitled to the entire award for such taking except for any statutory claim on the Lessee for injury, damage or destruction of Lessee's business accomplished by such taking. If a portion of the leased premises is taken or condemned by public authority for public use so as not to materially effect the ability of the Lessee to use its remaining portion of the leased premises for the purposes leased, this Lease will not be terminated but shall continue. In such case, the rent shall be equitably and fairly reduced or abated for the remainder of the term in proportion to the amount of the leased premises taken. In no event shall the Lessor be liable to the Lessee for any business interruption, diminution in use or for the value of any unexpired term of this Lease. 16. ASSIGNMENT AND SUBLEASE: The Lessee covenants and agrees not to encumber or assign this Lease or sublet all or any part of the leased premises without the written consent of the Lessor, which consent the Lessor covenants and agrees shall not be unreasonably withheld. Lessee shall provide Lessor with written notice of any proposed assignment or sublease at least thirty (30) days prior to any proposed effective date of assignment or sublease. If Lessor fails to provide Lessee with notice of whether such assignment or sublease is approved within thirty (30) days of receipt by Lessor of such request, such inaction by Lessor shall constitute consent. Notwithstanding the foregoing, Lessee has the right to assign or sublet this Lease as long as the guarantee executed by Diagnostic Retrieval Systems, Inc. remains 5 in full force and effect and said company has a financial worth at least comparable to that on the date this Lease and Guarantee are executed. Any such assignment shall in no way relieve the Lessee from any obligations hereunder for the payment of rents or the performance of the conditions, covenants and provisions of this Lease. In no event shall Lessee assign or sublet the leased premises for any terms, conditions and covenants other than those contained herein, except that Lessee may assign or sublet to another person for different rent or a different use as long as such use complies with all applicable regulations regarding the use and operation of businesses located in the leased premises. In no event shall this Lease be assigned or be assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges hereunder be an asset of Lessee under any bankruptcy, insolvency or reorganization proceedings. Lessor shall not be liable nor shall the leased premises be subject to any mechanics, materialmans, or other type liens and Lessee shall keep the premises and property in which the leased premises are situated free from any such liens caused by acts of Lessee and shall indemnify Lessor against and satisfy any such liens which may obtain because of acts of Lessee notwithstanding the foregoing provision. 17. HOLDOVER: It is further covenanted and agreed that if the Lessee, any assignee or sublessee shall continue to occupy the leased premises after the termination of this Lease without prior written consent of the Lessor, such tenancy shall be Tenancy at Sufferance. Acceptance by the Lessor of rent after such termination shall not constitute a renewal of this Lease or consent to such occupancy nor shall it waive Lessor's right of reentry or any other right contained herein. 18. SUBORDINATION: Subject to the last sentence of this paragraph, this Lease shall be subject and subordinated at all times to the liens of any mortgages or deeds of trust in any amount or amounts whatsoever now existing or hereafter encumbering the leased premises, without the necessity of having further instruments executed by the Lessee to effect such subordination. Notwithstanding the foregoing, Lessee covenants and agrees to execute and deliver upon demand, such further instruments evidencing such subordination of this Lease to such liens of any such mortgages or deeds of trust as may be requested by Lessor. Lessor shall provide a non-disturbance agreement from the mortgagee holding the mortgage on the leased premises on or before November 15, 1995. So long as the Lessee hereunder shall pay the rent reserved and comply with, abide by and discharge the terms, conditions, covenants, and obligations on its part, to be kept and performed herein and shall attorn to any successor in title, notwithstanding the foregoing, the peaceable possession of the Lessee in and to the leased premises for the term of this Lease shall not be disturbed, in the event of the foreclosure of any such mortgage or deed of trust, by the purchaser at such 6 foreclosure sale or such purchasers successor in title. 19. INDEMNIFICATION: The Lessor shall not be liable for any damage or injury to any person or property whether it be the person or property of the Lessee, the Lessee's employees, agents, guests, invitees or otherwise by reason of Lessee's occupancy of the leased premises or because of fire, flood, windstorm, Acts of God or for any other reason unless caused by the intentional acts or gross negligence of Lessor. The Lessee agrees to indemnify and save harmless the Lessor, its agents, employees and contractors from and against any and all loss, damage, claim, demand, liability or expense by reason of damage to person or property which may arise or be claimed to have arisen as a result of the occupancy or use of said leased premises by the Lessee or by reason thereof or in connection therewith, or in any way arising on account of any injury or damage caused to any person or property on or in the leased premises providing, however, that Lessee shall not indemnify as to the loss or damage due to fault of Lessor. 20. CONSTRUCTION OF LANGUAGE: The terms lease, lease agreement or agreement shall be inclusive of each other, also to include renewals, extensions or modifications of this Lease. Words of any gender used in this Lease shall be held to include any other gender, and in the singular shall be held to include the plural and the plural to include the singular, when the sense requires. The paragraph headings and titles are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 21. DEFAULT: In the event the Lessee shall default in the payment of rent, those sums designated as additional rent or any other sums payable by the Lessee herein, and such default shall continue for a period of ten days from the date of written notice by Lessor to Lessee, or if the Lessee shall default in the performance of any other covenants or agreements of this Lease and such default shall continue for thirty days after written notice thereof (or if the default cannot be cured within thirty (30) days, that Lessee failed to diligently proceed to cure), or if the Lessee should become bankrupt or insolvent or any debtor proceedings be taken by or against the Lessee, then and in addition to any and all other legal remedies and rights, the Lessor may terminate this Lease and retake possession of the leased premises, or enter the leased premises and re-let the same without termination, in which later event the Lessee covenants and agrees to pay any deficiency after Lessee is credited with the rent thereby obtained less all repairs and expenses (including the expenses of obtaining possession), or the Lessor may resort to any two or more of such remedies or rights, and any other remedies provided by law except acceleration, and adoption of one or more such remedies or rights shall not necessarily prevent the enforcement of others concurrently or thereafter. Lessor shall be entitled to its landlord's lien provided by law. Lessor agrees to mitigate damages, if possible. 7 The Lessee also covenants and agrees to pay reasonable attorney's fees and costs and expenses of the Lessor, including court costs, if the Lessor employs an attorney to collect rent or enforce other rights of the Lessor herein in event of any breach as aforesaid and the same shall be payable regardless of whether collection or enforcement is effected by suit or otherwise. In the event any litigation arises under this Agreement, the prevailing party shall be entitled to attorney's fees and costs, including attorney's fees for any appeal. 22. SUCCESSORS AND ASSIGNS: This Lease shall bind and inure to the benefit of the successors, assigns, heirs, executors, administrators and legal representatives of the parties hereto. 23. NON-WAIVER: No waiver of any covenant or condition of this Lease by either party shall be deemed to imply or constitute a further waiver of the same covenant or condition or any other covenant or condition of this Lease. 24. OPTION TO RENEW: Lessee is hereby granted an option to renew this lease for one additional term of five (5) years. Lessee shall, not less than ninety days prior to the end of the term hereof, by written notice to the Lessor, notify Lessor of its intention to exercise this option to renew. Failure of Lessee to serve such written notice of exercise of option on the Lessor shall terminate this option. Upon exercise of said option to renew, the lease term shall be extended for an additional five (5) years upon all of the terms and conditions of this lease, subject to any rent adjustments of Paragraph 5. However, there shall be no additional options to renew. 25. SECURITY DEPOSIT: The Lessee, concurrently with the execution of this Lease, has deposited with the Lessor the sum of $-0-, the receipt being hereby acknowledged, which sum shall be retained by Lessor as security for the payment by the Lessee of the rent herein agreed to be paid and for the faithful performance of the covenants of this Lease. If at any time the Lessee shall be in default following notice and the expiration of any applicable grace period in any of the provisions of this Lease, the Lessor shall have the right to use said deposit, or so much thereof as may be necessary in payment of any rent in default aforesaid and/or in payment of any expense incurred by the Lessor in and about the curing of any default by said Lessee, and/or in payment of any damages incurred by the Lessor by reason of such default of the Lessee, or at the Lessor's option, the same may be retained by the Lessor in liquidation of part of the damages suffered by the Lessor by reason of the default of the Lessee. In the event that said deposit shall not be utilized for any such purpose, then such deposit shall be applied to the rent last due for the term of this Lease or any renewal term thereof. Said deposit shall not bear interest. 8 26. ADDITIONAL CHARGES: The Lessee shall pay to Lessor as additional rent on a monthly basis its pro rata share of all costs and expenses related to operating, managing, equipping, insuring, lighting, repairing, cleaning, decorating, preserving, altering, replacing, maintaining and enhancing building 1 and building 2 of the commerce park in which the leased property is located along with parking areas and other areas within the commerce park in which the buildings are located. Such costs and expenses shall include but not be limited to: pest extermination; inspection of equipment; inspection and repair of fire sprinkler and alarm service; removal of dirt and debris; planting, replanting and replacing flowers; landscaping; irrigation and supplies; all costs and expenses associated with maintaining lighting facilities and storm drainage and retention systems, whether on or off premises; electric service, sewage treatment plant and domestic water well, pump and similar costs; audit costs; all premiums for liability, loss of rents, property damage, fire and worker's compensation insurance; wages; unemployment taxes; social security taxes; personal property taxes; management fees; legal fees; solid waste charges; windows; maintenance, lining, bumpering, top coating and repairing all impervious surfaces; rental of machinery necessary to implement any of the foregoing services; and bank charges, along with real property taxes and assessments. Notwithstanding, Lessee shall not be obligated to pay any portion of capital items with the exception of parking lot expansion if hereafter required in writing by Lessee. Nothing contained herein shall be deemed or construed to modify or negate Lessor's obligations under that memorandum dated ______________ . The only repair obligation of the Lessor is the exterior of the roof of the building and the structural portions of the building and leased premises, as long as such repair is not necessitated by the action of the Lessee, its employees, agents or contractors. Current estimated monthly charges are as follows: (a) Woodlake Commerce Park CAM $ 42.00 (inc. 6% sales tax) (b) Building CAM $734.40 (inc. 6% sales tax) (c) Real Property taxes $692.40 Copies of the proposed budget for the upcoming year are appended hereto. Lessee's pro rata percentage for the leased premises for determining Building CAM and Real Property taxes is 8.8%. This represents the Lessee's pro rata share determined by lease space of 14,400 square feet and total building square feet of 164,500 square feet. Lessee's pro rata percentage for the Woodlake Commerce Park CAM is 1.85%. This percentage is determined as follows: (i) the percentage of land comprising buildings 1 and 2 of Woodlake Commerce Park owned by Lessor in the entire Woodlake Commerce Park (20.96%) multiplied by (ii) the pro rata portion of CAM expenses (8.8%) (20.96%) x (8.8%) = 1.85%. 9 28. IMPACT FEE: It is understood that there is currently on record with the City of Palm Bay projected water and sewer uses with regard to the demised premises. Lessor has previously paid to the City of Palm Bay an impact fee based upon such projected usage. Lessor has been advised by the City of Palm Bay that Lessee's proposed use will not require the additional payment of impact fees. However, should the actual usage of water and sewer by Lessee hereunder increase over and above the projected usage, and should the City of Palm Bay assess an additional impact fee against the Lessor as a result of such increased usage, Lessee shall be and become responsible for any increased impact fee. Such increase shall be due and payable as additional rent hereunder and shall be paid by Lessee to Lessor within twenty (20) days after submission of invoice for said amount. 29. PAST DUE RENTS: If Lessee shall fail to pay any rents, additional rents or other charges characterized herein as additional rent when the same become due and payable, such unpaid amounts shall bear interest from the due date thereof to the date of payment at the rate of five percent (5%) until paid. The provisions herein for late payment service charges shall not be construed to extend the date for payment of any sums required to be paid by Lessee hereunder or to relieve Lessee of its obligation to pay all such sums at the time or times herein stipulated. Notwithstanding the imposition of any charges pursuant to this section, Lessee shall be in default under this Lease if any or all payments required to be made by Lessee are not made at the time therein stipulated and neither the demand nor collection by Lessor of such late payment service charges shall be construed as a cure for such default on the part of the Lessee. Lessor permits a ten (10) day grace period. 30. This information is being provided as required by Florida Statute 404.056: RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. 31. VENUE. In the event any litigation arises out of this Agreement, venue shall be in a court of competent jurisdiction in Brevard County, Florida. 32. SEVERABILITY. In the event that any term or provision of this Agreement or the application thereof to any person or 10 circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Agreement shall be valid and be enforced by the fullest extent permitted by law. 33. REPAIRS AND MAINTENANCE: Lessor shall not be liable to Lessee for any repairs necessitated by some act or neglect of Lessee or any Permittee, or any contractor, agent, employee, invitee of any of the aforesaid or, for any damage to merchandise, trade fixtures, or personal property of Lessee in the leased premises caused by water leakage from the roof, water lines, sprinklers or heating and air conditioning equipment. Lessee shall be liable for all repairs and replacements, ordinary and extraordinary, other than those for which Lessor is responsible, and shall maintain in the leased premises in good order and repair, clean, sanitary and safe, including the replacement and maintenance of equipment, fixtures, improvements, floor covering, the exterior and interior portions of all doors, door locks, security gates and windows, plumbing and sewage facilities, heating and air conditioning equipment, walls, ceilings, and all plate glass. Lessee shall, as part of its maintenance and repair obligations hereunder, enter into a service contract with a local, approved contractor for service, maintenance and repair of all heating, ventilation and air conditioning equipment within and servicing the leased premises, which shall provide for servicing by such contractor no less often than quarterly. A copy of such contract shall be delivered to the Lessor annually. If Lessee refuses or neglects to make repairs and/or maintain the leased premises, or any part thereof, in a manner reasonably satisfactory to Lessor, Lessor shall have the right, upon giving Lessee reasonable written notice of its election to do so, to make repair or perform such maintenance on behalf of and for the account of Lessee. In such event, such work shall be paid for by Lessee as additional rental promptly upon receipt of a bill therefor. Lessee further agrees to paint the interior of the leased premises when necessary in order to maintain at all times a clean and sightly appearance. Nothing herein shall imply any duty on Lessor to do any work which Lessor is not specifically and expressly required to perform under this Lease or which, under any provisions of this Lease, Lessee may be required to perform; and, the performing thereof by Lessor shall not constitute a waiver of Lessee's default in failing to perform the same. Lessee acknowledges that the foregoing provisions of this paragraph shall apply and become effective from and after the date Lessee or its agents or contractors enter the leased premises or undertake activities permitted hereunder. Lessee shall indemnify Lessor against, and hold it harmless from, any claims, demands, or actions against Lessor or its agents, employees or contractors for losses or damages incurred by Lessor or its agents, employees or contractors arising out of or in any way connected with Lessee's failure to perform its obligations or observe any covenants under this paragraph. 11 34. HAZARDOUS SUBSTANCES: The term "Hazardous Substances". as used in this Lease shall include, without limitation: flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum~products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. Lessee shall not cause or permit to occur any violation of any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under or about the premises arising from Lessee's use or occupancy therein, nor shall Lessee cause or permit the use, generation, release, manufacture, refinement, production, processing, storage or disposal of any Hazardous Substance which violates any federal, state or local law, ordinance or regulation now or hereafter enacted related to environmental conditions without Lessor's prior written consent, which consent may be withdrawn, conditioned, or modified by Lessor in its sole and absolute discretion. Lessee shall indemnify, defend and hold Lessor, its respective officers, directors, beneficiaries, shareholders, partners, agents, and employees harmless from all fines, suits, procedures, claims, clean-up and actions of every kind, and all costs associated therewith, including attorney's and consultant's fees, arising out of, or in any way connected with, any deposit, spill, discharge or other release of Hazardous Substances, at or from the premises, or which arises at any time from Lessee's use or occupancy of the premises, or from Lessee's failure to comply with or satisfy government required action on the matter. Lessee's obligations and liabilities under this paragraph shall survive the termination of this Lease. 35. CONFIDENTIALITY: Lessee shall not disclose the terms of this agreement to any person except on a need to know basis. IN WITNESS WHEREOF, Lessee and Lessor have caused this instrument to be executed as of the date first above written, by their respective officers or parties thereunto duly authorized. Signed, sealed and delivered Lessee: OMI ACQUISITION CORP. in the presence of: ____________________________ By _____________________________ ____________________________ Title___________________________ Attest__________________________ Secretary (Corporate Seal) 12 Signed, sealed and delivered in the presence of: ____________________________ Lessor: SUTTON PROPERTIES ____________________________ __________________________________ Authorized Agent for Sutton Properties 13 GUARANTEE In order to induce Lessor to execute the foregoing Lease (the "Lease") covering 14,400 square feet of space set forth in the foregoing Lease, and dated August __ , 1995, by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES and OMIT ACQUISITION CORP., to which this Guarantee is an integral part thereof, the undersigned hereby guarantees the payment and performance of and agrees to pay and perform as a primary obligor all liabilities, obligations and duties (including, but not limited to, payment of rent) imposed upon Lessee under the terms of the Lease, as if the undersigned had executed the Lease as Lessee thereunder as it relates only to the payment of rent, any sums identified as additional rent any obligations, duties and liabilities under Paragraph 34 of the Lease and any fines, attorney's fees and any other expenses or costs incurred by Lessor for code violations and code violation proceedings initiated by any regulatory agency for code violations alleged to exist in operation and maintenance of Lessee's business and maintenance of the leased premises by Lessee. The undersigned hereby waives notice of acceptance of this guarantee and all other notices in connection herewith or in connection with the liabilities, obligations and duties guaranteed hereby, including notices of default by Lessee under the Lease, and waives diligence, presentment and suit on the part of Lessor in the enforcement of any liability, obligation or duty guaranteed hereby. The undersigned further agrees that Lessor shall not be first required to enforce against Lessee or any other person any liability, obligation or duty guaranteed hereby before seeking enforcement thereof against the undersigned. Suit may be brought and maintained against the undersigned by Lessor to enforce any liability, obligation or duty guaranteed hereby without joinder of Lessee or any other person. The liability of the undersigned shall not be affected by any indulgence, compromise, settlement or termination of the Lease to the extent that Lessee thereafter continues to be liable thereunder. Lessor and Lessee, without notice to or consent by the undersigned, may at any time and from time to time enter into such modifications, extensions, amendments or other covenants respecting the Lease as they may deem appropriate and the undersigned shall not be released thereby, but shall continue to be fully liable to the extent provided for herein for the payment and performance of all liabilities, obligations and duties of Lessee under the Lease as so modified, extended or amended. It is understood that other agreements similar to this agreement may be executed by other persons with respect to the Lease. This agreement shall be cumulative of any such other agreements and the liabilities and obligations of the undersigned hereunder shall in no event be affected or diminished by reason of such other agreements. In the event that Lessor secures other agreements similar to this agreement, or secures the signature of more than one guarantor to this agreement, or both, the undersigned agrees that Lessor, in Lessor's sole discretion, may bring suit against all guarantors of the Lease jointly and severally against any one or more of them, may compound or settle with any one or more of such guarantors for such consideration as Lessor shall deem proper, and may release one or more of such guarantors from any liability, obligation or duty guaranteed hereby. The undersigned further agrees that no such action shall impair the rights of Lessor to enforce the Lease against any remaining guarantor(s). The undersigned agrees that if Lessor shall employ counsel to present, enforce or defend any or all of the Lessor's rights or remedies hereunder, or defend any action brought by the undersigned, undersigned shall pay any reasonable attorney's and expenses incurred by Lessor in such connection. EXECUTED this __ day of ___________, 199 __, to be effective as of the date of the Lease. GUARANTOR: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. _____________________________ By: ___________________________ Its: _____________________________ _______________________________ Attest: Secretary (Corporate Seal) EX-10.87 9 MEMORANDUM OF LEASE AGREEMENT MEMORANDUM OF LEASE AGREEMENT THIS MEMORANDUM OF LEASE AGREEMENT executed this _____ day of ___________, 1995 by and between FRED E. SUTTON and HAROLD S. SUTTON d/b/a SUTTON PROPERTIES, a Florida general partnership (hereinafter "Lessor"), OMI ACQUISITION CORP., a Delaware corporation (hereinafter "Lessee"), and DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (hereinafter "Guarantor"). WITNESSETH: WHEREAS, Lessor and Lessee entered into three separate Lease Agreements for space located at Building 2330, Woodlake Commerce Park, Palm Bay, Brevard County, Florida whereby Lessee leased premises of 35,510 square feet, 14,400 square feet and 4,000 square feet (hereinafter Lease 1, Lease 2 and Lease 3 respectively); and WHEREAS, the parties are desirous of setting forth their understanding with respect to said leases 1, 2 and 3. NOW THEREFORE, IN CONSIDERATION OF THE SUM OF $1.00, IT IS AGREED BY AND BETWEEN THE PARTIES, AS FOLLOWS: 1. That Lessor will provide to Lessee for use by its employees, customers, invitees and guests under said three leases, approximately 135 total parking spaces, which shall be in addition to those expressly provided for in lease 1. 2. At such time as Lessee takes possession of the demised premises under Leases 1 and 2, the HVAC, plumbing, electrical and other systems will be in good working order. 3. Should Lessee be legally entitled to terminate Lease 1, said termination shall also entitle Lessee at its option to terminate Lease 2 and/or Lease 3. 4. At such time as Lease 3 is in force, the parties acknowledge that the office buildings of which the demised premises are a part shall be increased by 4,000 square feet. Accordingly, at such time as the premises under Lease 3 are completed, the Lessee's obligation for "additional charges" as set forth in Paragraph 26 of Leases 1, 2 and 3 shall be re-prorated based upon the total amount of building square footage increasing from 164,500 square feet to 168,500 square feet. 5. Upon request by Lessee, the parties agree to enter into a lease for an additional 10,000 square feet located within or adjacent to Woodlake Commerce Park Buildings 1 and 2 at a location to be determined by Lessor. (a) Said lease space and improvements shall be constructed at the sole expense of Lessor. (b) Lessor shall have 180 days after execution of a lease for said premises within which to complete construction of said space. (c) The base rent for said space shall be the actual cost of construction as defined in Paragraph 3 of Lease 3 between the parties, amortized over the remaining terms of the above-referenced lease at 1.3 times the interest rate charged by a lender to Lessor at the time such improvements are completed. (d) The parties will enter into a lease in substantially the same form as lease 3. In addition to the rent as set forth in 5(c) above, Lessee shall pay additional rent as provided in Paragraph 26 of the subject leases based upon a pro-rata basis. IN WITNESS WHEREOF, Lessee, Lessor and Guarantor have caused this instrument to be executed as of the date first above written, by their respective officers or parties thereunto duly authorized. Signed, sealed and delivered Lessee: OMI ACQUISITION CORP. in the presence of: - -------------------------------- By -------------------------------- - -------------------------------- Title Secretary ------------------------------ Attest ---------------------------- Secretary (Corporate Seal) Signed, sealed and delivered Lessor: SUTTON PROPERTIES in the presence of: - -------------------------------- ----------------------------------- Authorized Agent for - -------------------------------- Sutton Properties Signed, sealed and delivered Guarantor: DIAGNOSTIC/RETRIEVAL in the presence of: SYSTEMS, INC. - -------------------------------- By: ------------------------------- - -------------------------------- Title: ---------------------------- Attest: --------------------------- Secretary (Corporate Seal) EX-10.88 10 MASTER LEASE AGREEMENT MASTER LEASE AGREEMENT THIS MASTER LEASE AGREEMENT, dated as of 8-31-95 ("Agreement"), between General Electric Capital Corporation, with an office at 303 International Circle Suite 300, Hunt Valley, MD 21031 (hereinafter called, together with its successors and assigns, if any, "Lessor"), and OMI Acquisition Corp., a corporation organized and existing under the laws of the State of Delaware with its mailing address and chief place of business at 425 North Drive, Melbourne, FL 32935 (hereinafter called "Lessee"). WITNESSETH: I. LEASING: (a) Subject to the terms and conditions set forth below, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment ("Equipment") described in Annex A to any schedule hereto ("Schedule"). Terms defined in a Schedule and not otherwise defined herein shall have the meanings ascribed to them in such Schedule. (b) The obligation of Lessor to purchase from the manufacturer or supplier thereof ("Supplier") and to lease the same to Lessee under any Schedule shall be subject to receipt by Lessor, prior to the Lease Commencement Date (with respect to such Equipment), of each of the following documents in form and substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder, (ii) a Purchase Order Assignment and Consent in the form of Annex B to the applicable Schedule, unless Lessor shall have delivered its purchase order for such Equipment, (iii) evidence of insurance which complies with the requirements of Section X, and (iv) such other documents as Lessor may reasonably request. As a further condition to such obligations of Lessor, Lessee shall, upon delivery of such Equipment (but not later than the Last Delivery Date specified in the applicable Schedule) execute and deliver to Lessor a Certificate of Acceptance (in the form of Annex C to the applicable Schedule) covering such Equipment, and deliver to Lessor a bill of sale therefor (in form and substance satisfactory to Lessor). Lessor hereby appoints Lessee its agent for inspection and acceptance of the Equipment from the Supplier. Upon execution by Lessee of any Certificate of Acceptance, the Equipment described thereon shall be deemed to have been delivered to, and irrevocably accepted by, Lessee for lease hereunder. II. TERM, RENT AND PAYMENT: (a) The rent payable hereunder and Lessee's right to use the Equipment shall commence on the date of execution by Lessee of the Certificate of Acceptance for such Equipment ("Lease Commencement Date"). The term of this Agreement shall be the period specified in the applicable Schedule. If any term is extended, the word "term" shall be deemed to refer to all extended terms, and all provisions of this Agreement shall apply during any extended terms, except as may be otherwise specifically provided in writing. (b) Rent shall be paid to Lessor at its address stated above, except as otherwise directed by Lessor. Payments of rent shall be in the amount set forth in, and due in accordance with, the provisions of the applicable Schedule. If one or more Advance Rentals are payable, such Advance Rental shall be (i) set forth on the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule, and (iii) when received by Lessor, applied to the first rent payment and the balance, if any, to the final rental payment(s) under such Schedule. In no event shall any Advance Rental or any other rent payments be refunded to Lessee. If rent is not paid within ten days of its due date, Lessee agrees to pay a late charge of five cents ($.05) per dollar on, and in addition to, the amount of such rent but not exceeding the lawful maximum, if any. III. RENT ADJUSTMENT: (a) The periodic rent payments in each Schedule have been calculated on the assumption (which, as between Lessor and Lessee, is mutual) that the maximum effective corporate income tax rate (exclusive of any minimum tax rate) for calendar-year taxpayers ("Effective Rate") will be thirty-five percent (35%) each year during the lease term. (b) If, solely as a result of Congressional enactment of any law (including, without limitation, any modification of, or amendment or addition to, the Internal Revenue Code of 1986, as amended, (the "Code")), the Effective Rate is higher than thirty-five percent (35%) for any year during the lease term, then Lessor shall have the right to increase such rent payments by requiring payment of a single additional sum equal to the product of (i) the Effective Rate (expressed as a decimal) for such year less .35 (or, in the event that any adjustment has been made hereunder for any previous year, the Effective Rate (expressed as a decimal) used in calculating the next previous adjustment) times (ii) the adjusted Termination Value divided by the difference between the new Effective Tax Rate (expressed as a decimal) and one (1). The adjusted Termination Value shall be the Termination Value (calculated as of the first rental due in the year for which such adjustment is being made) less the Tax Benefits that would be allowable under Section 168 of the Code (as of the first day of the year for which such adjustment is being made and all subsequent years of the lease term). Lessee shall pay to Lessor the full amount of the additional rent payment on the later of (i) receipt of notice or (ii) the first day of the year for which such adjustment is being made. (c) Lessee's obligations under this Section III shall survive any expiration or termination of this Agreement. IV. TAXES: Except as provided in Section III and XV(c), Lessee shall have no liability for taxes imposed by the United States of America or any State or political subdivision thereof which are on or measured by the net income of Lessor. Lessee shall report (to the extent that it is legally permissible) and pay promptly all other taxes, fees and assessments due, imposed, assessed or levied against any Equipment (or the purchase, ownership, delivery, leasing, possession, use or operation thereof), this Agreement (or any rentals or receipts hereunder), any Schedule, Lessor or Lessee by any foreign, federal, state or local government or taxing authority during or related to the term of this Agreement, including, without limitation, all license and registration fees, and all sales, use, personal property, excise, gross receipts, franchise, stamp or other taxes, imposts, duties and charges, together with any penalties, fines or interest thereon (all hereinafter called "Taxes"). Lessee shall (i) reimburse Lessor upon receipt of written request for reimbursement for any Taxes charged to or assessed against Lessor, (ii) on request of Lessor, submit to Lessor written evidence of Lessee's payment of Taxes, (iii) on all reports or returns show the ownership of the Equipment by Lessor, and (iv) send a copy thereof to Lessor. V. REPORTS: (a) Lessee will notify Lessor in writing, within ten (10) days after any tax or other lien shall attach to any Equipment, of the full particulars thereof and of the location of such Equipment on the date of such notification. (b) Lessee will within ninety (90) days of the close of each fiscal year of Lessee, deliver to Lessor, Lessee's balance sheet and profit and loss statement, certified by a recognized firm of certified public accountants. Upon request Lessee will deliver to Lessor quarterly, within ninety (90) days of the close of each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's quarterly financial report certified by the chief financial officer of Lessee. ---- PAGE MISSING ---- (a) Lessor may in writing this Agreement in default if: Lessee breaches its obligation to pay rent or any other sum when due and fails to cure the breach within ten (10) days; Lessee breaches any of its insurance obligations under Section X; Lessee breaches any of its other obligations and fails to cure that breach within thirty (30) days after written notice thereof; any representation or warranty made by lessee in connection with this Agreement shall be false or misleading in any material respect; Lessee becomes insolvent or ceases to do business as a going concern; any Equipment is illegally used; or a petition is filed by or against Lessee or any guarantor of Lessee's obligations to Lessor under any bankruptcy or insolvency laws. Such declaration shall apply to all Schedules except as specifically excepted by Lessor. (b) After default, at the request of Lessor, Lessee shall comply with the provisions of Section XI(a). Lessee hereby authorizes Lessor to enter, with or without legal process, any premises where any Equipment is believed to be and take possession thereof. Lessee shall, without further demand, forthwith pay to Lessor (i) as liquidated damages for loss of a bargain and not as a penalty, the Stipulated Loss Value of the Equipment (calculated as of the rental next preceding the declaration of default), and (ii) all rentals and other sums then due hereunder. Lessor may, but shall not be required to, sell Equipment at private or public sale, in bulk or in parcels, with or without notice and without having the Equipment present at the place of sale; or Lessor may, but shall not be required to, lease, otherwise dispose of or keep idle all or part of the Equipment; and Lessor may use Lessee's premises for any or all of the foregoing without liability for rent, costs, damages or otherwise. The proceeds of sale, lease or other disposition, if any, shall be applied in the following order of priorities: (1) to pay all of Lessor's costs, charges and expenses incurred in taking, removing, holding, repairing and selling, leasing or otherwise disposing of Equipment; then, (2) to the extent not previously paid by Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to reimburse to Lessee any sums previously paid by Lessee as liquidated damages; and (4) any surplus shall be retained by Lessor. Lessee shall pay any deficiency in (1) and (2) forthwith. (c) The foregoing remedies are cumulative, and any or all thereof may be exercises in lieu of or in addition to each other or any remedies at law, in equity, or under statute. Lessee waives notice of sale or other disposition (and the time and place thereof), and the manner and place of any advertising. Lessee shall pay Lessor's actual attorney's fees incurred in connection with the enforcement, assertion, defense or preservation of Lessor's rights and remedies hereunder, or if prohibited by law, such lesser sum as may be permitted. Waiver of any default shall not be a waiver of any other or subsequent default. (d) Any default under the terms of this or any other agreement between Lessor and Lessee may be declared by Lessor a default under this and any such other agreement. XIII. ASSIGNMENT: Lessor may, without the consent of Lessee, assign this Agreement or any Schedule. Lessee agrees that if Lessee receives written notice of an assignment from Lessor, Lessee will pay all rent and all other amounts payable under any assigned Equipment Schedule to such assignee or as instructed by Lessor. Lessee further agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by assignee. Lessee hereby waives and agrees not to assert against any such assignee any defense, set-off, recoupment claim or counterclaim which Lessee has or may at any time have against Lessor for any reason whatsoever. XIV. NET LEASE; NO SET-OFF, ETC: This Agreement is a net lease. Lessee's obligation to pay rent and other amounts due hereunder shall be absolute and unconditional. Lessee shall not be entitled to any abatement or reductions of, or set-offs against, said rent or other amounts, including, without limitation, those arising or allegedly arising out of claims (present or future, alleged or actual, and including claims arising out of strict tort or negligence of Lessor) of Lessee against Lessor under this Agreement or otherwise. Nor shall this Agreement terminate or the obligations of Lessee be affected by reason of any defect in or damage to, or loss of possession, use or destruction of, any Equipment from whatsoever cause. It is the intention of the parties that rents and other amounts due hereunder shall continue to be payable in all events in the manner and at the times set forth herein unless the obligation to do so shall have been terminated pursuant to the express terms hereof. XV. INDEMNIFICATION: (a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its agents, employees, successors and assigns from and against any and all losses, damages, penalties, injuries, claims, actions and suits, including legal expenses, of whatsoever kind and nature, in contract or tort, whether caused by the active or passive negligence of Lessor or otherwise, and including, but not limited to, Lessor's strict liability in tort, arising out of (i) the selection, manufacture, purchase, acceptance or rejection of Equipment, the ownership of Equipment during the term of this Agreement, and the delivery, lease, possession, maintenance, uses, condition, return or operation of Equipment (including, without limitation, latent and other defects, whether or not discoverable by Lessor or Lessee and any claim for patent, trademark or copyright infringement or environmental damage) or (ii) the condition of Equipment sold or disposed of after use by Lessee, any sublessee or employees of Lessee. Lessee shall, upon request, defend any actions based on, or arising out of, any of the foregoing. (b) Lessee hereby represents, warrants and covenants that (i) on the Lease Commencement Date for any unit of Equipment, such unit will qualify for all of the items of deduction and credit specified in Section C of the applicable Schedule ("Tax Benefits") in the hands of Lessor (all references to Lessor in this Section XV include Lessor and the consolidated taxpayer group of which Lessor is a member), and (ii) at no time during the term of this Agreement will Lessee take or omit to take, nor will it permit any subleasee or assignee to take or omit to take, any action (whether or not such act or omission is otherwise permitted by Lessor or the terms of this Agreement), which will result in the disqualification of any Equipment for, or recapture of, all or any portion of such Tax Benefits. (c) If as a result of a breach of any representation, warrant or covenant of the Lessee contained in this Agreement or any Schedule (x) tax counsel of Lessor shall determine that Lessor is not entitled to claim on its Federal income tax return all or any portion of the Tax Benefits with respect to any Equipment, or (y) any such Tax Benefit claimed on the Federal income tax return of Lessor is disallowed or adjusted by the Internal Revenue Service, or (z) any such Tax Benefit is recomputed or recaptured (any such determination, disallowance, adjustment, recomputation or recapture being hereinafter called a "Loss"), then Lessee shall pay to Lessor, as an indemnity and as additional rent, such amount as shall, in the reasonable opinion of Lessor, cause Lessor's after-tax economic yields and cash flows, computed on the same assumptions, including tax rates (unless any adjustment has been made under Section III hereof, in which case the Effective Rate used in the next preceding adjustment shall be substituted), as were utilized by Lessor in originally evaluating the transaction (such yields and flows being hereinafter called the "Net Economic Return") to equal the Net Economic Return that would have been realized by Lessor if such Loss had not occurred. Such amount shall be payable upon demand accompanied by a statement describing in reasonable detail such Loss and the computation of such amount. (d) All of Lessor's rights, privileges and indemnities contained in this Section XV shall survive the expiration or other termination of this Agreement and the rights, privileges and indemnities contained herein are expressly made for the benefit of, and shall be enforceable by Lessor, its successors and assigns. XVI. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE EQUIPMENT LEASED HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks, as between Lessor and Lessee, are to be borne by Lessee. ---- PAGE MISSING ---- LESSEE AND LESSOR RELATING TO THE SUBJECT-MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS LEASE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (b) Unless and until Lessee exercises its rights under Section XIX above, nothing herein contained shall give or convey to Lessee any right, title or interest in and to any Equipment except as a lessee. Any cancellation or termination by Lessor, pursuant to the provision of this Agreement, any Schedule, supplement or amendment hereto, or the lease of any Equipment hereunder, shall not release Lessee from any then outstanding obligations to Lessor hereunder. All Equipment shall at all times remain personal property of Lessor regardless of the degree of its annexation to any real property and shall not by reason of any installation in, or affixation to, real or personal property become a part thereof. (c) Time is of the essence of this Agreement. Lessor's failure at any time to require strict performance by Lessee of any of the provisions hereof shall not waive or diminish Lessor's right thereafter to demand strict compliance therewith. Lessee agrees, upon Lessor's request, to execute any instrument necessary or expedient for filing, recording or perfecting the interest of Lessor. All notices required to be given hereunder shall be deemed adequately given if sent by registered or certified mail to the addressee at its address stated herein, or at such other place as such addressee may have designated in writing. This Agreement and any Schedule and Annexes thereto constitute the entire agreement of the parties with respect to the subject matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO. (d) In case of a failure of Lessee to comply with any provision of this Agreement, Lessor shall have the right, but shall not be obligated, to effect such compliance, in whole or in part; and all moneys spent and expenses and obligations incurred or assumed by Lessor in effecting such compliance shall constitute additional rent due to Lessor within five days after the date Lessor sends notice to Lessee requesting payment. Lessor's effecting such compliance shall not be a waiver of Lessee's default. (e) Any rent or other amount not paid to Lessor when due hereunder shall bear interest, both before and after any judgment or termination hereof, at the lesser of eighteen percent (18%) per annum or the maximum rate allowed by law. Any provision in this Agreement and any Schedule which are in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed by their duly authorized representative as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation OMI Acquisition Corp. By: /s/ KEVIN G. WORTMAN By: /s/ RICHARD ROSS -------------------------------- -------------------------------- Title: Sr. Credit Analyst Title: President ----------------------------- ----------------------------- - ------------------------------------------------------------------ AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 THIS AMENDMENT amends and supplements the above lease (the "Lease"), between GENERAL ELECTRIC CAPITAL CORPORATION ("Lessor") and OMI ACQUISITION CORP. ("Lessee") and is hereby incorporated into the Lease as though fully set forth therein. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Lease. The Lease is hereby amended as follows: 1. Section III(c). After "Lessee's" add "and Lessor's" 2. The following is added as paragraph two to Section III(b): If, solely as a result of congressional enactment of any law (including, without limitation, an modification of, or amendment or addition to, the Internal Revenue code of 1986, as amended, (the "Code")), the Effective Rate is lower than thirty-five percent (35%) for any year during the lease term, then Lessee shall have the right to request a decrease in the rent payments by requiring the Lessor to make a payment of a single sum equal to the product of (i) the Effective Rate (expressed as a decimal) for such year less .35 (or, in the event that any adjustment has been made hereunder for any previous year, the Effective Rate (expressed as a decimal) used in calculating the next previous adjustment) times (ii) the adjusted Termination Value divided by the difference between the new Effective Tax Rate (expressed as a decimal) and one (1). The adjusted Termination Value shall be the Termination Value (calculated as of the first rental due in the year for which such adjustment is being made) less the Tax Benefits that would be allowable under Section 168 of the code (as of the first day of the year for which such adjustment is being made and all subsequent years of the lease term). Lessor shall pay to Lessee the full amount of the reduction rent payment on the later of (i) receipt of notice or (ii) the first day of the year for which such adjustment is being made. Except as expressly modified hereby, all terms and provisions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL OMI ACQUISITION CORP. CORPORATION (Sig.) (Sig.) By:______________________________ By: _______________________________ Name: ___________________________ Name: _____________________________ Title: __________________________ Title: ____________________________ Attest: (Sig.) By: ________________________________ Name: ______________________________ AMENDMENT NO. 2 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 THIS AMENDMENT amends and supplements the above lease (the "Lease"), between GENERAL ELECTRIC CAPITAL CORPORATION ("Lessor") and OMI ACQUISITION CORP. ("Lessee") and is hereby incorporated into the Lease as though fully set forth therein. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Lease. The Lease is hereby amended as follows: 1. Section IV, line 2. After "measured by" delete the remainder of the sentence and substitute the following: "the Lessor's net income, profits, receipts, franchise, or conduct of business, and taxes on capital, equity or net worth relating to any payment to Lessor under this Agreement." 2. Section X, line 5. The sentence that begins with "Lessee hereby appoints Lessor..." is deleted in its entirety and replaced by the following: "Lessee shall cause all insurers to issue checks for payments covering casualty losses to the Equipment payable to the order of Lessor only, and no other payee. If Lessee fails to do so, or if notwithstanding Lessee's instructions the insurer issues any check payable jointly to Lessee and Lessor, then Lessee shall upon Lessor's request promptly endorse any and every such check as directed by Lessor. Lessee and Lessor agree that the foregoing provision may be specifically enforced by a court of competent jurisdiction." 3. Section XV(a), line 8. After "foregoing." Add "Anything in the foregoing to the contrary notwithstanding, Lessee shall have no obligation to indemnify, defend or hold harmless Lessor from and against any claims which are the direct and proximate result of any gross negligence or willful misconduct of Lessor, its employees or agent (excluding Lessee and its employees and agents)." 4. Section XVIII(a), line 1. After "hereunder," delete the remainder of the sentence and substitute the following: "(i) terminate this Agreement as to any item of Equipment (provided, however, that the aggregate original Capitalized Lessor's Cost of all items of the Equipment so terminated pursuant to this Section XVIII shall not exceed twenty-five (25) percent of the aggregate original Capitalized Lessor's Cost of all Equipment described on all Schedules executed hereunder) which have not previously been terminated, or (ii) terminate this Agreement as to all items of the Equipment then leased pursuant to an individual Schedule, as of a rent payment date ("Termination Date") upon at least 90 days prior written notice to Lessor. Except as expressly modified hereby, all terms and provisions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL OMI ACQUISITION CORP. CORPORATION (Sig.) (Sig.) By:______________________________ By: _______________________________ Name: ___________________________ Name: _____________________________ Title: __________________________ Title: ____________________________ AMENDMENT NO. 3 TO MASTER LEASE AGREEMENT DATED AUGUST 31, 1995 (the "Lease") BY AND BETWEEN OMI ACQUISITION CORP. ("Lessee") AND GENERAL ELECTRIC CAPITAL CORPORATION ("Lessor") DATED AUGUST 31, 1995 WHEREAS, Lessor and Lessee desire to amend certain provisions of the Lease as hereinafter provided; NOW THEREFORE, for good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease by adding the following language: Section XII of the Lease is amended in the following manner: (e) Lessee shall be deemed to be in default hereunder if Lessee shall be in default under any material obligation for the payment of borrowed money, for the deferred purchase price of property or for the payment of any rent under any material lease agreement, and the applicable grace period with respect thereto shall have expired. This Amendment shall be deemed to have been entered into contemporaneously with and integrated into the terms and conditions of the Lease. Except as set out herein, the terms and conditions of the Lease shall remain in full force and effect as entered into by the parties on or prior to the date hereof. Dated: August 31, 1995 LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL OMI ACQUISITION CORP. CORPORATION By:______________________________ By: _______________________________ Name: ___________________________ Name: _____________________________ Title: __________________________ Title: ____________________________ CORPORATE GUARANTY Date: August 31, 1995 General Electric Capital Corporation 303 International Circle Suite 300 Hunt Valley, MD 21031 To induce you to enter into, purchase or otherwise acquire, now or at any time hereafter, any promissory notes, security agreements, chattel mortgages, pledge agreements, conditional sale contracts, lease agreements, and/or any other documents or instruments evidencing, or relating to, any lease, loan, extension of credit or other financial accommodation (collectively "Account Documents" and each an "Account Document") to OMI Acquisition Corp., a corporation organized and existing under the laws of the State of Delaware ("Customer"), but without in any way binding you to do so, the undersigned, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, does hereby guarantee to you, your successors and assigns, the due regular and punctual payment of any sum or sums of money which the Customer may owe to you now or at any time hereafter, whether evidenced by an Account Document, on open account or otherwise, and whether it represents principal, interest, rent, late charges, indemnities, an original balance, an accelerated balance, liquidated damages, a balance reduced by partial payment, a deficiency after sale or other disposition of any leased equipment, collateral or security, or any other type of sum of any kind whatsoever that the Customer may owe to you now or at any time hereafter, and does hereby further guarantee to you, your successors and assigns, the due, regular and punctual performance of any other duty or obligation of any kind or character whatsoever that the Customer may owe to you now or at any time hereafter (all such payment and performance obligations being collectively referred to as "Obligations"). Undersigned does hereby further guarantee to pay upon demand all losses, costs, attorneys' fees and expenses which may be suffered by you by reason of Customer's default or default of the undersigned. This Guaranty is a guaranty of prompt payment and performance (and not merely a guaranty of collection). Nothing herein shall require you to first seek or exhaust any remedy against the Customer, its successors and assigns, or any other person obligated with respect to the Obligations, or to first foreclose, exhaust or otherwise proceed against any leased equipment, collateral or security which may be given in connection with the Obligations. It is agreed that you may, upon any breach of default of the Customer, or at any time thereafter, make demand upon the undersigned and receive payment and performance of the Obligations, with or without notice or demand for payment of performance by the Customer, its successors or assigns, or any other person. Suit may be brought and maintained against the undersigned, at your election, without joinder of the Customer or any other person as parties thereto. The obligations of each signatory to this Guaranty shall be joint and several. The undersigned agrees that its obligations under this Guaranty shall be primary, absolute, continuing and unconditional, irrespective of and unaffected by any of the following actions or circumstances (regardless of any notice to or consent of the undersigned): (a) the genuineness, validity, regularity and enforceability of the Account Documents or any other document; (b) any extension, renewal, amendment, change, waiver or other modification of the Account Documents or any other document; (c) the absence of, or delay in, any action to enforce the Account Documents, this Guaranty or any other document; (d) your failure or delay in obtaining any other guaranty of the Obligations (including, without limitation, your failure to obtain the signature of any other guarantor hereunder); (e) the release of, extension of time for payment or performance by, or any other indulgence granted to the Customer or any other person with respect to the Obligations by operation of law or otherwise; (f) the existence, value, condition, loss, subordination or release (with or without substitution) of, or failure to have title to or perfect and maintain a security interest in, or the time, place and manner of any sale or other disposition of any leased equipment, collateral or security given in connection with the Obligations, or any other impairment (whether intentional or negligent, by operation of law or otherwise) of the rights of the undersigned; (g) the Customer's voluntary or involuntary bankruptcy, assignment for the benefit of creditors, reorganization, or similar proceedings affecting the Customer or any of its assets; or (h) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or grantor. This Guaranty may be terminated upon delivery to you (at your address shown above) of a written termination notice from the undersigned. However, as to all Obligations (whether matured, unmatured, absolute, contingent or otherwise) incurred by the Customer prior to your receipt of such written termination notice (and regardless of any subsequent amendment, extension or other modification which may be made with respect to such Obligations), this Guaranty shall nevertheless continue and remain undischarged until all such Obligations are indefeasibly paid and performed in full. The undersigned agrees that this Guaranty shall remain in full force and effect or be reinstated (as the case may be) if at any time payment or performance of any of the Obligations (or any part thereof) is rescinded, reduced or must otherwise be restored or returned by you, all as though such payment or performance had not been made. If, by reason of any bankruptcy, insolvency or similar laws effecting the rights of creditors, you shall be prohibited from exercising any of your rights or remedies against the Customer or any other person or against any property, then, as between you and the undersigned, such prohibition shall be of no force and effect, and you shall have the right to make demand upon, and receive payment from, the undersigned of all amounts and other sums that would be due to you upon a default with respect to the Obligations. Notice of acceptance of this Guaranty and of any default by the Customer or any other person is hereby waived. Presentment, protest demand, and notice of protest, demand and dishonor of any of the Obligations, and the exercise of possessory, collection or other remedies for the Obligations, are hereby waived. The undersigned warrants that it has adequate means to obtain from the Customer on a continuing basis financial data and other information regarding the Customer and is not relying upon you to provide any such data or other information. Without limiting the foregoing, notice of adverse change in the Customer's financial condition or of any other fact which might materially increase the risk of the undersigned is also waived. All settlements, compromises, accounts stated and agreed balances made in good faith between the Customer, its successors or assigns, and you shall be binding upon and shall not effect the liability of the undersigned. Payment of all amounts now or hereafter owed to the undersigned by the Customer or any other obligor for any of the Obligations is hereby subordinated in right of payment to the indefeasible payment in full to you of all Obligations and is hereby assigned to you as a security therefor. The undersigned hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law, equitable and all other claims against the Customer, any other obligor for any of the Obligations, any collateral therefor, or any other assets of the Customer or any such other obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to you by the undersigned hereunder, and the undersigned hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which it might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by, or collected or due from, it, the Customer or any other obligor for any of the Obligations, or realized from any of their respective assets. THE UNDERSIGNED HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN US RELATING TO THE SUBJECT MATTER HEREOF OR THEREOF, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN US. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, OR ANY RELATED DOCUMENTS. IN THE EVENT OF LITIGATION, THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. As used in this Guaranty, the word "person" include any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or any government or any political subdivision thereof. This Guaranty is intended by the parties as a final expression of the guaranty of the undersigned and is also intended as a complete and exclusive statement of the terms thereof. No course of dealing, course of performance or trade usage, nor any paid evidence of any kind, shall be used to supplement or modify any of the terms hereof. Nor are there any conditions to the full effectiveness of this Guaranty. This Guaranty and each of its provisions may only be waived, modified, varied, released, terminated or surrendered, in whole or in part, by a duly authorized written instrument signed by you. No failure by you to exercise your rights hereunder shall give rise to any estoppel against you, or excuse the undersigned from performing hereunder. Your waiver of any right to demand performance hereunder shall not be a waiver of any subsequent or other right to demand performance hereunder. This Guaranty shall bind the undersigned's successors and assigns and the benefits thereof shall extend to and include your successors and assigns. In the event of default hereunder, you may at any time inspect undersigned's records, or at your option, undersigned shall furnish you with a current independent audit report. If any provisions of this Guaranty are in conflict with any applicable statute, rule or law, then such provisions shall be deemed null and void to the extent that they may conflict therewith, but without invalidating any other provisions hereof. Each signatory on behalf of a corporate guarantor warrants that he had authority to sign on behalf of such corporation and by so signing, to bind said guarantor corporation hereunder. IN WITNESS WHEREOF, this Guaranty is executed the day and year above written. Photronics Corp. By: _____________________________ (Signature) Title: __________________________ (Officer's Title) ATTEST: _____________________________ Secretary/Assistant Secretary Stockholders Certification We, the undersigned, being all of the stockholders of ____________________ ("Guarantor"), the corporation which is about to execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") in favor of General Electric Capital Corporation (the "GECC Corporation"), do hereby certify to such GECC Corporation that it is to the benefit of the Guarantor to execute such guaranty, that the benefit to be received by the Guarantor from such guaranty is reasonably worth the obligations thereby guaranteed, that the Guarantor is authorized to execute said guaranty, and that the persons executing the same on behalf of the Guarantor are duly authorized to do so in their named capacity and to thereby bind the Guarantor to the terms of said instrument as therein set forth. Dated: __________________________, 19___ _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) Certified Resolution The undersigned hereby certifies that he is Secretary of ________________, that the following resolution was passed at a meeting of the Board of Directors of said corporation held on __________________________, 19___ duly called, a quorum being present, that said resolution has not since been revoked or amended, and that the form of guaranty referred to therein is the form attached hereto: "RESOLVED that it is to the benefit of this corporation that it execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") to General Electric Capital Corporation (the "GECC Corporation") and that the benefit to be received by this corporation from such guaranty is reasonably worth the obligations thereby guaranteed, and further that such guaranty shall be substantially in the form annexed to these minutes, and further that the ______________________ and ______________________ (Title of Officers) of this corporation are authorized to execute such guaranty on the behalf of this corporation." WITNESS my hand and the seal of this corporation on this _______________ day of _______________________, 19___. _____________________________ [Seal] Secretary Certification and Representation by Signing Officers We, the undersigned, ______________________ and ____________________ being the ____________________ and ____________________ of ___________________, the corporation which executed the guaranty hereto, hereby jointly and severally certify and represent to General Electric Capital Corporation that each of the undersigned executed the guaranty for and on behalf of said corporation and that in so executing said instrument the undersigned were duly authorized to do so in their named capacity as officers and by so executing to hereby bind said guarantor corporation to the terms of said instrument as therein set forth. _____________________________ (L.S.) _____________________________ (L.S.) Date: ______________________________ Date: ______________________________ Stockholders Certification We, the undersigned, being all of the stockholders of ____________________ ("Guarantor"), the corporation which is about to execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") in favor of General Electric Capital Corporation (the "GECC Corporation"), do hereby certify to such GECC Corporation that it is to the benefit of the Guarantor to execute such guaranty, that the benefit to be received by the Guarantor from such guaranty is reasonably worth the obligations thereby guaranteed, that the Guarantor is authorized to execute said guaranty, and that the persons executing the same on behalf of the Guarantor are duly authorized to do so in their named capacity and to thereby bind the Guarantor to the terms of said instrument as therein set forth. Dated: __________________________, 19___ _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) Certified Resolution The undersigned hereby certifies that he is Secretary of ________________, that the following resolution was passed at a meeting of the Board of Directors of said corporation held on __________________________, 19___ duly called, a quorum being present, that said resolution has not since been revoked or amended, and that the form of guaranty referred to therein is the form attached hereto: "RESOLVED that it is to the benefit of this corporation that it execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") to General Electric Capital Corporation (the "GECC Corporation") and that the benefit to be received by this corporation from such guaranty is reasonably worth the obligations thereby guaranteed, and further that such guaranty shall be substantially in the form annexed to these minutes, and further that the ______________________ and ______________________ (Title of Officers) of this corporation are authorized to execute such guaranty on the behalf of this corporation." WITNESS my hand and the seal of this corporation on this _________________ day of _______________________, 19___. _____________________________ [Seal] Secretary Certification and Representation by Signing Officers We, the undersigned, ____________________ and _____________________ being the ____________________ and _____________________ of __________________, the corporation which executed the guaranty hereto, hereby jointly and severally certify and represent to General Electric Capital Corporation that each of the undersigned executed the guaranty for and on behalf of said corporation and that in so executing said instrument the undersigned were duly authorized to do so in their named capacity as officers and by so executing to hereby bind said guarantor corporation to the terms of said instrument as therein set forth. ____________________________ (L.S.) _____________________________ (L.S.) Date: _____________________________ Date: ______________________________ CORPORATE GUARANTY Date: August 31, 1995 General Electric Capital Corporation 303 International Circle Suite 300 Hunt Valley, MD 21031 To induce you to enter into, purchase or otherwise acquire, now or at any time hereafter, any promissory notes, security agreements, chattel mortgages, pledge agreements, conditional sale contracts, lease agreements, and/or any other documents or instruments evidencing, or relating to, any lease, loan, extension of credit or other financial accommodation (collectively "Account Documents" and each an "Account Document") to OMI Acquisition Corp., a corporation organized and existing under the laws of the State of Delaware ("Customer"), but without in any way binding you to do so, the undersigned, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, does hereby guarantee to you, your successors and assigns, the due regular and punctual payment of any sum or sums of money which the Customer may owe to you now or at any time hereafter, whether evidenced by an Account Document, on open account or otherwise, and whether it represents principal, interest, rent, late charges, indemnities, an original balance, an accelerated balance, liquidated damages, a balance reduced by partial payment, a deficiency after sale or other disposition of any leased equipment, collateral or security, or any other type of sum of any kind whatsoever that the Customer may owe to you now or at any time hereafter, and does hereby further guarantee to you, your successors and assigns, the due, regular and punctual performance of any other duty or obligation of any kind or character whatsoever that the Customer may owe to you now or at any time hereafter (all such payment and performance obligations being collectively referred to as "Obligations"). Undersigned does hereby further guarantee to pay upon demand all losses, costs, attorneys' fees and expenses which may be suffered by you by reason of Customer's default or default of the undersigned. This Guaranty is a guaranty of prompt payment and performance (and not merely a guaranty of collection). Nothing herein shall require you to first seek or exhaust any remedy against the Customer, its successors and assigns, or any other person obligated with respect to the Obligations, or to first foreclose, exhaust or otherwise proceed against any leased equipment, collateral or security which may be given in connection with the Obligations. It is agreed that you may, upon any breach of default of the Customer, or at any time thereafter, make demand upon the undersigned and receive payment and performance of the Obligations, with or without notice or demand for payment of performance by the Customer, its successors or assigns, or any other person. Suit may be brought and maintained against the undersigned, at your election, without joinder of the Customer or any other person as parties thereto. The obligations of each signatory to this Guaranty shall be joint and several. The undersigned agrees that its obligations under this Guaranty shall be primary, absolute, continuing and unconditional, irrespective of and unaffected by any of the following actions or circumstances (regardless of any notice to or consent of the undersigned): (a) the genuineness, validity, regularity and enforceability of the Account Documents or any other document; (b) any extension, renewal, amendment, change, waiver or other modification of the Account Documents or any other document; (c) the absence of, or delay in, any action to enforce the Account Documents, this Guaranty or any other document; (d) your failure or delay in obtaining any other guaranty of the Obligations (including, without limitation, your failure to obtain the signature of any other guarantor hereunder); (e) the release of, extension of time for payment or performance by, or any other indulgence granted to the Customer or any other person with respect to the Obligations by operation of law or otherwise; (f) the existence, value, condition, loss, subordination or release (with or without substitution) of, or failure to have title to or perfect and maintain a security interest in, or the time, place and manner of any sale or other disposition of any leased equipment, collateral or security given in connection with the Obligations, or any other impairment (whether intentional or negligent, by operation of law or otherwise) of the rights of the undersigned; (g) the Customer's voluntary or involuntary bankruptcy, assignment for the benefit of creditors, reorganization, or similar proceedings affecting the Customer or any of its assets; or (h) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or grantor. This Guaranty may be terminated upon delivery to you (at your address shown above) of a written termination notice from the undersigned. However, as to all Obligations (whether matured, unmatured, absolute, contingent or otherwise) incurred by the Customer prior to your receipt of such written termination notice (and regardless of any subsequent amendment, extension or other modification which may be made with respect to such Obligations), this Guaranty shall nevertheless continue and remain undischarged until all such Obligations are indefeasibly paid and performed in full. The undersigned agrees that this Guaranty shall remain in full force and effect or be reinstated (as the case may be) if at any time payment or performance of any of the Obligations (or any part thereof) is rescinded, reduced or must otherwise be restored or returned by you, all as though such payment or performance had not been made. If, by reason of any bankruptcy, insolvency or similar laws effecting the rights of creditors, you shall be prohibited from exercising any of your rights or remedies against the Customer or any other person or against any property, then, as between you and the undersigned, such prohibition shall be of no force and effect, and you shall have the right to make demand upon, and receive payment from, the undersigned of all amounts and other sums that would be due to you upon a default with respect to the Obligations. Notice of acceptance of this Guaranty and of any default by the Customer or any other person is hereby waived. Presentment, protest demand, and notice of protest, demand and dishonor of any of the Obligations, and the exercise of possessory, collection or other remedies for the Obligations, are hereby waived. The undersigned warrants that it has adequate means to obtain from the Customer on a continuing basis financial data and other information regarding the Customer and is not relying upon you to provide any such data or other information. Without limiting the foregoing, notice of adverse change in the Customer's financial condition or of any other fact which might materially increase the risk of the undersigned is also waived. All settlements, compromises, accounts stated and agreed balances made in good faith between the Customer, its successors or assigns, and you shall be binding upon and shall not effect the liability of the undersigned. Payment of all amounts now or hereafter owed to the undersigned by the Customer or any other obligor for any of the Obligations is hereby subordinated in right of payment to the indefeasible payment in full to you of all Obligations and is hereby assigned to you as a security therefor. The undersigned hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law, equitable and all other claims against the Customer, any other obligor for any of the Obligations, any collateral therefor, or any other assets of the Customer or any such other obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to you by the undersigned hereunder, and the undersigned hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which it might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by, or collected or due from, it, the Customer or any other obligor for any of the Obligations, or realized from any of their respective assets. THE UNDERSIGNED HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN US RELATING TO THE SUBJECT MATTER HEREOF OR THEREOF, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN US. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, OR ANY RELATED DOCUMENTS. IN THE EVENT OF LITIGATION, THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. As used in this Guaranty, the word "person" include any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or any government or any political subdivision thereof. This Guaranty is intended by the parties as a final expression of the guaranty of the undersigned and is also intended as a complete and exclusive statement of the terms thereof. No course of dealing, course of performance or trade usage, nor any paid evidence of any kind, shall be used to supplement or modify any of the terms hereof. Nor are there any conditions to the full effectiveness of this Guaranty. This Guaranty and each of its provisions may only be waived, modified, varied, released, terminated or surrendered, in whole or in part, by a duly authorized written instrument signed by you. No failure by you to exercise your rights hereunder shall give rise to any estoppel against you, or excuse the undersigned from performing hereunder. Your waiver of any right to demand performance hereunder shall not be a waiver of any subsequent or other right to demand performance hereunder. This Guaranty shall bind the undersigned's successors and assigns and the benefits thereof shall extend to and include your successors and assigns. In the event of default hereunder, you may at any time inspect undersigned's records, or at your option, undersigned shall furnish you with a current independent audit report. If any provisions of this Guaranty are in conflict with any applicable statute, rule or law, then such provisions shall be deemed null and void to the extent that they may conflict therewith, but without invalidating any other provisions hereof. Each signatory on behalf of a corporate guarantor warrants that he had authority to sign on behalf of such corporation and by so signing, to bind said guarantor corporation hereunder. IN WITNESS WHEREOF, this Guaranty is executed the day and year above written. Diagnostic/Retrieval Systems, Inc. By: _____________________________ (Signature) Title: __________________________ (Officer's Title) ATTEST: _____________________________ Secretary/Assistant Secretary Stockholders Certification We, the undersigned, being all of the stockholders of ____________________ ("Guarantor"), the corporation which is about to execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") in favor of General Electric Capital Corporation (the "GECC Corporation"), do hereby certify to such GECC Corporation that it is to the benefit of the Guarantor to execute such guaranty, that the benefit to be received by the Guarantor from such guaranty is reasonably worth the obligations thereby guaranteed, that the Guarantor is authorized to execute said guaranty, and that the persons executing the same on behalf of the Guarantor are duly authorized to do so in their named capacity and to thereby bind the Guarantor to the terms of said instrument as therein set forth. Dated: __________________________, 19___ _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) _____________________________ (L.S.) Certified Resolution The undersigned hereby certifies that he is Secretary of _________________, that the following resolution was passed by unanimous written consent of the Board of Directors of said corporation on __________________________, 19___ duly called, a quorum being present, that said resolution has not since been revoked or amended, and that the form of guaranty referred to therein is the form attached hereto: "RESOLVED that it is to the benefit of this corporation that it execute a guaranty of the obligations of OMI Acquisition Corp. ("Customer") to General Electric Capital Corporation (the "GECC Corporation") and that the benefit to be received by this corporation from such guaranty is reasonably worth the obligations thereby guaranteed, and further that such guaranty shall be substantially in the form annexed to these minutes, and further that the ______________________ and ______________________ (Title of Officers) of this corporation are authorized to execute such guaranty on the behalf of this corporation." WITNESS my hand and the seal of this corporation on this __________________ day of _______________________, 19___. _____________________________ [Seal] Secretary Certification and Representation by Signing Officers We, the undersigned, ______________________ and _____________________ being the _____________________ and _______________________ of ______________________, the corporation which executed the guaranty hereto, hereby jointly and severally certify and represent to General Electric Capital Corporation that each of the undersigned executed the guaranty for and on behalf of said corporation and that in so executing said instrument the undersigned were duly authorized to do so in their named capacity as officers and by so executing to hereby bind said guarantor corporation to the terms of said instrument as therein set forth. _____________________________ (L.S.) _____________________________ (L.S.) Date: ______________________________ Date: ______________________________ EX-10.89 11 MACHINE TOOLS EQUIPMENT SCHEDULE MACHINE TOOLS EQUIPMENT SCHEDULE SCHEDULE NO. 001 DATED THIS SEPTEMBER 1, 1995 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 Lessor & Mailing Address: Lessee & Mailing Address: General Electric Capital Corporation OMI Acquisition Corp. 303 International Circle Suite 300 425 North Drive Hunt Valley, MD 21031 Melbourne, FL 32935 Capitalized terms not defined herein shall have the meanings assigned to them in the Master Lease Agreement identified above ("Agreement"; said Agreement and this Schedule being collectively referred to as "Lease"). A. Equipment Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to Lessee the Equipment listed on Annex A attached hereto and made a part hereof. B. Financial Terms 1. Advance Rent (if any): $30,777.53. 2. Capitalized Lessor's Cost: $1,900,000.00. 3. Basic Term Lease Rate Factor: 1.61987%. 4. Daily Lease Rate Factor: 0.053996%. 5. Basic Term (No. of Months): 72. 6. Basic Term Commencement Date: September 1, 1995. 7. Equipment Location: 425 North Drive, Melbourne, FL 32935. 8. Lessee Federal Tax ID No.: 59-3321536. 9. Last Delivery Date: September 1, 1995. 10. First Termination Date: Thirty-six (36) months after the Basic Term Commencment Date. C. Tax Benefits Depreciation Deductions a. Depreciation Method (check one): [x] The 200% declining balance method, switching to straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance; OR [ ] The method determined by applying to the unadjusted basis the applicable percentages set forth in Section 168(b)(1) of the Code, as in effect prior to the adoption of the Tax Reform Act of 1986. b. Recovery Period: 7 years c. Basis: 100% of Capitalized Lessor's Cost. D. Term and Rent 1. Interim Rent. For the period from and including the Lease Commencement Date to the Basic Term Commencement Date ("Interim Period"), Lessee shall pay as rent ("Interim Rent") for each unit of Equipment, the product of the Daily Lease Rate Factor times the Capitalized Lessor's Cost of such unit times the number of days in the Interim Period. Interim Rent shall be due on N/A. 2. Basic Term Rent. Commencing on September 1, 1995 and on the same day of each month thereafter (each, a "Rent Payment Date") during the Basic Term, Lessee shall pay as rent ("Basic Term Rent") the product of the Basic Term Lease Rate Factor times the Capitalized Lessor's Cost of all Equipment on this Schedule. 3. Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no more than ten percent (10%) to account for equipment change orders, equipment returns, invoicing errors, and similar matters. Leseee acknowledges and agrees that the Rent shall be adjusted as a result of such change in the Capitalized Lessor's Cost (Pursuant to paragraphs 1 and 2 above). Lessor shall send Lessee a written notice stating the final Capitalized Lessor's cost, if different from that disclosed on this Schedule. Except as expressly modified hereby, all terms and provisions of the Agreement shall remain in full force and effect. This Schedule is not binding or effective with respect to the Agreement or Equipment until executed on behalf of Lessor and Lessee by authorized representatives of Lessor and Lessee, respectively. IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL OMI ACQUISITION CORP. CORPORATION By: /S/ KEVIN G. WORTMAN By: /S/ RICHARD ROSS -------------------------------- -------------------------------- Name: Kevin G. Wortman Name: Richard Ross ------------------------------ ------------------------------ Title: Sr. Credit Analyst Title: President ----------------------------- ----------------------------- Attest: By: Nancy R. Pitek --------------------------------- Name: Nancy R. Pitek -------------------------------- ADDENDUM NO. 01 TO EQUIPMENT SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 THIS AMENDMENT amends and supplements the above schedule (the "Schedule") to the above lease (the "Lease"), between GENERAL ELECTRIC CAPITAL CORPORATION ("Lessor") and OMI Acquisition Corp ("Lessee") and is hereby incorporated into the Schedule as though fully set forth therein. Capitalized terms not otherwise defined hrein shall have the meanings set forth in the Lease. The Schedule is hereby amended as follows: Section D3. is deleted in its entirety. Except as expressly modified hereby, all terms and provisions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL OMI ACQUISITION CORP. CORPORATION By: /S/ KEVIN G. WORTMAN By: /S/ RICHARD ROSS -------------------------------- -------------------------------- Name: Kevin G. Wortman Name: Richard Ross ------------------------------ ------------------------------ Title: Sr. Credit Analyst Title: President ----------------------------- ----------------------------- Attest: By: Nancy R. Pitek --------------------------------- Name: Nancy R. Pitek -------------------------------- ADDENDUM NO. 02 TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 THIS ADDENDUM (this "Addendum") amends and supplements the above referenced schedule (the "Schedule") to the above referenced lease (the "Lease"), between General Electric Capital Corporation ("Lessor") and OMI Acquisition Corp. ("Lessee") and is hereby incorporated into the Schedule as though fully set forth therein. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Lease. For purposes of this Schedule only, the Lease is authorized by adding the following thereto: EARLY PURCHASE OPTION. (a) Provided that the Lease has not been earlier terminated and provided further that Lessee is not in default under the Lease or any other agreement between Lessor and Lessee, Lessee may, UPON AT LEAST 30 DAYS BUT NO MORE THAN 270 DAYS PRIOR WRITTEN NOTICE TO LESSOR OF LESSEE'S IRREVOCABLE ELECTION TO EXERCISE SUCH OPTION, purchase all (but not less than all) of the Equipment listed and described in this Schedule on the rent payment date (the "Early Purchase Date") which is 60 months from the Basic Term Commencement Date of the Schedule for a price equal to $680,067.00 (the "FMV Early Option Price"), plus all applicable sales taxes on an AS IS BASIS. Lessor and Lessee agree that the FMV Early Option Price is a reasonable prediction of the Fair Market Value (as such term is defined in Section XIX(b) hereof) of the Equipment at the time the option is exercisable. Lessor and Lessee agree that if Lessee makes any non-severable improvement to the Equipment which increases the value of the Equipment and is not required or permitted by Section VII or XI of the Lease prior to lease expiration, then at the time of such option being exercised, Lessor and Lessee shall adjust the purchase price to reflect any addition to the price to reflect any addition to the price anticipated to result from such imProvement. (The purchase option granted by this subsection shall be referred to herein as the "Early Purchase Option".) (b) If Lessee exercises its Early Purchase Option with respect to the Equipment leased hereunder, then on the Early Purchase Option Date, Lessee shall pay to Lessor any Rent and other sums due and unpaid on the Early Purchase Option Date and Lessee shall pay the FMV Early Option Price, plus all applicable sales taxes, to Lessor in cash. Except as expressly modified hereby, all terms and provisions of the Lease shall remain in full force and effect. This Addendum is not binding nor effective with respect to the Lease or the Equipment until executed on behalf of Lessor and Lessee by authorized representatives of Lessor and Lessee. IN WITNESS WHEREOF, Lessee and Lessor have caused this Addendum to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation OMI Acquisition Corp. By: /S/ KEVIN G. WORTMAN By: /S/ RICHARD ROSS -------------------------------- -------------------------------- Name: Kevin G. Wortman Name: Richard Ross ------------------------------ ------------------------------ Title: Sr. Credit Analyst Title: President ----------------------------- ----------------------------- GE Capital - ------------------------------------------------------------------------ (Article 2A notice letter) Electronics Financial Services General Electric Capital Corporation 2200 Powell Street, Suite 600, Emeryville, CA 94608 August 28, 1995 OMI Acquisition Corp. 425 North Drive Melbourne, FL 32935 Attn: Ms. Diane Maroney Dear Ms. Maroney: General Electric Capital Corporation is entering into a financing Agreement dated ________________ (the "Agreement") with OMI Acquisition Corp. for the lease of certain equipment set forth on the attached Annex A (the "Equipment") to the Agreement. In accordance with the requirements of Article 2A of the Uniform Commercial Code, Lessor hereby makes the following disclosures to Lessee prior to execution of the Agreement, (a) the person supplying the Equipment is various--more fully described on Annex A to Schedule No. 001 attached hereto and made a part hereof, (the "Supplier"), (b) Lessee is entitled to the promises and warranties, including those of any third party, provided to the Lessor by Supplier, which is supplying the Equipment in connection with or as part of the contract by which Lessor acquired the Equipment and (c) with respect to such Equipment, Lessee may communicate with Supplier and receive an accurate and complete statement of such promises and warranties, including any disclaimers and limitations of them or of remedies. General Electric Capital Corporation By: /s/ --------------------------------- Its: Documentation Specialist --------------------------------- Acknowledged and Agrees: OMI Acquisition Corp. By: /s/ -------------------------------- Its: President -------------------------------- ANNEX TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF 8-31-95 DESCRIPTION OF EQUIPMENT - -------------------------------------------------------------------------------- QTY DESCRIPTION S/N# FMV - -------------------------------------------------------------------------------- 2640 Gages & Measuring Devices: 250 plug pins & $1,000,000.00 ring cages; 100 spectrometers; collimator, projectors, microscopes, telescopes, rotary tables, environmental chambers, granite surface plates, spectrophotometer; 50 test jigs, stands, and fixtures; 120 pressure test sets, V-block, angle plates; 20 freq counters, meters, power supplies; 100 precision gages, ID/OD gages, calipers, bore gages, dial indicators; 2000 test plates. 1 Okuma LC30-2ST chucker, 2 turrets, #3497 1197 $ 75,000.00 1 Matsuura MC1500 vertical machining center, 7191083 1987 $ 120,000.00 40 station ATC, 1987, #5207 1 Matsuura MC560V vertical machining center, 871006315 $ 65,000.00 20 station, ATC, #5208 1 LOH RTM 3 axis CNC milling machine #6728 5307 $ 60,000.00 2 LOH LZ80 laser centering OD grinders, 2651 & 2677 $ 100,000.00 #4679 & 6821 1 Balzers coating chamber BAK 760, #3925 $ 120,000.00 1 Leybold heraeus coating chamber, #6674 7088 $ 60,000.00 1 Howard Strasbaugh planetary polisher, 31087 $ 80,000.00 model 6CX, #5257 1 Thermotron environmental chamber, model 19857 $ 80,000.00 FX-82CHV-25-25, #6658 1 Screening system, #5927 712-060 $ 80,000.00 1 Numerex coordinate measuring machine, X-1125 $ 60,000.00 model 2428-18, #6524 - -------------------------------------------------------------------------------- Total $1,900,000.00 - -------------------------------------------------------------------------------- Equipment listed on Annex A more fully described in the 7/5/95 Appraisal Report, performed by Mr. Barry Savage, ASA for Asset Control Services Equipment Currently Located at 425 North Dr., Melbourne, FL Initial LESSOR: LESSEE: ------------------------------- ------------------------------- ANNEX TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF 8-31-95 BILL OF SALE OMI Acquisitions Corp. (the "Seller"), in consideration of the sum of One Million Nine Hundred Thousand Dollars ($1,900,000.00) plus sales taxes in the amount of Zero Dollars ($0.00) (if exemption from sales tax is claimed, an exemption certificae must be furnished to Buyer herewith), paid by General Electric Capital Corporation (the "Buyer"), receipt of which is acknowledged, hereby grants, sells, assigns, transfers and delivers to Buyer the equipment (the "Equipment") described in the above schedule (said schedule and related lease being collectively referred to as "Lease"), along with whatever claims and rights Seller may have against the manufacturer and/or supplier of the Equipment (the "Supplier"), including but not limited to all warranties and representations. At Buyer's request, Seller will cause Supplier to execute the attached Acknowledgment. Buyer is purchasing the Equipment for leasing back to Seller pursuant to the Lease. Seller represents and warrants to Buyer that (1) Buyer will acquire by the terms of this Bill of Sale good title to the Equipment free from all liens and encumbrances whatsoever, (2) Seller has the right to sell the Equipment; and (3) the Equipment has been delivered to Seller in good order and condition, and conforms to the specifications, requirements and standards applicable thereto; and (4) the equipment has been accurately labeled, consistent with the requirements of 40 CFR part 82 Subpart E, with respect to products manufactured with a controlled (ozone-depleting) substance. Seller agrees to save and hold harmless Buyer from and against any and all federal, state, municipal and local license fees and taxes of any king or nature, including, without limiting the generality of the foregoing, any and all excise, personal property, use and sales taxes, and from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions and suits resulting therefrom and imposed upon, incurred by or asserted against Buyer as a consequence of the sale of the Equipment to Buyer. IN WITNESS WHEREOF, Seller has executed this Bill of Sale this 31st day of August, 1995. SELLER: OMI Acquisition Corp. By: ----------------------------- Title: President ----------------------------- ANNEX C TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF 8-31-95 CERTIFICATE OF ACCEPTANCE To: General Electric Capital Corporation ("Lessor") Pursuant to the provisions of the above schedule and lease (collectively, the "Lease"), Lessee hereby certifies and warrants that (a) all Equipment listed in the related Bill of Sale is in good condition and appearance, installed (if applicable) and in working order; and (b) Lessee accepts the Equipment for all purposes of the Lease, the purchase documents and all attendant documents. Lessee does further certify that as of the date hereof (i) Lessee is not in default under the Lease; (ii) the representations and warranties made by Lessee pursuant to or under the Lease are true and correct on the date hereof and (iii) Lessee has reviewed and approves of the purchase documents for the Equipment, if any. DESCRIPTION OF EQUIPMENT Type of Model Number Cost Manufacturer Serial Numbers of Equipment of Units Per Unit See Annex A to Equipment Schedule No. 001 Attached hereto and made a part hereof. /s/ --------------------------------- Authorized Representative Dated: 8/29/95 ANNEX D TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF 8-31-95 STIPULATED LOSS AND TERMINATION VALUE TABLE ------------------------------------------- TERMINATION VALUE STIPULATED LOSS RENTAL PERCENTAGE VALUE PERCENTAGE ------ ----------------- ---------------- 1 103.807 107.835 2 102.977 107.032 3 102.136 106.220 4 101.284 105.395 5 100.419 104.558 6 99.544 103.710 7 98.659 102.854 8 97.763 101.985 9 96.855 101.105 10 95.935 100.213 11 95.004 99.310 12 94.063 98.396 13 93.110 97.471 14 92.145 96.534 15 91.170 95.587 16 90.183 94.628 17 89.185 93.657 18 88.176 92.676 19 87.157 91.684 20 86.128 90.684 21 85.090 89.673 22 84,042 88.653 23 82.984 87.623 24 81.917 86.583 25 80.839 85.533 26 79.752 84.474 27 78.654 83.404 28 77.546 82.324 29 76.428 81.234 30 75.300 80.133 31 74.161 79.022 32 73.013 77.902 33 71.858 76.774 34 70.694 75.638 35 69.521 74.494 36 68.338 73.338 37 67.147 72.174 38 65.947 71.002 39 64.735 69.819 40 63.516 68.627 41 62.287 67.426 42 61.048 66.214 43 59.797 64.991 44 58.538 63.761 45 57.272 62.522 46 55.999 61.277 47 54.718 60.023 cont. PAYMENT AUTHORIZATION General Electric Capital Corporation 303 International Circle Suite 300 Hunt Valley, MD 21031 You are hereby authorized to pay the proceeds from our sale to you of certain Equipment as evidenced on the attached Bill of Sale to the following parties in the amount(s) designated below. OMI Acquisition Corp. $1,900,000.00 425 North Drive, Melbourne, FL 32925 Reimbursement for funds previously paid for Equipment listed on Annex A to Equipment Schedule No. 001 attached hereto and made a part hereof. Very truly yours, OMI Acquisition Corp. (Sig) By: ___________________________________ President Title: ________________________________ 8/29/95 Date: _________________________________ CERTIFICATE CONCERNING PAYMENT OF PERSONAL PROPERTY TAXES To: General Electric Capital Corporation To insure Lessee's compliance with the provisions of a Master Lease Agreement dated as of 8-31-95 (the "lease") by and between the undersigned as Lessee and General Electric Capital Corporation as Lessor, Lessee hereby agrees to one of the following options with respect to the payment of personal property taxes on the Equipment described in Annex A to the Lease, such agreement to be conclusively evidenced by the initials and signature of an authorized agent of Lessee in the appropriate spaces provided below: Please choose one of the options below by placing an "X" in the appropriate box and initialing where indicated. Initial ONLY ONE Choice of Option ---------------------------------- OPTION 1 Lessee's Initials: ---------------------------------- (Applicable in Jurisdictions Requiring Lessor to List Equipment): Lessee agrees that it will not list any of such Equipment for property tax purposes or report any property tax assessed against such Equipment until otherwise directed in writing by Lessor. Upon receipt of any property tax bill pertaining to such Equipment from the appropriate taxing authority, Lessor will pay such tax and will invoice Lessee for the expense. Upon receipt of such invoice, Lessee will promptly reimburse Lessor for such expense; ---------------------------------- OPTION 2 Lessee's Initials: ---------------------------------- (Applicable in Jurisdictions Permitting Lessee to List Equipment): Lessee agrees that it will (a) list all such Equipment, (b) report all property taxes assessed against such Equipment and (c) pay all such taxes when due directly to the appropriate taxing authority until Lessor shall otherwise direct in writing. LESSEE: OMI Acquisition Corp. (Sig) By: ___________________________________ President Title: ________________________________ 8/29/95 Date: _________________________________ AMENDMENT NO. 01 TO MASTER SECURITY AGREEMENT DATED AS OF AUGUST 31, 1995, 1994 THIS AMENDMENT amends and supplements the above Master Security Agreement (the "Agreement"), between GENERAL ELECTRIC CAPITAL CORPORATION ("Secured Party") and OMI Acquisition Corp ("Debtor") and is hereby incorporated into the Agreement as though fully set forth therein. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Agreement. The Agreement is hereby amended as follows: 1. Section 2(i), line 1. After "will remain, in" delete "good condition and repair" and substitute "a state of condition and repair consistent with the like evaluation in the Asset Control Services Appraisal dated July 5, 1995," 2. Section 3(f), line 1. After "Secured Party" delete "may, but shall in no event be" and substitute "would be" 3. Section 3(f), line 2. after "Collateral" and before "." Insert "so long as the substitutions and exchanges of property for property, and additions to property, would not diminish the value or impair the original intended use of the collateral as determined by a new equipment appraisal ordered at the sole discretion of Secured Party and paid for by the Debtor. 4. Section 4, line 9. Delete "Secured Party" and insert "Debtor" 5. Section 6(c), line 2. after "limitation," delete "related" and insert "reasonable" 6. Section 7(h), line 1. after "consolidation" insert "(excepting merger or consolidation whereby Debtor remains the wholly owned subsidiary of Photronics Corp and Diagnostic/Retrieval Systems, Inc.)" 7. Section 9(c), line 1. delete "consistent" 8. Section 9(f), line 1. Delete the second sentence in its entirety. Except as expressly modified hereby, all terms and provisions of the Agreement shall remain in full force and effect. MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT, made as of August 31, 1995 ("Agreement"), by and between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation with an address at 303 International Circle Suite 300, Hunt Valley, MD ("Secured Party"), and OMI Acquisition Corp., a corporation organized and existing under the laws of the State of Delaware with its chief executive offices located at 425 North Drive, Melbourne, FL ("Debtor"). In consideration of the promises herein contained and of certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and secured Party hereby agree as follows: 1. CREATION OF SECURITY INTEREST. Debtor hereby gives, grants and assigns to Secured Party, its successors and assigns forever, a security interest in and against any and all property listed on any collateral schedule now or hereafter annexed hereto or made a part hereof ("Collateral Schedule"), and in and against any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds thereof (all of the foregoing being hereinafter individually and collectively referred to as the "Collateral"). The foregoing security interest is given to secure the payment and performance of any and all debts, obligations and liabilities of any kind, nature or description whatsoever (whether primary, secondary, direct, contingent, sole, joint or several, or otherwise, and whether due or to become due) of Debtor to Secured Party, now existing or hereafter arising, including but not limited to the payment and performance of certain Promissory Notes from time to time identified on any Collateral Schedule (collectively "Notes" and each a "Note"), and any renewals, extensions and modifications of such debts, obligations and liabilities (all of the foregoing being hereinafter referred to as the "Indebtedness"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Debtor hereby represents, warrants and covenants as of the date hereof and as of the date of execution of each Collateral Schedule hereto that: (a) Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the first paragraph of this Agreement, has its chief executive offices at the location set forth in such paragraph, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations; (b) Debtor has adequate power and capacity to enter into, and to perform its obligations, under this Agreement, each Note and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing being hereinafter referred to as the "Debt documents"); (c) This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debtor and constitute legal, valid and binding agreements enforceable under all applicable laws in accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; (d) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by, Debtor of any of the Debt documents, except such as may have already been obtained; (e) The entry into, and performance by, Debtor of the Debt Documents will not (i) violate any of the organizational documents of Debtor or any judgment, order, law or regulations applicable to Debtor, or (ii) result in any breach of, constitute a default under, or result in the creation of any lien, claim or encumbrance on any of Debtor's property (except for liens in favor of Secured Party) pursuant to, any indenture mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party; (f) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to perform its obligations under the Debt Documents; (g) All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change; (h) The Collateral is not, and will not be, used by Debtor for personal, family or household purposes; (i) The Collateral is, and will remain, in good condition and repair and Debtor will not be negligent in the care and use thereof; (j) Debtor is, and will remain the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement; and (k) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of every kind, nature and description, except for (i) liens in favor of Secured Party, (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the reasonable judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate materialmen's, mechanic's, repairmen's and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such permitted liens being hereinafter referred to as "Permitted Liens"). 3. COLLATERAL (a) Until the declaration of any default hereunder, Debtor shall remain in possession of the Collateral; provided, however, that Secured Party shall have the right to possess (i) any chattel paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral which because of its nature may require that Secured Party's security interest therein be perfected by possession. Secured Party, its successors and assigns, and their respective agents, shall have the right to examine and inspect any of the Collateral at any time during normal business hours. Upon any request from Secured Party, Debtor shall provide Secured Party with notice of the then current location of the Collateral. (b) Debtor shall (i) use the collateral only in its trade or business, (ii) maintain all of the Collateral in good condition and working order, (iii) use TO COME (a) Debtor fails to pay any installment or other amount due or coming due under any of the Debt Documents within ten (10) days after its due date; (b) Any attempt by Debtor, without the prior written consent of Secured Party, to sell, rent, lease, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral; (c) Debtor fails to procure, or maintain in effect at all times, any of the insurance on the Collateral in accordance with Section 4 of this Agreement; (d) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure the same within thirty (30) days after written notice thereof; (e) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (f) Any of the Collateral being subjected to, or being threatened with, attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise; (g) Any default by Debtor under any other agreement between Debtor and Secured Party; (h) Any dissolution, termination of existence, merger, consolidation, change in controlling ownership, insolvency, or business failure of Debtor or any guarantor or other obligor for any of the Indebtedness (collectively "Guarantor"), or if Debtor or any Guarantor is a natural person, any death or incompetency of Debtor or such Guarantor; (i) The appointment of a receiver for all or of any part of the property of Debtor or any Guarantor, or any assignment for the benefit of creditors by Debtor or any Guarantor; or (j) The filing of a petition by Debtor or any Guarantor under any bankruptcy, insolvency or similar law, or the filing of any such petition against Debtor or any Guarantor if the same is not dismissed within thirty (30) days of such filing. 8. REMEDIES ON DEFAULT. (a) Upon the occurrence of an Event of Default under this Agreement, the Secured Party, at its option, may declare any or all of the Indebtedness, including without limitation the Notes, to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The obligations and liabilities accelerated thereby shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law. (b) Upon such declaration of default, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured Party, (ii) with or without legal process, enter any premises where the Collateral may be and take possession and/or remove said Collateral from said premises, (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, and/or (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds therefrom to the obligations then in default. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor's premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice which Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute reasonable notice if such notice is given to the last known address of Debtor at least five (5) days prior to such action. (c) Proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation attorneys', appraisers', and auctioneers' fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Debtor to Secured Party, whether as obligor, endorsor, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor shall remain fully liable for any deficiency. (d) In the event this Agreement, any Note or any other Debt Documents are placed in the hands of an attorney for collection of money due or to become due or to obtain performance of any provision hereof, Debtor agrees to pay all reasonable attorneys' fees incurred by Secured Party, and further agrees that payment of such fees is secured hereunder. Debtor and Secured Party agree that such fees to the extent not in excess of twenty percent (20%) of subject amount owing after default (if permitted by law, or such lesser sum as may otherwise be permitted by law) shall be deemed reasonable. (e) Secured Party's rights and remedies hereunder or otherwise arising are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Secured Party shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waivers be in writing and signed by Secured Party. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. (f) DEBTOR HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF THE INDEBTEDNESS SECURED HEREBY, ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN DEBTOR AND SECURED PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. TO COME COLLATERAL SCHEDULE THIS COLLATERAL SCHEDULE is annexed to and made a part of that certain Security Agreement dated as of August 31, 1995, between General Electric Capital Corporation as Secured Party and OMI Acquisition Corp., as Account Party and describes collateral in which Account Party has granted Secured Party a security interest in connection with the Indebtedness (as defined in the Security Agreement) including without limitation that certain Master Lease Agreement dated August 31, 1995.
QTY DESCRIPTION S/N# FMV - --- ----------- ---- --- Fixed tooling & fixtures; #40 taper holders; 24 lg; 149 small; 177 extended; 34 roller lock; 60 collet holders; 21 tapers; #45 taper tool holder; 214 lg; 38 small; 43 roller lock; 50 Jacob & Ericson chucks; 63 mill arbors; 32 lg borring heads; 18 small boring heads; 146 tappers; 99 extended holders; other tooling; 1160 collets; 7 speed tappers; 2 shepherd right angle heads; 5 roller burnishers; 72 indexable carbide tools; 25 adjustable boring bars; 7 rotary indexers; 13 CNC vertical index tables, 10"-16"; 8 sets angle plates; 15 machine viser; 18" face mill; hardinge lathe tooling; dekel tooling. ........................ 800,000.00 Heavy duty racks, including cantilevered ............................ 28,000.00 Yale electric forklift, 5000 lbs .................................... N451919 8,000.00 Yale electric forklift, 3000 lbs .................................... N451786 8,000.00 Black & Webster drill grinder ....................................... 27654 3,000.00 Harshaw environmental chamber, #0249 ................................ 22A027 4,000.00 Thermotron vibration control, #6892 ................................. 8,000.00 MRAD pneumatic shock machine, #0758 ................................. Z18-32 12,000.00 Profile projector, model PJ311, #6221 ............................... 302-11 9,000.00 Minolta microfiche printer, model RP603, #6558 ...................... 360733 7,000.00 3M microfiche reader, model 630, #5202 .............................. 735777 12,000.00 Brunning blueprint machine, #0832 ................................... 7780798 3,000.00 Brunning copier, #4676 .............................................. 1524 5,000.00 Assembly tables and equipment ....................................... 25,000.00 12436, 16875 867167 Meles griot air balance tables ...................................... & 85106 12,000.00 LOH puddle bench polishing machine, model OLP 200, #3852 ............ 2681 3,000.00 LOH polishers, model LP75, #4680 & 4687 ............................. 2952, 2949 & 2953 24,000.00 LOH polisher, model PLM 400, #4678 .................................. 3035 10,000.00 Walter rotary table, #6751 .......................................... 2617 800.00 Sonicor sonic cleaner, #6295 ........................................ 3,000.00 Branson parts cleaner, #1067 ........................................ Z-6-11389-79 3,000.00 Rite-Hete parts cleaner, #6943 ...................................... 4,000.00 International centrifuge, #1548 ..................................... 800.00 Tennant floor scrubber .............................................. 27012 5,000.00 EZ Go electric lift truck, #5274 .................................... 59351187 800.00 Nord polishing machine, P582VCT, #5141 .............................. 8712P582585 12,000.00 Hand polisher, #6844 ................................................ 1,000.00 547-9-75, 183-6-78,592 9-76, 295-69, 568-3-76, 62-568, 187-678 & 98-8 Howard Strasbaugh grinding machines; 4 four spindle; 4 one spindle .. 69 32,000.00 Meles griot air leveling tables ..................................... 77529, 6296, & 132740 9,000.00 Mikron black body heat source for calibration, #5976, 5702 .......... 36588, 38453 & 35462 12,000.00 Rockwell drill ...................................................... 300.00
QTY DESCRIPTION S/N# FMV - --- ----------- ---- --- LOH engine lathe, model DSM, 6" swing, 18" CC ....................... 2275 1,600.00 Beck ealing base optical colimators, #1771 & 1772 ................... 7,500.00 Branson ultrasonic cleaner, model PSD 1216R, #4004 .................. 7995517 5,000.00 Poly cold cryogenerators ............................................ 55126, 55125, 501300 24,000.00 Precision scientific ovens, #1517 & 1546 ............................ 12,000.00 Bridgeport vertical turret mill, #4808 .............................. 270098 4,000.00 Cincinnati vertical turret mill, #4041 .............................. 6J2F1ACF53 2,500.00 Rogers Clark radius cutting machine, #6871 .......................... 01028601 16,000.00 LOH radius cutting machine, #6818 ................................... RF154028 12,000.00 LOH beveling machine, #4045 ......................................... 513 3,000.00 Howard Strasbaugh spherical radius grinders ......................... 88265, 294669 4,800.00 Universal ID/OD grinder, AE100, #3819 ............................... 383 4,800.00 LOH radius cutting machine, 5VC2MI, #4042 ........................... 15737532 14,000.00 Special tools ....................................................... 16,000.00 Shelving ............................................................ 9,000.00 Nint blast cabinet with hopper, 2 hole, #6820 ....................... 916750 1,000.00 476591189Y, Bridgeport vertical turret mills, accurite III DRO .................. 476591189Y 16,000.00 Diacro hand brake, #3590 ............................................ 100.00 Hand shear, #3718 ................................................... 70.00 Arbor presses ....................................................... 200.00 Makino Universal tool grinder, #3445 ................................ D53-8073 8,000.00 Optical comparator, 10", #3444 ...................................... 8011 2,500.00 Miller DIA-ARC AC/DC welder, HF, #3456 .............................. 8011 300.00 Lincoln 225 AMP ARC welder, #4290 ................................... 150.00 Precision quincy solvent drying oven, 450 degrees, 6'x7'x9', #3513 .. 32-450TDD 7,000.00 Diagraph stencil cutters, #4895 & 4920 .............................. 6,000.00 Binks paint spray booths, PBS 1 & 2, water curtain .................. 10,000.00 Baron-Blakeslee degreaser, #3514 .................................... D-58125 BH320 2,500.00 Sullair 40 HP air compressor, rotary, #5271 & 3502 .................. 20,000.00 Delta drill, #3475 .................................................. 162640 300.00 Ealing electro optic table, 4'x8', #6599 ............................ 867167 2,500.00 Delta drills, #3443, 3474, 3481, 3472, 3476, 3501 ................... 11,500.00 High speed bench drill, #4262 ....................................... 50.00 3 Chamber deburring machine (stone) ................................. 1,500.00 1" belt sander, #3468 ............................................... 50.00 Herrblitz punch ..................................................... 029244 500.00 Trinco blast cabinet, 2 hole, #3448 ................................. 6146-3 2,000.00 Bridgeport vertical turret mills #3466 .............................. 167360 & 2J48179 3,500.00 Electro-ARC disintegrator, #3443 .................................... 3710 1,000.00 Troyke rotary table, 15", vertical & horizontal ..................... 500.00 Powermatic duel head floor type drill, #3478 ........................ 300.00 Jib crane, 1 ton model #B288 ........................................ 10199 1,500.00 Hardinge engine lathe, 10" swing, 2' CC, #3442 ...................... 6,000.00 Mazak engine lathe, 16" swing, 5' CC steady rest, #3437 ............. 29080W 10,000.00 Bridgeport vertical turret mill, #3477 .............................. BR99035 J97012 3,000.00 Rolling racks ....................................................... 6,000.00 Dual wheel bench grinders ........................................... 1,400.00 1" belt sander, #3498 ............................................... 50.00 6" belt sander, #6966 ............................................... 150.00 Lift table, #6633 ................................................... 500.00
QTY DESCRIPTION S/N# FMV - --- ----------- ---- --- Pedal type metal shear, #1064 ....................................... 500.00 Powermatic band saw, 20" throat, with welder, #1038 ................. 2,500.00 Methods slant jr. universal lathe, chip conveyor, #3518 ............. 11249 40,000.00 Ro-Tab rotary table calibration device, #6647 ....................... 2,400.00 Shop furniture and equipment ........................................ 100,000.00 Office furniture, including panels .................................. 25,000.00 Office equipment .................................................... 20,000.00 Computer equipment .................................................. 50,000.00 Zygo laser interometer & spheres, #4181 ............................. 7948-126 18,000.00 Ovens, hotpack, FECO, 2 blue M, national, 2 industrial .............. 10,000.00 Do-all C260A band saw with roller, conveyor & clamp, #5669 .......... 459-88291 28,000.00 Matsuura MC500V vertical machining center, 20 station ATC, #3429 .... 85034648 40,000.00 ?? Diamond wheels ...................................................... 35,000.00 LOH WG optical centering OD grinders, #4005, 4006 ................... 33,333.33 UV spectro photometer, #7090 ........................................ 2071119 36,000.00 594-9-76, 571-3-76, 591 9-76, 593-9-76, 642-9- 77,567-3-76, 570-3-76, 554-10-75, 185-6-79, 151-4-76, 153-5-76, 18- 12-68, 172-4-76, 164-6- 78, 67-7-68, 22-2-70, 81 Howard Strasbaugh polishing machines, 10 one spindle, 2 ten spindle, 12-68, 82-12-68, 99-8- 21 9 four spindle ...................................................... 60, 186-6-78 72,000.00 3703, 3702, 4115 & LOH polishers/grinders, model PM250 ................................. 4116 32,000.00 Enirotronics environmental chamber, #6704 ........................... 03911624 10,000.00 13160, 25-2890-04 & 25 Thermotron mini-max environmental chambers .......................... 1661-09 36,000.00 Zygo laser interferometer, model 4, #6530 ........................... 55,000.00 ------------ TOTAL ............................ 1,972,753.33 ============
Equipment listed on Collateral Schedule more fully described in the 7/5/95 Appraisal Report, performed by Mr. Barry Savage, ASA for Asset Control Services Equipment Currently Located at: 425 North Dr., Melbourne, FL SECURED PARTY: ACCOUNT PARTY: General Electric Capital Corporation OMI Acquisition Corp By: By: Richard Ross ------------------------------ ---------------------------- Title: Sr. Credit Analyst Title: President --------------------------- ------------------------- Date: August 31, 1995 Date: August 31, 1995 ---------------------------- -------------------------- REORDER FROM INSTRUCTIONS 1. PLEASE TYPE ALL INFORMATION, and sign REGISTRE, INC. with ball point pen. Signature must be 514 PIERCE ST. legible on Filing Officer Copies. P.O. BOX 218 2. Contact Filing Officer for fee ANOKA, MIN. 55303 schedule or additional information. (612) 421-1713 - -------------------------------------------------------------------------------- STATE OF FLORIDA UNIFORM COMMERCIAL CODE--FINANCING STATEMENT--FORM UCC-1 REV. 1981 THIS FINANCING STATEMENT is presented to a filing officer for filing pursuant to the Uniform Commercial Code: ================================================================================ (Last Name First if a Person) Lessee THIS SPACE FOR USE OF FILING OFFICER NAME OMI Acquisition corporation Date, Time, Number & Filing Office 1A MAILING ADDRESS 425 North Drive CITY Melbourne STATE FL 32935 - -------------------------------------------------------------------------------- ONLY ONE NAME PER BOX MULTIPLE DEBTOR (IF ANY) (Last Name First if a Person) NAME 1B MAILING ADDRESS CITY STATE - -------------------------------------------------------------------------------- MULTIPLE DEBTOR (IF ANY) (Last Name First if a Person) NAME 1C MAILING ADDRESS CITY STATE - -------------------------------------------------------------------------------- (Last Name First if a Person) Lessor NAME General Electric Capital Corporation 2A MAILING ADDRESS International Circle Suite 300 CITY Hunt Valley STATE MD 20131 - -------------------------------------------------------------------------------- MULTIPLE SECURED PARTY (IF ANY) (Last Name First if a Person) NAME 2b MAILING ADDRESS AUDIT UPDATE CITY STATE - -------------------------------------------------------------------------------- ASSIGNEE OF SECURED PARTY (IF ANY) (Last Name First if a Person) NAME VALIDATION INFORMATION 3 MAILING ADDRESS CITY STATE - -------------------------------------------------------------------------------- 4. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located and owner of record when required). If more space is required, attach additional sheets 81/2" x 11". All equipment wherever located as more fully described on Annex A attached hereto and made a part hereof. Including all other attachments, accessories, * additions, replacements and substitutions and proceeds now or hereafter attached hereto. Equipment located at: 425 North Drive; Melbourne, FL 32935 5. Proceeds of collateral are covered as provided in Sections 679.203 and 679.306, F.S. 6. Filed with: Secretary of State-FL 7. No. of additional Sheets presented: 8. (Check [ ]) [ ] All documentary stamp taxes due and payable or to become due and payable pursuant to Section 201.22, F.S., have been paid. [X] Florida Documentary Stamp Tax is not required. 9. This statement is filed without the debtor's signature to perfect a security interest in collateral (Check [ ] if so) [ ] already subject to a security interest in another jurisdiction when it was brought into this state or debtor's location changed to this state. [ ] which is proceeds of the original collateral described above in which a security interest was perfected. [ ] as to which the filing has lapsed. [ ] acquired after a change of name, identify, or corporate structure of the [ ] debtor or [ ] secured party. 10. (Check [ ] if so) [ ] Debtor is a transmitting utility [ ] Products of collateral are covered 11. SIGNATURE(S) OF LESSEE OMI Acquisition Corporation 13. Return copy to; Name {Sig) NAME AND ADDRESS OF PREPARER REORDER FROM INSTRUCTIONS: 1. PLEASE TYPE ALL INFORMATION, and sign REGISTRE, INC. with ball point pen. Signature must be 514 PIERCE ST. legible on Filing Officer Copies. P.O. BOX 218 2. Contract Filing Officer for fee ANOKA, MN. 55303 schedule or additional information. (612) 421-1713 - -------------------------------------------------------------------------------- STATE OF FLORIDA UNIFORM COMMERCIAL CODE--FINANCING STATEMENT--FORM UCC-1 REV. 1981 THIS FINANCING STATEMENT is presented to a filing officer for filing pursuant to the Uniform Commercial Code: ================================================================================ DEBTOR(Last Name First if a Person) THIS SPACE FOR USE OF FILING OFFICER NAME OMI Acquisition corporation Date, Time, Number & Filing Office 1A MAILING ADDRESS 425 North Drive CITY Melbourne STATE FL 32935 - -------------------------------------------------------------------------------- ONLY ONE NAME PER BOX MULTIPLE DEBTOR (IF ANY) (Last Name First if a Person) NAME 1B MAILING ADDRESS CITY STATE - -------------------------------------------------------------------------------- MULTIPLE DEBTOR (IF ANY) (Last Name First if a Person) NAME 1C MAILING ADDRESS * CITY STATE - -------------------------------------------------------------------------------- SECURED PARTY (Last Name First if a Person) NAME General Electric Capital Corporation 2A MAILING ADDRESS 303 International Circle Suite 300 CITY Hunt Valley STATE MD 20131 - -------------------------------------------------------------------------------- MULTIPLE SECURED PARTY (IF ANY) (Last Name First if a Person) NAME 2B MAILING ADDRESS AUDIT UPDATE CITY STATE - -------------------------------------------------------------------------------- ASSIGNEE OF SECURED PARTY (IF ANY) (Last Name First if a Person) NAME VALIDATION INFORMATION 3 MAILING ADDRESS CITY STATE - -------------------------------------------------------------------------------- 4. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located and owner of record when required). If more space is required, attach additional sheets 81/2" x 11". All equipment wherever located as more fully described on Collateral Schedule to Master Security Agreement dated as of _______________attached hereto and made a part hereof. Including all other attachments, accessories, * additions, replacements and substitutions and proceeds now or hereafter attached hereto. Equipment located at: 425 North Dr.; Melbourne, FL 32935 5. Proceeds of collateral are covered as provided in Sections 679.203 and 679.306, F.S. 6. Filed with: Secretary of State-FL 7. No. of additional Sheets presented: 8. (Check [ ]) [ ] All documentary stamp taxes due and payable or to become due and payable pursuant to Section 201.22, F.S., have been paid. [X] Florida Documentary Stamp Tax is not required. 9. This statement is filed without the debtor's signature to perfect a security interest in collateral (Check [ ] if so) [ ] already subject to a security interest in another jurisdiction when it was brought into this state or debtor's location changed to this state. [ ] which is proceeds of the original collateral described above in which a security interest was perfected. [ ] as to which the filing has lapsed. [ ] acquired after a change of name, identify, or corporate structure of the [ ] debtor or [ ] secured party. 10. (Check [ ] if so) [ ] Debtor is a transmitting utility [ ] Products of collateral are covered 11. SIGNATURE(S) OF Debtor(s) OMI Acquisition Corporation 13. Return copy to: Name {Sig) NAME AND ADDRESS OF PREPARER [LOGO] GE Cap - -------------------------------------------------------------------------------- Electronics Financial Services General Electric Capital Corporation 2200 Powell Street, Suite 600, Emeryville, CA 94608 3013 (3/91) August 28, 1995 Fred Sutton 2174 Harris Avenue, Northeast, Suite 5 Palm Bay, FL 32905 Gentlemen/Ladies: General Electric Capital Corporation ("Lessor") has entered into, or is about to enter into, a lease agreement, security agreement, chattel mortgage or similar agreement ("Financing Agreement") with OMI Acquisition Corp. ("Lessee"), pursuant to which the Lessee has granted, or will grant, to Lessee a security interest in certain personal property described in the attached Annex A and Collateral Schedule (such property, together with any replacements thereof, being the "Personal property"). Some or all of the Personal Property is, or will be, located at certain premises known as Woodlake Commerce Park Building 2330, Suite 8, 2330 Commerce Park Drive in the City or Town of Palm Bay, County of Brevard and State of FL ("Premises"). This letter is being sent to you because of your interest in the Premises. By your signature below, you hereby agree (and we shall rely on your agreement) that: (i) the Personal Property is, and shall remain, personal property regardless of the method by which it may be, or become, affixed to the Premises; (ii) your interest in the Personal Property and any proceeds thereof (including, without limitation, proceeds of any insurance therefor) shall be, and remain, subject and subordinate to the interests of Lessor; (iii) Lessor, and its employees and agents, shall have the right, from time to time, to enter into the Premises for the purpose of inspecting the Personal Property; and (iv) Lessor Party, and its employees and agents, shall have the right, upon any default by the Lessee under the Financing Agreement, to enter into the Premises and to remove the Personal Property from such Premises. Lessor agrees to reimburse you for any damages actually caused to the Premises or it employees or agents, during any such removal. These agreements shall be binding upon, and shall inure to the benefit of, any successors and assigns of the parties hereto. We appreciate your cooperation in this matter of mutual interest. General Electric Capital Corporation By: Patricia A. Favier Title: Credit Analyst AGREED TO AND ACCEPTED BY: Fred Sutton By: Fred Sutton Title: President, Sutton Properties Date: 8-30-95 Interest in the Premises (check applicable box) [X] Owner [ ] Morgage [X] Landlord [ ] Realty Manager A GE Capital Services Company CORPORATE LESSEE'S BOARD OF DIRECTORS RESOLUTION The undersigned hereby certifies (i) that she/he is the Secretary of OMI Acquisition Corp. (ii) that the following is a true and correct copy of resolutions duly adopted by unanimous written consent of the Board of Directors of said Corporation duly held on the 29 day of August, 1995 and (iii) that the resolutions have not been amended, rescinded, modified or revoked, and are in full force and effect: "RESOLVED, that each of the officers of this Corporation, whose name appears below: (Sig) (Sig) ---------------------------- ----------------------------- President Controller ---------------------------- ----------------------------- Vice President Secretary or the duly elected or appointed successor in office of any or all of them, be, and hereby is, authorized and empowered in the name and on behalf of this Corporation to enter into, execute and deliver a master lease agreement with General Electric Capital Corporation ("Lessor") as Lessor, providing for the leasing to (or sale and leaseback by) this Corporation, from time to time, of certain equipment, and further providing for this Corporation to indemnify said lessor against certain occurrences and against the loss of contemplated tax treatment; and FURTHER RESOLVED, that each officer of this Corporation be, and hereby is, authorized and empowered in the name and on behalf of this Corporation to enter into, execute and deliver any documents and to do and perform all other acts and deeds which may be necessary and appropriate to effectuate the lease (or sale and leaseback) for equipment from Lessor, and FURTHER RESOLVED, that the Lessor may rely upon the aforesaid resolutions until receipt by it of written notice of any change. IN WITNESS WHEREOF, I have set my hand and affixed the seal of said Corporation this __________ day of _____________, 19 __. (CORPORATE SEAL) (Sig) - ------------------------------- Secretary CERTIFIED COPY OF RESOLUTION OF BOARD OF DIRECTORS The undersigned hereby certifies: that he/she is the Secretary of OMI Acquisition Corp., a Delaware corporation; that the following is a true, accurate and complete transcript of resolutions duly adopted by unanimous written consent of the Board of Directors of said Corporation duly held on the 29 day of August, 1995, at which a quorum was present, and that the proceedings were in accordance with the Articles and by-laws of said Corporation: and that said resolutions have not been amended or revoked, and are in full force and effect: "RESOLVED, that each of the officers of this Corporation, whose name appears below, or the duly elected or appointed successor in office of any or all of them, be and hereby is authorized and empowered in the name and on behalf of this Corporation to borrow from General Electric Capital Corporation (hereinafter referred so as "GE Capital") from time to time, such sum or sums of money as in the judgment of such officer or officers the Corporation may require and to execute on behalf of the Corporation and to deliver to GE Capital in the form required by GE Capital a promissory note or notes of this Corporation evidencing the amount or amounts borrowed or any renewals and/or extensions thereof, such note or notes to bear such rate of interest and be payable in such installments and on such terms and conditions as such officer may agree to by his signature thereon. FURTHER RESOLVED, that any of the aforesaid officers, or his duly elected or appointed successor in office, be and hereby is authorized and empowered to do any acts, including, but not limited to, the mortgage, pledge, or hypothecation from time to time with GE Capital of any or all the assets of this Corporation to secure such loan or loans and any other indebtedness or obligations, now existing or hereafter arising, of this Corporation to GE Capital, and to expect in the name of and on behalf of this Corporation, any chattel mortgages, notes, security agreements, financing statements, renewal, extension or consolidation agreement, and any other instruments or agreements deemed necessary or proper by GE Capital in respect of the collateral securing any indebtedness of this Corporation, and to affix the seal of this Corporation to any mortgage, pledge, or other such instrument if so required or requested by GE Capital. FURTHER RESOLVED, that each said officer of this Corporation is hereby authorized to do and perform all other acts and deeds that may be requisite or necessary to carry fully into effect the foregoing resolutions. FURTHER RESOLVED, that the officers referred to in the foregoing resolutions, their names and signatures are as follows: NAME TITLE SIGNATURE ---- ----- --------- Richard Ross President Richard Ross Diane M. Maroney Controller Diane M. Maroney FURTHER RESOLVED, that GE Capital is authorized to rely upon the aforesaid resolutions until receipt by it of written notice of any change, which changes of whatever nature shall not be effective as to GE Capital to the extent that it has theretofore relied upon the aforesaid resolutions in the above form." IN WITNESS WHEREOF, I have set my hand and affixed the seal of said Corporation this ____ day of _____________, 19__. (Sig) - ---------------------------------- Secretary (CORPORATE SEAL) EX-10.90 12 TELECOMMUNICATIONS TOOLS EQUIPMENT SCHEDULE GE Capital - ----------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT SCHEDULE SCHEDULE NO. 002 DATED THIS OCTOBER 20, 1995 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 Lessor & Mailing Address: Lessee & Mailing Address: General Electric Capital Corporation OMI Acquisition Corp. 303 International Circle Suite 300 425 North Drive Hunt Valley, MD 21031 Melbourne, FL 32935 Capitalized terms not defined herein shall have the meanings assigned to them in the Master Lease Agreement identified above ("Agreement"; said Agreement and this Schedule being collectively referred to as "Lease"). A. Equipment Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to Lessee the telecommunications system(s) and/or other equipment (collectively, the "Equipment") listed on Annex A attached hereto and made a part hereof. B. Financial Terms 1. Advance Rent (if any): $762.97. 2. Capitalized Lessor's Cost: $31,999.32. 3. Basic Term Lease Rate Factor: 2.38433. 4. Daily Lease Rate Factor: .07948. 5. Basic Term (No. of Months): 49. 6. Basic Term Commencement Date: October 20, 1995. 7. Equipment Location: 2330 Commerce Park Drive, N.E. Palm Bay, FL 32905. 8. Lessee Federal Tax ID No.: 59-3321536. 9. Supplier: Thistle Communications, Inc. 10. Last Delivery Date: October 10, 1995. 10. First Termination Date: N/A C. Tax Benefits Depreciation Deductions a. Depreciation Method: 200% declining balance method, switching to straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance. b. Recovery Period: 5 Years. c. Basis: 100% of Capitalized Lessor's Cost. D. Term and Rent 1. Interim Rent. For the period from and including the Lease Commencement Date to the Basic Term Commencement Date ("Interim Period"). Lessee shall pay as rent ("Interim Rent") for each unit of Equipment, the product of the Daily Lease Rate Factor times the Capitalized Lessor's Cost of such unit times the number of days in the Interim Period. Interim Rent shall be due on N/A. 2. Basic Term Rent. Commencing on October 20, 1995 and on the same day of each month thereafter (each, a "Rent Payment Date") during the Basic Term, Lessee shall pay as rent ("Basic Term Rent") the product of the Basic Term Lease Rate Factor times the Capitalized Lessor's Cost of all Equipment on this Schedule. 3. Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no more than ten percent (10%) to account for equipment change orders, equipment returns, invoicing errors, and similar matters. Lessee acknowledges and agrees that the Rent shall be adjusted as a result of such change in the Capitalized Lessor's Cost (pursuant to paragraphs 1 and 2 above). Lessor shall send Lessee a written notice stating the final Capitalized Lessor's Cost, if different from that disclosed on this Schedule. E. Insurance 1. Public Liability: $1,000,000 total liability per occurrence. 2. Casualty and Property Damage: An amount equal to the higher of the Stipulated Loss Value or the full replacement cost of the Equipment. F. Modifications and Additions to Agreement For purposes of this Schedule only, the Agreement is amended as follows: 1. Section I shall be deleted in its entirety and the following substituted in its stead; (a) Subject to the terms and conditions set forth below, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the telecommunications system(s) and/or such other equipment (such system(s) and/or equipment being referred to as "Equipment") described in Annex A to any schedule hereto ("Schedule"). Terms defined in a Schedule and not otherwise defined herein shall have the meanings ascribed to them in such Schedule. (b) The obligation of Lessor to purchase Equipment from the manufacturer or supplier thereof ("Supplier") and, to lease the same to Lessee under any Schedule shall be subject to receipt by Lessor, prior to the Cut-Over Date for such Equipment (which shall be the date on which such Equipment is first connected to a public telephone network in a manner permitting calls to be made through such Equipment to or from the facility in which such Equipment is located), of the following documents in form and substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder, (ii) a Purchase Order Assignment and Consent in the form of Annex B to the applicable Schedule, unless Lessor shall have delivered its purchase order for the Equipment, (iii) evidence of insurance which complies with the requirements of Section X, and (iv) such other documents as Lessor may reasonably request. As a further condition to such obligations of Lessor, Lessee shall, on the Cut-Over Date (but no later than the Last Delivery Date) for such Equipment, execute and deliver to Lessor a Certificate of Acceptance, in the form of Annex C to the applicable Schedule, covering all such Equipment, and deliver a bill of sale therefor (in form and substance satisfactory to Lessor). Lessor hereby appoints Lessee its agent for inspection and acceptance of the Equipment from the Supplier. Upon execution by Lessee of any Certificate of Acceptance, the Equipment described thereon shall be deemed to have been delivered to, and irrevocably accepted by, Lessee for lease hereunder. 2. Subsection VII(a) shall be amended to add the following sentence at the end thereof: Lessee shall protect the Equipment from the elements (except if this is impossible in light of the normally contemplated use of an item or items thereof). 3. Section VIII shall be deleted and the following substituted in its stead; VIII. STIPULATED LOSS VALUE. In the even that title to any Equipment is taken by eminent domain or otherwise or any Equipment shall be or become worn out, lost, stolen, destroyed, requisitioned or condemned by governmental or judicial order or otherwise, or, in the reasonable opinion of Lessee, irreparably damaged, from any cause whatsoever (any such occurrence being hereinafter called ("Casualty Occurrence"), Lessee shall promptly and fully notify Lessor in writing with respect thereto. In the event of a Casualty Occurrence as to part of the Equipment described on any Schedule, the same shall be treated as applicable to all the Equipment described on such Schedule, and Lessee will pay the Stipulated Loss Value for all Equipment on such Schedule unless it repairs and makes the system comprised of such Equipment fully functional to the satisfaction of Lessor. On the rental payment date next succeeding a Casualty Occurrence (the "Payment Date"). Lessee shall pay Lessor the sum of (x) the Stipulated Loss Value payment with respect to the rental next preceding such Casualty Occurrence ("Calculation Date"); and (y) all rentals and other amounts which are due hereunder as of the Payment Date. Upon payment of all sums due hereunder, the term of this lease as to such Equipment shall terminate, and except in the case of the loss, theft or complete destruction Lessor shall be entitled to return of the Equipment. 4. MAINTENANCE PROVISIONS: In addition to provisions set forth in the Service Section VII of this Lease Lessee, at its own expense; (a) shall keep the Equipment in operation and under the manufacturer's maintenance agreement acceptable to Lessor throughout the full term of the Lease; and shall comply with all requirements for enforcing warranty claims during the term of this Lease, including, but not limited to any extension or renewal term and including the period during which the Equipment is being deinstalled and returned to Lessor; and (b) Lessee shall not modify the terms of the maintenance agreement without the prior written consent of Lessor. Lessee shall maintain the Equipment within specifications and conditions recommended by the manufacturer and any associated maintenance manuals. Lessee will not permit others, other than the original maintenance provider, to perform any maintenance of the Equipment unless it is expressly approved by Lessor. 5. RETURN PROVISIONS: In addition to the provisions provided for in Section XI of the Lease, and provided that Lessee has elected not to exercise its option to purchase the Equipment Lessee shall, at its expense: (a) Upon the request of Lessor, Lessee shall no later than ninety (90) days prior to the expiration or other termination of the Lease provide: (i) a detailed inventory of the Equipment (including the model and serial number of each major component thereof), including, without limitation, all internal circuit boards, module boards, and software features; (ii) a complete and current set of all manuals, equipment configuration diagrams, maintenance records and other data that may be reasonably requested by Lessor concerning the configuration and operation of the Equipment; and (iii) a certification of the manufacturer or of a maintenance provider acceptable to Lessor that the Equipment (1) has been tested and is operating in accordance with manufacturers specifications (together with a report detailing the conditions of the Equipment), the results of such test(s) and inspection(s) and all repairs that were performed as a result of such test(s) and inspection(s) and (2) qualifies for the manufacturers used equipment maintenance program. (b) Upon the request of Lessor, Lessee shall, no later than sixty (60) days prior to the expiration or other termination of the Lease, make the Equipment available for on-site operational inspection by persons designated by the Lessor who shall be duly qualified to inspect the Equipment in its operational environment. (c) All Equipment shall be cleaned and tested with respect to rust, corrosion and appearance in accordance with manufacturers recommendations and consistent with the best practices of dealers in used equipment similar to the Equipment; shall have no Lessee installed markings or labels which are not necessary for the operation, maintenance or repair of the Equipment; and shall be in compliance with all applicable governmental laws, rules and regulations. (d) Provide for the deinstallation, packing, transporting, and certifying of the Equipment to include, but not limited to, the following: (i) the manufacturer's representative shall de-install all Equipment (including all wire, cable and mounting hardware) in accordance with the specifications of the manufacturer; (ii) each item of Equipment will be returned with a certificate supplied by the manufacturer's representative qualifying the Equipment to be in good condition and (where applicable) to be eligible for the manufacturer's maintenance plan; the certificate of eligibility shall be transferable to another operator of the Equipment; (iii) the Equipment shall be packed properly and in accordance to the manufacturer's recommendations; (iv) Lessee shall provide for the transportation of the Equipment in a manner consistent with the manufacturer's recommendations and practices to any locations within the continental United States as Lessor shall direct, and shall have the Equipment unloaded at such locations; (v) Lessee shall obtain and pay for a policy of transit insurance for the redelivery period in an amount equal to the replacement value of the Equipment and Lessor shall be named as the loss payee on all such policies of insurance; and (vi) Lessee shall provide insurance and safe, secure storage for the Equipment for thirty (30) days after expiration or earlier termination of the Lease at an accessible location satisfactory to Lessor. Except as expressly modified hereby, all terms and provisions of the Agreement shall remain in full force and effect. This Schedule is not binding or effective with respect to the Agreement or Equipment until executed on behalf of Lessor and Lessee by authorized representatives of Lessor and Lessee, respectively. IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation OMI Acquisition Corp. By: (Signature) By: (Signature) Name: Kevin C. Wortman Name: Diane M. Maroney Title: Sr. Credit Analyst Title: Controller Attest: By: (Signature) Name: Rita Donegan ANNEX A TO SCHEDULE NO. 002 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 DESCRIPTION OF EQUIPMENT Serial Type and Model Number Cost Manufacturer Numbers of Equipment of Units Per Unit Adix Telephone Equipment $24,101.00 (46)Single Line Phones 46 $ 1,309.45 (12)Ceiling Speakers 12 $ 456.00 (2)Ship Horns 2 $ 214.00 (1)Power Supply 1 $ 80.00 Bridge Clips, Blocks, Jumper Wire, Amp Tails $ 405.00 TAX $ 1,593.87 INSTALLATION $ 3,840.00 TOTAL $31,999.32 Initials: _______________ _______________ Lessor Lessee ANNEX B TO SCHEDULE NO. TO MASTER LEASE AGREEMENT DATED AS OF _______________ PURCHASE ORDER ASSIGNMENT AND CONSENT THIS ASSIGNMENT AGREEMENT, dated as of _________________ ("Agreement"), between General Electric Capital Corporation ("Lessor") and OMI ACQUISITION CORP. ("Lessee"). WITNESSETH: Lesse desires to lease certain equipment ("Equipment from Lessor pursuant to the above schedule and lease (collectively, "Lease"). All terms used herein which are not otherwise defined shall have the meaning ascribed to them in the Lease. Lesse desires to assign, and Lessor is willing to acquire, cerain of Lessee's rights and interests under the purchase order(s), agreement(s), and/or document(s) (the "Purchase Order") Lessee has heretofore issued to the Supplier(s) of such Equipment. NOW, THEREFORE, in consideration of the mutual covenants herein contained, Lessor and Lessee hereby agree as follows: SECTION 1. ASSIGNMENT. (a) Lessee does hereby assign and set over to Lessor all of Lessee's rights and interests in and to such Equipment and the Purchase Orders as the same relate thereto including, without limitation, (i) the rights to purchase, to take title, and to be named the purchaser in the bill of sale for such Equipment, (ii) all claims for damages in respect of such Equipment arising as a result of any default by the Supplier (including, without limitation ? ? ? indemnity claims) and (iii) any and all rights of Lessee to compel performance by the Supplier. (b) If, and so long as no default exists under the Lease, Lessee shall be, and is hereby, authorized during the term of the Lease to assert and enforce, at Lessee's sole cost and expense, from time to time, in the name of and for the account of Lessor and/or Lessee, as their interests may appear, whatever claims and rights Lessor may have against any Supplier of the Equipment. SECTION 2. CONTINUING LIABILITY OF LESSEE. It is expressly agreed that, anything herein contained to the contrary notwithstanding, (a) Lessee shall at all times remain liable to the Supplier to perform all of the duties and obligations of the purchaser under the Purchase Orders to the same extent as if this Agreement had not been executed, (b) the execution of this Agreement shall not modify any contractual rights of the Supplier under the Purchase Orders and the liabilities of the Supplier under the Purchase Orders shall be to the same extent and continue as if this Agreement had not been executed, (c) the exercise by the Lessor of any of the rights hereunder shall not release Lessee from any of its duties or obligations to the Supplier under the Purchasd Orders, and (d) Lessor shall not have any obligation or liability under the Purchase Orders by reason of, or arising out of, this Agreement or be obligated to perform any of the obligations or duties of Lessee under the Purchase Orders or to make any payment (other than under the terms and conditions set forth in the Lease) or to make any inquiry of the sufficiency of or authorization for any payment received by any Supplier or to present or file any clam or to take any other action to collect or enforce any claim for any payment assigned hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation OMI Acquisition Corp. By: (Signature) By: (Signature) Title: Senior Credit Analyst Title: Controller CONSENT AND AGREEMENT Supplier hereby consents to the above assignment agreement ("Agreement") and agrees not to accept any claims against Lessor or OMI ACQUISITION CORP. ("Lessee") inconsistent with such Agreement. Supplier agrees that the Purchase Orders are hereby amended as necessary to provide as follows: (a) Title to and risk of loss of the Equipment shall pass to Lessor upon Lessee's execution of the Certificate of Acceptance for such Equipment; and (b) Supplier hereby waives and discharges any security interest, lien or other encumbrance in or upon the Equipment and agrees ? ? ? such documents as Lessor may request evidencing the release of any such encumbrance and the conveyance of title thereto to Lessor. (c) Supplier agrees that on and after the date this Consent is executed it will not make any addition to or delete any items from the Equipment referred to in the Agreement without the prior written consent of both Lessor and Lessee. (d) Seller represents that the Equipment has been accurately labeled, consistent with the requirements of 40 CFR Part 82 Subpart B, with respect to products manufactured with a controlled (ozone-depleting) substance. IN WITNESS WHEREOF, the undersigned has caused this Consent to be executed this 10th day of October, 1995. JANE W. REYNOLDS SUPPLIER: My Commission CC398033 THISTLE COMMUNICATIONS INC. [LOGO] Expires Aug. 07, 1998 Bonded by HAJ By: (Signature) 800-422-1555 Title: President ANNEX C TO SCHEDULE NO. 002 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 CERTIFICATE OF ACCEPTANCE To: General Electric Capital Corporation ("Lessor") Pursuant to the provisions of the above schedule and lease (collectively, the "Lease"), Lessee hereby certifies and warrants that (a) all Equipment listed below has been delivered and installed (if applicable); (b) Lessee has inspected the Equipment, and all such testing as it deems necessary has been performed by Lesee, Supplier or the manufacturer; and (c) Lessee accepts the Equipment for all purposes of the Lease, the purchase documents and all attendant documents. Lessee does further certify that as of the date hereof (i) Lessee is not in default under the Lease; (ii) the representations and warranties made by Lessee pursuant to or under the Lease are true and correct on the date hereof and (iii) Lessee has reviewed and approves of the purchase documents for the Equipment, if any. DESCRIPTION OF EQUIPMENT Serial Type and Model Number Cost Manufacturer Numbers of Equipment of Units Per Unit Adix Telephone Equipment $24,101.00 (46)Single Line Phones 46 $ 1,309.45 (12)Ceiling Speakers 12 $ 456.00 ( 2)Ship Horns 2 $ 214.00 ( 1)Power Supply 1 $ 80.00 Bridge Clips, Blocks, Jumper Wire, Amp Tails $ 405.00 TAX $ 1,593.87 INSTALLATION $ 3,840.00 TOTAL $31,999.32 By: (Signature) Title: Controller Dated: October 20, 1995 ANNEX D TO SCHEDULE NO. 002 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 31, 1995 STIPULATED LOSS AND TERMINATION VALUE TABLE* -------------------------------------------- TERMINATION VALUE STIPULATED LOSS RENTAL PERCENTAGE VALUE PERCENTAGE ------ ----------------- ---------------- 1 103.939 108.163 2 102.476 106.925 3 100.973 105.647 4 99.431 104.329 5 97.871 102.994 6 96.293 101.640 7 94.695 100.267 8 93.078 98.874 9 91.441 97.461 10 89.784 96.028 11 88.108 94.577 12 86.412 93.106 13 84.697 91.615 14 82.962 90.105 15 81.207 88.575 16 79.432 87.024 17 77.638 85.454 18 75.824 83.865 19 73.996 82.261 20 72.152 80.641 21 70.292 79.006 22 68.417 77.356 23 66.522 75.685 24 64.612 73.999 25 62.685 72.297 26 60.739 70.575 27 58.776 68.837 28 56.798 67.083 29 54.799 65.309 30 52.779 63.514 31 50.747 61.706 32 48.701 59.885 33 46.642 58.050 34 44.569 56.202 35 42.475 54.332 36 40.367 52.449 37 38.246 50.552 38 36.103 48.634 39 33.946 46.702 40 31.775 44.755 41 29.583 42.787 42 27.369 40.797 43 25.138 38.791 44 22.890 36.768 45 20.626 34.728 46 20.626 32.672 TERMINATION VALUE STIPULATED LOSS RENTAL PERCENTAGE VALUE PERCENTAGE ------ ----------------- ---------------- 47 20.626 30.593 48 20.626 28.497 49 20.626 26.384 Initials: ________________ ________________ Lessor Lessee * The Stipulated Loss Value or Termination Value for any unit Equipment shall be equal to the Capitalized Lessor's Cost of such unit multiplied by the appropriate percentage derived from the above table. In the event that the Lease is for any reason extended, then the loss percentage figure shown above shall control throughout any such extended term. Date: October 10, 1995 General Electric Capital Corporation 303 International Circle Suite 300 Hunt Valley, MD 21031 Gentlemen: You are hereby irrevocably authorized and directed to deliver and apply the proceeds due under the assigned in connection with a lease to the undersigned evidenced by that Master Lease Agreement dated August 31, 1995 and Equipment Schedule No. 002 dated 10/20/95 as follows: Thistle Communications, Inc. $31,999.32 2101 S. Waverly Place Melbourne, FL 32901 Payment in Full of Invoice Nos. 3175, 3176 & 3177 This authorization and direction is given pursuant to the same authority authorizing the above-mentioned financing. Very truly yours, OMI Acquisition Corp. By: Diane M. Maroney Title: Controller CERTIFICATE OF DELIVERY To: General Electric Capital Corporation ("Lessor") The undersigned manufacturer, supplier or vendor ("Supplier") hereby certifies that all the equipment set forth in Annex A attached hereto and made a part hereof has been delivered to OMI Acquisition Corp. ("Lessee") at 2330 Commerce Park Drive, N.E., Palm Bay, FL 32903 ("Equipment Location"); that all installation, construction, manufacture, assembly and testing required to be performed by the Supplier in connection with the Equipment has been satisfactorily completed in a workman like manner, and that the Equipment meets all applicable specifications and is fully operational for its intended use. [LOGO] JANE W. REYNOLDS SUPPLIER: My Commission CC398033 Expires Aug. 07, 1998 Thistle Communications, Inc. Bonded by HAJ 800-422-1555 By: J. L. Thistle Title: President Signature of Jane W. Reynolds Date: 10-11-95 CERTIFICATE CONCERNING PAYMENT OF PERSONAL PROPERTY TAXES To: General Electric Capital Corporation To insure Lessee's compliance with the provisions of a Master Lease Agreement dated as of August 31, 1995 (the "Lease") by and between the undersigned as Lessee and General Electric Capital Corporation as Lessor, Lessee hereby agrees to one of the following options with respect to the payment of personal property taxes on the Equipment described in Annex A to Schedule Number 002 to the Lease, such agreement to be conclusively evidenced by the initials and signature of an authorized agent of Lessee in the appropriate spaces provided below: Please choose one of the options below by placing an "X" in the appropriate box and initialing where indicated. Initial ONLY ONE Choice of Option - ----------------------------------------- OPTION 1 Lessee's Initials: DM - ----------------------------------------- (Applicable in Jurisdictions Requiring Lessor to List Equipment): Lessee agrees that it will not list any of such Equipment for property tax purposes or report any property tax assessed against such Equipment until otherwise directed in writing by lessor. Upon receipt of any property tax bill pertaining to such Equipment from the appropriate taxing authority, Lessor will pay such tax and will invoice Lessee for the expense. Upon receipt of such invoice, Lessee will promptly reimburse Lessor for such expense; - ----------------------------------------- OPTION 2 Lessee's Initials: - ----------------------------------------- (Applicable in Jurisdictions Permitting Lessee to List Equipment): Lessee agrees that it will (a) list all such Equipment, (b) report all property taxes assessed against such Equipment and (c) pay all such taxes when due directly to the appropriate taxing authority until Lessor shall otherwise direct in writing. LESSEE: OMI Acquisition Corp. By: Diane M. Maroney Title: Controller Date: 10/20/95 Fi 1 With: STATE OF FLORIDA FINANCING STATEMENT UNIFORM COMMERCIAL CODE FORM UCC-1 (REV. 1993) THIS FINANCING STATEMENT is presented to a filing officer for filing pursuant to the Uniform Commercial Code: 1. (Last Name First if an Individual) OMI Acquisition Corporation (Lessee) 1a. Date of Birth or FEI# 59-3321536 1b. Mailing Address 425 North Drive 1c. City, State Melbourne, FL 1d. Zip Code 32935 2. Additional Debtor or Trade Name (Last Name First if an Individual) 2a. Date of Birth or FEI# 2b. Mailing Address 2c. City, State 2d. Zip Code 3. (Last Name First if an Individual) General Electric Capital Corporation (Lessor) 3a. Mailing Address 303 International Circle, Suite 300 3b. City, State Hunt Valley, MD 3c. Zip Code 21031 4. Additional Secured Party (Last Name First if an Individual) 4a. Mailing Address 4b. City, State 4c. Zip Code 5. This Financing Statement covers the following types or items or property (Include description of real property on which located and owner or record when required. If more space is required, attach additional sheet(s)). All equipment wherever located as more fully described on Annex A attached hereto and made a part hereof. Including all other attachments, accessories, additions, replacements and substitutions and proceeds now or hereafter attached hereto. Equipment currently located at: 2330 Commerce Park Drive N.E. Palm Bay, FL 32905 6. Check only if Applicable: [x] Products of collateral are also covered. [x] Proceeds of collateral are also covered. [ ] Debtor is transmitting utility. 7. Check appropriate box: (One box must be marked) [ ] All documentary stamp taxes due and payable or to become due and payable pursuant to s. 201.22 F.S., have been paid. [x] Florida Documentary Stamp Tax is not required. 8. In accordance with s. 679.402(2), F.S., this statement is filed without the Debtor's signature to perfect a security interest in collateral: [ ] already subject to a security interest in another jurisdiction when it was brought into this state or debtor's location changed to this state. [ ] which is proceeds of the original collateral described above in which a security interest was perfected. [ ] as to which the filing has lapsed. Date filed______________and previous UCC-1 file number______________. [ ] acquired after a change of name, identity, or corporate structure of the debtor. 9. Number of additional sheets presented:___________ 10. Signature(s) of OMI Acquisition Corporation (Lessee) Diane M. Maroney 11. Signature(s) of or if Assigned, by Assignee(s). General Electric Capital Corporation (Lessor) ---signature--- 12. Return Copy to: Name Address Address City, State, Zip This Space for Use of Filing Officer EX-10.91 13 JOINT VENTURE AGREEMENT JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT is made as of February 6, 1996 ("Agreement") by and among DRS/MS, INC. ("DRS/MS"), a Delaware corporation, UNIVERSAL SONICS CORPORATION ("USC"), a New Jersey corporation, RON HADANI, an individual residing at 1486 West Terrace Circle, Teaneck, New Jersey 07666 ("Hadani"), HOWARD FIDEL, an individual residing at 24 Scott Place, Hartsdale, New York, 10530 ("Fidel"), and THOMAS S. SOULOS, an individual residing at 1199 Park Avenue, Apt. 11 C, New York, New York 10128 ("Soulos") (collectively, Hadani, Fidel and Soulos shall hereinafter be referred to as the "Shareholders"). A. Diagnostic/Retrieval Systems, Inc. ("DRS"), a Delaware corporation, and USC have entered into a nonbinding letter of intent describing their interest in forming a joint venture for the purpose of developing, manufacturing and marketing low cost, high performance ultrasound medical imaging equipment and products that perform three-dimensional ultrasound medical imaging. B. Each of DRS/MS and USC desires to make an investment in the business operated by the joint venture. C. To accomplish such investment, DRS/MS, on the one hand, and USC, on the other hand, desire to associate themselves as partners, and desire to form a partnership ("Partnership") under the laws of the State of New Jersey for the purposes described in and on the terms of a Partnership Agreement of DRS Medical Systems substantially in the form of Exhibit A hereto ("Partnership Agreement"). D. DRS/MS desires to contribute $400,000 to the Partnership as well as certain managerial expertise and manufacturing capabilities as more specifically set forth herein. E. USC desires to contribute to the capital of the Partnership all of the assets, net of certain Royalties (as defined below), of USC, subject only to certain liabilities of USC, such liabilities being no greater than such net assets. NOW, THEREFORE, in consideration of the mutual covenants and agreements and on the terms and conditions contained herein, and intending to be legally bound, the parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accounts Receivable" means all of the accounts receivable of USC due from customers which are contributed to the Partnership pursuant to the terms of the Partnership Agreement. "Affiliate" means, when used with reference to a specified Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person or (ii) any Person that is an executive officer or director of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity; and, (iii) when used with reference to a natural Person, any Person that is related to the specified Person by blood or marriage in the first degree of consanguinity; provided, however, that no natural Person shall be deemed to be controlled by any other Person. "Applicable Law" has the meaning specified in Section 4.05(a). "Assumed Liabilities" shall mean the liabilities of USC to be assumed by the Partnership pursuant to the Partnership Agreement as set forth in Schedule 4.04 hereof. "Closing" has the meaning specified in Section 2.03. "Closing Date" shall have the meaning specified in Section 2.03. "Code" means the Internal Revenue Code of 1986, as amended. "Contracts" means all contracts, subcontracts, agreements, options, guarantees, orders, commitments, undertakings and arrangements, whether written or oral. "DRS/MS Capital Contribution" means the contribution by DRS/MS to the capital of the Partnership determined pursuant to the provisions of Section 2.02(i). "Employment Agreements" means collectively the employment agreements with the Partnership to be individually executed substantially in the form attached hereto as Exhibit B by each of the Shareholders. "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), costs and expenses, including costs and expenses of defense of any claim and of any settlement of claims, including, without limitation, reasonable attorneys' fees and consultants' fees, which are incurred at any time as a result of the existence of Hazardous Material upon, about or beneath the Premises or migrating or threatening to migrate to or from the Premises, or arising in any manner whatsoever out of any violation of Environmental Requirements pertaining to the Premises and the activities thereon or to the past, present or future operations of USC, including without limitation: (i) damages for personal injury, or injury to property or natural resources, including but not limited to claims brought by or on behalf of employees of USC, occurring upon or off of the Premises, whether foreseeable or unforeseeable, including, without limitation, lost profits, consequential damages, interest and penalties; (ii) diminution in the value of the Premises and damages for the loss of or restriction on the use of or adverse impact on the marketing of rentable or usable space or of any amenity of the real property containing the Premises; (iii) fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs and liabilities (including liabilities to indemnify any Person for costs) incurred in connection with the investigation or remediation of such Hazardous Materials or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remedial, removal, containment, restoration or monitoring work required by any Governmental Authority, or reasonably necessary to make full economic use of the Premises or any other property or otherwise expended in connection with such conditions; and (iv) damages and claims resulting from the off-site disposal of Hazardous Materials which derived from the use, generation, storage, treatment, transportation or disposal of Hazardous Materials by USC. "Environmental Requirements" means all Applicable Laws relating to the protection of human health or the environment, including, without limitation: (i) all requirements pertaining to reporting, licensing, permitting, investigation or remediation of emissions, discharges, releases or threatened releases of Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; and (ii) all requirements pertaining to the protection of the health and safety of employees or the public. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended (P.L. 93-406). "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time, applied consistently throughout the periods involved. "Governmental Approval" means an authorization, consent, approval, permit, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority, including, without limitation, federal and New Jersey environmental authorities. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any government authority, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof and any tribunal or arbitrator(s) of competent jurisdiction. "Hazardous Materials" means any chemical substance: (i) the presence of which requires investigation, removal or remediation under any Applicable Law; or (ii) which is or becomes defined as a "hazardous waste" or "hazardous substance" under any Applicable Law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any Governmental Authority or Applicable Law; or (iv) the presence of which causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the Premises or to the health or safety of any Person on or about the Premises; or (v) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without limitation which contains PCBs or asbestos. "IRS" means the United States Internal Revenue Service. "Intellectual Property Rights" means any and all copyrights, trademarks, trademark applications, service marks, service mark applications, licensing agreements and similar Contracts, technology, trade secrets, trade names, division names and other information, property or rights used in or relating to the business or operations of the Partnership or the Transferred Assets, as more specifically set forth in Schedule 4.06 hereof. "Inventories" means all inventories relating to the business of the Partnership and contributed to the Partnership including, without limitation, all finished goods, work in progress, raw materials, stores, all production, shipping and packaging supplies and all spare parts. "Liens" has the meaning specified in Section 4.04. "Material Adverse Effect" means any loss, liability or expenditure, whether contingent or not, exceeding $10,000.00. "Material Contract" shall have the meaning specified in Section 4.08. "Net Worth Statement" shall have the meaning specified in Section 5.05. "Notice" shall have the meaning specified in Section 11.09. "Partnership" has the meaning specified in the Recitals. "Partnership Agreement" has the meaning specified in the Recitals. "Permitted Liens" shall have the meaning specified in Section 4.04. "Partnership Percentage Interest" shall have the meaning specified in the Partnership Agreement. "Person" means any individual, firm, partnership, corporation, trust, estate, limited liability company, limited liability partnership, or other entity. "Personal Property Leases" shall have the meaning specified in Section 4.24. "Plan(s)" shall have the meaning specified in Section 4.11. "Premises" means those locations leased by USC or otherwise used thereby for the business operations of USC. "Return" shall mean all reports, estimates, declarations, information statements and returns due under all foreign, federal, state or local laws or regulations, as appropriate, relating to Taxes. "Royalties" shall mean the dollar value of certain royalty payments due and to become due during the six years after the Closing Date to USC, such dollar value not to exceed $3,000,000, as more specifically described on Schedule 4.04 hereof. "Subsidiary" of any Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other equity having ordinary voting power to elect a majority of the Board of Directors or other managers of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) or other entity is at the time directly or indirectly owned by such Person, by such Person and one or more of such Person's other Subsidiaries or by one or more of such Person's other Subsidiaries. "Taxes" means all federal, state and local taxes, assessments and governmental charges, of any nature, kind or description (including, without limitation, all income taxes, franchise taxes, withholding taxes, estimated taxes, unemployment insurance, social security taxes, payroll taxes, sales and use taxes, excise taxes, occupancy taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation and withholding taxes) and all interest, additions to tax and penalties with respect thereto, whether such interest, additions or penalties arise before or after the Closing Date. "Transaction Documents" shall mean the collective reference to the Partnership Agreement, the Employment Agreements and all other agreements and documents to be delivered pursuant hereto or thereto on the Closing Date, in each case with such changes as may be agreed among the parties. "Transferred Assets" shall mean all of the assets of USC, less any Royalties, to be contributed to the capital of the Partnership and/or sold to the Partnership pursuant to Section 2.02 below, including without limitation the Intellectual Property Rights, as more specifically set forth on Schedule 4.04 hereof. "USC Capital Contribution" means the contribution by USC to the capital of the Partnership described in Section 2.02(ii). ARTICLE II FORMATION OF PARTNERSHIP AND EXECUTION OF TRANSACTION DOCUMENTS SECTION 2.01 Formation of Partnership and Execution of Transaction Documents. Subject to the fulfillment of the conditions specified in Article VI of this Agreement, on the Closing Date the parties (a) shall form the Partnership under the terms of the Partnership Agreement, and (b) shall execute, and cause the Partnership and its Affiliates to execute, the Transaction Documents to which each of them is a party. SECTION 2.02 Contributions. Subject to the fulfillment of the conditions specified in Article VI of this Agreement and pursuant to and in accordance with the provisions of the Transaction Documents, on the Closing Date the parties shall make the following initial contributions to the Partnerships: (i) DRS/MS shall transfer or cause to be transferred to the capital of the Partnership, $400,000 in readily available funds. DRS/MS shall also contribute certain managerial expertise and manufacturing capabilities as set forth in Schedule 2.02. The parties agree to use the aggregate of the $400,000 contributed by DRS/MS hereunder to purchase from USC certain assets delineated on Schedule 2.02 hereto. DRS/MS shall prepare an allocation schedule in accordance with Section 1060 of the Code, and the parties shall cooperate with each other and provide such information as either of them shall reasonably request. The parties shall each report the federal, state, local and other Tax consequences of the purchase and sale contemplated hereby in a manner consistent with such allocation schedule. (ii) USC shall transfer or cause to be transferred to the capital of the Partnership the Transferred Assets (other than those assets delineated on Schedule 2.02 hereof), subject only to the Assumed Liabilities, such Assumed Liabilities being no greater than the Transferred Assets. SECTION 2.03 Closing. (a) Upon the terms and subject to the conditions set forth herein, the execution and delivery of the Transaction Documents to be executed at closing and the closing of the transactions contemplated hereby and thereby (the "Closing") shall take place at the offices of Hannoch Weisman, a Professional Corporation, 4 Becker Farm Road, Roseland, New Jersey 07068-3788 (or at such different location as the parties shall mutually agree) at such time as shall be mutually agreed upon in writing by the parties hereto no later than February 1, 1996 (the "Closing Date"); provided, however, that all of the conditions precedent in Article VI of this Agreement shall have been satisfied or waived, as the case may be. All of the actions contemplated to be taken pursuant to this Agreement on the Closing Date and taken or occurring on such date shall be deemed to occur simultaneously. (b) At the Closing, the following Transaction Documents associated with the transfer of the Transferred Assets shall be delivered by each of the parties thereto (such Transaction Documents hereinafter referred to as the "Asset Transfer Documents"): (i) Assignments substantially in the form attached hereto as Exhibit C; (ii) assignments and, as required, consents to such assignments of USC's right, title and interest under each Contract to be assigned under this Agreement and the Partnership Agreement; (iii) assignment in recordable form of USC's right, title and interest in, or licenses for the use of, the Intellectual Property Rights to be assigned or licensed; (iv) such other instruments of assignment or conveyance as DRS/MS may reasonably request as necessary or appropriate to vest in the Partnership good and marketable title to the Transferred Assets being contributed to the Partnership. SECTION 2.04 Method of Payment. All payments to be made under this Agreement and under the Transaction Documents shall, unless otherwise specified herein or therein, be made in lawful money of the United States and in funds immediately available by wire transfer to the account specified by the party to receive such payment. ARTICLE III REPRESENTATIONS AND WARRANTIES OF DRS/MS Representations and Warranties of DRS/MS. DRS/MS represents and warrants to USC as follows: SECTION 3.01 Corporate Existence. DRS/MS is (or will be, prior to the Closing Date) a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; has all requisite power and authority to enter into this Agreement and each Transaction Document to which it is a party and to perform its obligations hereunder and thereunder; and has all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being conducted. DRS/MS is (or will be prior to the Closing Date) duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary. SECTION 3.02 Authority Relative to this Agreement and Transaction Documents. The execution, delivery and performance by DRS/MS of this Agreement and each Transaction Document to which it is, or on the Closing Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all requisite corporate action, and no other corporate action on the part of DRS/MS is necessary for the execution, delivery and performance by DRS/MS of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party and the consummation by DRS/MS of the transactions contemplated hereby and thereby. Neither the execution nor the delivery by DRS/MS of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party, nor the consummation by DRS/MS of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by DRS/MS of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) the Certificate of Incorporation or Bylaws of DRS/MS or (B) any lease, Contract, instrument, mortgage, deed of trust, trust deed or deed to secure debt evidencing or securing indebtedness for borrowed money, any financing lease, any law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which DRS/MS is, or on the Closing Date will be, a party or by which it is bound, (ii) require DRS/MS to obtain the consent, approval, authorization or other order or action of, or filing with, any court, Governmental Authority or regulatory body, (iii) require the consent, approval, authorization or order of any Person under, and will not conflict with, or result in the breach, lapse or termination of, or constitute a default under, or result in the acceleration of the performance by DRS/MS or any Affiliate thereof under any material lease, permit, license, Contract, mortgage, deed of trust, trust deed, deed to secure debt, other lease, indenture or other instrument to which DRS/MS or any Affiliate thereof is a party or by which any of them or any of their properties are subject, (iv) give any party with rights under any instrument, Contract, lease, mortgage, deed of trust, trust deed, deed to secure debt, judgment, order, award, decree or other restriction of any kind to which DRS/MS is bound the right to terminate, modify or otherwise change the rights or obligations of any party under such instrument, Contract, lease, mortgage, deed of trust, trust deed, deed to secure debt, judgment, order, award, decree or other restriction, causing a Material Adverse Effect, (v) require any declaration, filing or registration with any governmental or regulatory authority by DRS/MS, or (vi) otherwise cause a Material Adverse Effect. This Agreement has been duly executed and delivered by DRS/MS and, together with each other Transaction Document and other agreement and instrument required to be delivered hereunder or thereunder by DRS/MS, when duly executed and delivered by DRS/MS, is or will be, as the case may be, a legal, valid and binding obligation of DRS/MS, enforceable against DRS/MS in accordance with its respective terms, subject as to enforcement of remedies only to any applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws of general application at the time in effect and general principles of equity. SECTION 3.03 No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of DRS/MS, threatened against or affecting DRS/MS that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. SECTION 3.04 Full Disclosure; Materiality. No representation or warranty by DRS/MS herein, nor any statement or certificate furnished to USC pursuant hereto, or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made not materially misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF USC AND THE SHAREHOLDERS Representations and Warranties of USC. USC and each of the Shareholders jointly and severally represent and warrant to DRS/MS that: SECTION 4.01 Corporate Existence. USC is a corporation duly organized, validly existing and in good standing under the laws of New Jersey and has all requisite power and authority to enter into this Agreement and each Transaction Document to which it is a party and to perform its obligations hereunder and thereunder; and has all requisite corporate power and authority to own its properties and assets and conduct its business as it is now being conducted. USC is duly qualified as a foreign corporation in each jurisdiction where the nature of its activities makes such qualification necessary, or where the failure to so qualify gives rise to a reasonable possibility of a material adverse effect. SECTION 4.02 Authority Relative to this Agreement and Transaction Documents; Consents. The execution, delivery and performance by USC of this Agreement and each Transaction Document to which it is, or on the Closing Date will be, a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action, and no other corporate action on the part of USC is necessary for the execution, delivery and performance by USC of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party and the consummation by it of the transactions contemplated hereby and thereby. Except as disclosed on Schedule 4.02, neither the execution nor the delivery by USC of this Agreement or any Transaction Document to which it is, or on the Closing Date will be, a party, nor the consummation by USC of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment by USC of the terms and provisions hereof or thereof, will, (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under (A) the Certificate of Incorporation or Bylaws of USC, or (B) any lease, Contract, instrument, mortgage, deed of trust, trust deed or deed to secure debt evidencing or securing indebtedness for borrowed money, any financing lease, any law, rule, regulation, judgment, order, award, decree or other restriction of any kind to which USC is a party, or on the Closing Date will be, or by which it is bound, (ii) require USC to obtain the consent, approval, authorization or other order or action of, or filing with, any court, Governmental Authority or regulatory body, (iii) require the consent, approval, authorization or order of any Person under, and will not conflict with, or result in the breach, lapse or termination of, or constitute a default under, or result in the acceleration of the performance by USC or any Affiliate thereof under any material lease, permit, license, Contract, mortgage, deed of trust, trust deed, deed to secure debt, other lease, indenture or other instrument to which USC or any Affiliate thereof is a party or by which any of them or any of their properties are subject, (iv) give any party with rights under any instrument, Contract, lease, mortgage, deed of trust, trust deed, deed to secure debt, judgment, order, award, decree or other restriction of any kind to which USC is bound the right to terminate, modify or otherwise change the rights or obligations of any party under such instrument, Contract, lease, mortgage, deed of trust, trust deed, deed to secure debt, judgment, order, award, decree or other restriction, causing a Material Adverse Effect, (v) require any declaration, filing or registration with any governmental or regulatory authority by USC, or (vi) otherwise cause a Material Adverse Effect. This Agreement has been duly executed and delivered by USC and, together with each other Transaction Document and other agreement and instrument required to be delivered hereunder or thereunder by USC, when duly executed and delivered by USC, is or will be, as the case may be, a legal, valid and binding obligation of USC, enforceable against USC in accordance with its respective terms, subject as to enforcement of remedies only to any applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws of general application at the time in effect and general principles of equity. SECTION 4.03 No Litigation. There is no action, lawsuit, claim, counterclaim, proceeding or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of USC, threatened against or affecting USC that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or any Transaction Document. SECTION 4.04 Title to Transferred Assets; Assumed Liabilities. USC owns or has the legal right to use all of the Transferred Assets. Schedule 4.04 hereof lists all of the machinery, equipment, Intellectual Property Rights, furniture, fixtures, personalty, and other items constituting the Transferred Assets of USC. USC has good and marketable title to all of the Transferred Assets being transferred by it, free and clear of all liens (including environmental liens), mortgages, deeds of trust, trust deeds, deeds to secure debt, pledges, encumbrances, defects, security interests, restrictions, conditional and installment sale agreements, options, easements and other legal or equitable encumbrances and claims or charges of any kind (collectively, "Liens"), except (a) as disclosed in Schedule 4.04 and (b) liens for current taxes, assessments or governmental charges not yet due and payable (the Liens referred to in clauses (a) through (b) being "Permitted Liens"). At the Closing, USC will deliver or cause to be delivered to the Partnership good title to the Transferred Assets, except as permitted or disclosed in this Section, free and clear of any Liens. Schedule 4.04 hereof lists all of the liabilities constituting the Assumed Liabilities of USC. Such list of Assumed Liabilities presents fairly the nature of the liability to be assumed by the Partnership. In the event that the general representations and warranties contained in this Section 4.04 conflict with or render ambiguous specific representations or warranties contained in other provisions of Article IV of this Agreement, each other more specific provision shall govern. SECTION 4.05 Compliance with Laws; Permits and Licenses. (a) Except as disclosed in Schedule 4.05(a), to the best of its knowledge USC is in compliance with all applicable statutes, orders, rules and regulations promulgated by Governmental Authorities (collectively, "Applicable Law") relating to the Transferred Assets, or the operation or conduct of the business of USC, or the use of the properties of the business of USC, including, without limitation, any applicable statute, order, rule or regulation relating to (i) wages, hours, hiring, non-discrimination, promotion, retirement, benefits, pensions and working conditions, (ii) health and safety, (iii) zoning and building codes or municipal ordinances, violation of which would substantially interfere with the ability of USC to operate, (iv) the production, storage, processing, advertising, sale, transportation, distribution, disposal, use and warranty of products of the business of USC, (v) obligations of USC to disabled persons, or (vi) trade and antitrust regulations, and USC has not received any notice of alleged violation of any such statute, order, rule or regulation. Except as disclosed in Schedule 4.05(a), USC has not received any notice that it is in default and is unaware of any default under or in violation of, any applicable franchise, permit or license, its Certificate of Incorporation or other charter document, Bylaws, any promissory note, indenture or any evidence of indebtedness or security therefor, lease, Contract or any other instrument to which it is a party or by which it or any of its properties or assets is or may be bound. (b) Schedule 4.05(b) lists all governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority and any pending applications for any thereof material to the conduct of the business of USC. Except as disclosed in Schedule 4.05(b), such licenses, permits, product registration, authorizations, approvals and indicia of authority are (i) all the governmental licenses, permits, product registrations, authorizations, approvals and indicia of authority necessary to conduct the business of USC or to use the Transferred Assets as currently conducted or used and (ii) valid and in full force and effect and, assuming the related consents referenced in Section 5.02(f) have been obtained prior to the Closing, are transferable by USC to the Partnership. SECTION 4.06 Intellectual Property. (a) Schedule 4.06 hereof sets forth a true and complete list of all Intellectual Property Rights for USC. The Intellectual Property Rights constitute all such property forming a part of the business of USC and, except as disclosed in Schedule 4.06, to the knowledge of USC, do not conflict with or, to the knowledge of USC, infringe on the rights of others. There is no Intellectual Property Right necessary to operate the business of the Partnership which is not included in the Transferred Assets. (b) Except as disclosed in Schedule 4.06: (i) all the Intellectual Property Rights are owned by USC or are licensed to USC under licenses or written agreements included in the Transferred Assets; (ii) no claims have been made and are pending or, to the knowledge of USC, are currently threatened against USC alleging that any services provided or products manufactured or sold by USC, or any Intellectual Property Rights, are being provided, sold or used in violation of any patents or trademarks, or any other rights of any Person; (iii) USC has not granted any license to any Person with respect to any Intellectual Property Rights; (iv) to the knowledge of USC, no other Person is infringing on any Intellectual Property Rights; (v) all Intellectual Property Rights of USC are legal, valid and binding, in full force and effect and freely and fully assignable to the Partnership; (vi) USC has duly made punctual payments of all royalties or fees required to be made by it under or in connection with any Intellectual Property Right; and (vii) no event has occurred which (with the passing of time or the giving of notice) would result in or permit the termination of any Intellectual Property Right or the acceleration of any obligation thereunder without the consent of USC. (c) Except as disclosed in Schedule 4.06, all rights of USC in each item of the Intellectual Property Rights are transferable to the Partnership as contemplated herein and in the Partnership Agreement. Following the transactions contemplated hereby, the Partnership shall own or possess adequate and enforceable licenses or other rights to use, without payment of any fee other than as disclosed in Schedule 4.06, all Intellectual Property Rights. SECTION 4.07 Litigation. Except as disclosed in Schedule 4.07, there is no action, lawsuit, claim, counterclaim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations) pending or, to the knowledge of USC, threatened against or affecting USC in any court, or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, and as of the Closing Date USC knows of no reasonable basis for any such action, lawsuit, claim, proceeding, or investigation (or group of related actions, lawsuits, claims, proceedings or investigations). USC is not in default, and no condition exists that with notice or the lapse of time or both would constitute a default, with respect to any judgment, order, writ, injunction or decree of any court or before any federal, state, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting or relating to the business of USC. No condemnation proceeding has been commenced or, to the knowledge of USC, is threatened to be commenced against any of the Transferred Assets. SECTION 4.08 Contracts. Schedule 4.08 contains a complete and correct list as of the date hereof of all agreements, contracts and commitments of the following types, written or oral, to which USC is a party or by which USC or its properties are bound as of the date hereof: (a) mortgages, indentures, security agreements, letters of credit, loan agreements and other agreements, guarantees and instruments relating to the borrowing of money or extension of credit; (b) employment, consulting, severance and agency agreements; (c) collective bargaining agreements; (d) bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plans, trusts or funds for the benefit of employees, officers, agents and directors (whether or not legally binding); (e) sales agency, manufacturer's representative or distributorship agreements; (f) agreements, orders or commitments for the purchase of raw materials, supplies or finished products exceeding $5,000; (g) agreements, orders or commitments for the sale of its products exceeding $5,000; (h) licenses of patent, copyright, tradenames, trademark, transfer of technology or know how and other intellectual property rights; (i) agreements or commitments for capital expenditures in excess of $5,000 for any single project (it being warranted that all undisclosed agreements or commitments for capital projects do not exceed $10,000 in the aggregate for all projects); (j) brokerage or finder's agreements; (k) joint venture, partnership and development agreements; and (1) other agreements, contracts and commitments which in any case involve payments or receipts of more than $5,000. USC has delivered to DRS/MS complete and correct copies of all such written agreements, contracts and commitments, together with all amendments thereto, and accurate descriptions of all oral agreements listed in Schedule 4.08. No reason exists that would not allow each such oral agreement to be enforceable against any party to such oral agreement. Except as disclosed in Schedule 4.08, all such agreements, contracts and commitments governed by this Section 4.08 are in full force and effect, are enforceable by USC against the other parties thereto in accordance with their terms, and, except as disclosed in Schedule 4.08, there does not exist thereunder any violation or any default or event or condition or course of dealing which, after notice or lapse of time or both, would constitute a default thereunder on the part of USC so as to cause a Material Adverse Effect or, to the best knowledge of USC after due inquiry, any other party thereto so as to cause a Material Adverse Effect or would provide a basis for any creditor of USC, or any party to such agreements, contracts or commitments, to challenge the extent, validity or priority of the interest of any other party to such agreements, contracts or commitments so as to cause a Material Adverse Effect; consummation of the transactions contemplated under this Agreement and the Transaction Documents shall not give rise to any violation or any default or event or condition or course of dealing which, after notice or lapse of time or both, would constitute a default thereunder on the part of USC so as to cause a Material Adverse Effect or, to the best knowledge of USC after due inquiry, any other party thereto so as to cause a Material Adverse Effect or would provide a basis for any creditor of USC, or any party to such agreements, contracts or commitments to challenge the extent, validity or priority of the interest of any other party to such agreements, contracts or commitments so as to cause a Material Adverse Effect. Except as disclosed in Schedule 4.08, no agreement, contract or commitment to which USC is a party, or by which it or any of its properties is bound, materially and adversely affects or in the future may (so far as USC can now reasonably foresee) materially and adversely affect the business of USC. Except as disclosed in Schedule 4.08, no agreement, contract or commitment to which USC is a party, or by which it or any of its properties is bound, is in conflict, whether by way of violation of any term or condition or by way of default, with any other agreement, contract or commitment to which USC is a party, or by which it or any of its properties is bound. All agreements, contracts or commitments with Affiliates of USC to which USC is a party or by which it or any of its properties is bound reflect terms no less favorable to USC than could be obtained from unaffiliated third parties. USC has no outstanding powers of attorney, except routine powers of attorney relating to representation before governmental agencies or given in connection with qualification to conduct business in another jurisdiction. SECTION 4.09 Labor Union Contracts. USC is not a party to any collective bargaining or other labor union Contract applicable to persons employed by USC. There are no unfair labor practice complaints or there are no current union representation questions involving persons employed in the business of USC. Except as disclosed on Schedule 4.09, USC knows of no current activities or proceedings of any labor union (or representatives thereof) to organize any unorganized employees of USC and of no strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any employees of USC. During the 24-month period preceding the date hereof, there have not been any formally filed grievances involving employees of USC. SECTION 4.10 Employees, Labor Matters, etc. (a) Schedule 4.10 contains a complete and correct list of the names of all directors, officers and salaried employees of USC. There is no payment that has not been paid for more than 30 days past the date on which such payment would ordinarily be made in the ordinary course of business that is owed by USC to any of its directors, officers, employees, trustees, agents, brokers, representatives or other personnel, current and former, or any beneficiaries, dependents or survivors of the foregoing (including, without limitation, expense reimbursement and severance payments), in accordance with the terms of their respective employment arrangements or under their employment, severance or agency agreements, if any. (b) Except as set forth in Schedule 4.10, there has not been any (i) unfair labor practice complaint against USC before the National Labor Relations Board; (ii) labor strike, dispute, or work stoppage actually pending or, to the best of USC's knowledge after due inquiry, threatened against or affecting USC; (iii) representation petition respecting the employees of USC filed with the National Labor Relations Board; or (iv) arbitration proceeding arising out of or under collective bargaining agreements pending against USC. SECTION 4.11 ERISA. Schedule 4.11 lists (i) all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical, disability or life insurance, supplemental retirement, or severance benefit plans, programs or arrangements, and all employment, termination, or severance contracts to which USC is a party, with respect to which USC has any obligation, or that are maintained, contributed to or sponsored by USC for the benefit of any current or former employee, officer or director, (ii) each employee benefit plan for which USC could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated and (iii) any plan in respect of which USC or the Partnership could incur liability under Section 4212(c) of ERISA (collectively, the "Plans"). (a) Each Plan that is intended to qualify under Section 401(a) of the Code or similar provision of foreign law is so qualified. USC has performed all obligations required to be performed by it by the terms of the Plans and applicable laws, rules and regulations. USC has complied in all material respects with all applicable laws, rules and regulations relating to each Plan. (b) USC has not and has no knowledge that any other "party in interest" (as defined in Section 3(14) of ERISA) to any Plan has engaged in any transaction with respect to any Plan in connection with which USC or any other party in interest could be subjected to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code. (c) No Plan which is a "defined benefit plan" (as defined in Section 3(35) of ERISA) or any trust created under any such Plan has been terminated since September 2, 1974. No material liability to the Pension Benefit Guaranty Corporation (the "PBGC"), other than annual premium payments, has been or is expected by USC to be incurred by USC with respect to any Plan. There has been no reportable event (within the meaning of Section 4043 of ERISA), which at the time of such event required notification within 30 days to the PBGC. There has been no other reportable event with respect to any Plan which could result in a liability to USC as a result thereof. There has been no event or condition which presents a risk of termination of any such Plan by the PBGC. (d) Full payment has been made of all amounts which USC is required under the terms of each Plan to have paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof or, if later, the most recent date as of which such amount is required to be paid under such Plan (and, with respect to any Plan that is subject to Section 412(m) of the Code, all payments required to be made have been paid on or before each required installment due date (as defined in Section 412(m) of the Code) preceding the date hereof), and, with respect to any Plan, no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists. There has been no failure to make any payment due prior to the date hereof that is or could become a liability of USC under Section 412(c) of the Code. (e) The present value as of December 31, 1994 of all accrued benefits under all Plans subject to Section 412 of the Code did not, as of such date, exceed the current value of the assets of such Plans allocable to such accrued benefits. The terms "present value," "current value" and "accrued benefit" have the meanings specified in Section 3 of ERISA. (f) No Plan is a "multiemployer plan" (as defined in Sections 3(37) and 4001(3) of ERISA) and USC has not withdrawn or partially withdrawn from any multiemployer plan under circumstances giving rise to a withdrawal liability under ERISA. (g) Neither USC nor any corporation, trade or business under common control with USC (within the meaning of Sections 414(b), (c), (m) or (o) of the Code) has engaged in any transaction since January 1, 1986 described in Section 4069(a) of ERISA. (h) No Plan provides for the payment of any welfare benefit (as described in Section 3(1) of ERISA) to any former or retired employee of USC or any of its Affiliates, except as may be required by Section 4980B of the Code or Section 601 of ERISA. (i) No Plan provides for the payment of severance benefits upon termination of employment. SECTION 4.12 Brokers' or Finders' Fees. USC has not paid nor will become obligated to pay any fee or commission to any broker, finder, consultant or other intermediary for or on account of the transactions provided for in this Agreement. SECTION 4.13 Financial Information; Undisclosed Liabilities. (a) Attached hereto as Schedule 4.13 are copies of the balance sheet of USC (the "USC Balance Sheet") as of December 31, 1995 (the "Balance Sheet Date"). Except as disclosed on Schedule 4.13, the USC Balance Sheet, together with the books and records of the business of USC, present fairly and consistently the financial condition of the business of USC as of the Balance Sheet Date. (b) The books of account of USC reflect all items of income and expense and all assets and liabilities of the business of USC. (c) USC has delivered to DRS/MS a copy of its balance sheets, together with the notes thereto, as of December 31, 1992, 1993 and 1994 and the related statement of operations and retained earnings and of cash flows for the year then ended. Except as disclosed on Schedule 4.13, such financial statements, together with the notes thereto, (i) are in accordance with the books and records of USC, (ii) present fairly and consistently the financial condition of USC as of the date thereof, (iii) present fairly and consistently the result of operations of USC for the periods covered by such statements, and (iv) include all adjustments that are necessary for a fair and consistent presentation of the financial condition of USC and the results of USC's business operations for the periods covered by such statements. (d) There are no material liabilities of USC relating to or involving any Transferred Asset of any kind whatsoever, whether or not accrued or fixed, absolute or contingent, determined or determinable, known or unknown, other than liabilities (i) that comprise part of the Assumed Liabilities, (ii) reflected on and adequately provided for in the USC Balance Sheet attached hereto as Schedule 4.13, (iii) incurred since the Balance Sheet Date in the ordinary course of the operation of USC and not as a result of any violation of law or regulation which, singly or in the aggregate, are likely to have a Material Adverse Effect, or (iv) disclosed in Schedule 4.13. SECTION 4.14 Taxes. (a) Except as disclosed in Schedule 4.14, USC has duly filed all federal, state and local Returns which are required to be filed by it prior to the date hereof and has paid all Taxes which are shown thereon to be due and all other Taxes imposed by law upon it or any of its properties, assets, income, receipts, payrolls, transactions, capital, net worth or franchises which have become due and payable. Except as disclosed in Schedule 4.14, the Taxes payable set forth in the USC Balance Sheet are adequate to cover all liabilities for Taxes of USC with respect to all assets held and activities conducted by USC on or prior to the Closing Date, other than liabilities for Taxes incurred in the ordinary course of business subsequent to the date of the USC Balance Sheet and permitted by this Agreement. No tax liens have been filed and neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the best knowledge of USC after due inquiry, threatening to assert against USC any deficiency or claim for additional Taxes. Except as provided in Schedule 4.14, no Return of USC is currently under audit by the Internal Revenue Service or by the taxing authorities of any other jurisdiction. USC has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any federal, state or local Tax. Without limiting the foregoing, USC has no knowledge of any actual claim for any additional Tax to be imposed upon USC for the periods ending on or prior to the Closing Date in excess of the accruals of USC set forth in the USC Balance Sheet with respect to Taxes. The federal, state and local tax Returns of USC have been examined by the appropriate taxing authority, or the statutes of limitations with respect to the relevant income or franchise tax liability have expired, for all tax periods through and including the tax period listed with respect to each such jurisdiction set forth in Schedule 4.14. (b) No consent or agreement under Section 341(f) of the Code is in effect with respect to USC. (c) Except as provided in Schedule 4.14, USC has not (i) agreed to and is not required to make any adjustment under Section 481(a) of the Code or Revenue Procedure 87-32 (or any successor thereto), by reason of a change in method of accounting or otherwise; (ii) ever been included in a combined or consolidated income tax return; (iii) ever owned stock representing 50% or more of the voting power or value of another corporation; (iv) entered into any agreement or arrangement that could result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code; (v) consummated any transaction with another corporation that is owned, directly or indirectly, by the Sellers on other than an arms-length basis within the meaning of Section 482 of the Code and the regulations thereunder; or (vi) entered into any tax sharing agreements or similar arrangements. (d) USC's taxable year for federal and state income and franchise tax purposes has always been a taxable year beginning January 1 and ending December 31. SECTION 4.15 Absence of Changes. Since December 31, 1995 except as specified in Schedule 4.15, USC has not: (a) undergone any adverse change in its condition (financial or other), properties, assets, liabilities, business, operations or prospects, other than changes in the ordinary course of business; (b) declared, set aside, made or paid any dividend or other distribution in respect of its capital stock or otherwise purchased or redeemed, directly or indirectly, any shares of its capital stock; (c) issued or sold any shares of its capital stock of any class or any options, warrants or conversion or other rights to purchase any such shares or any securities convertible into or exchangeable for such shares; (d) other than in the ordinary course of business, incurred any indebtedness for borrowed money, issued or sold any debt securities or prepaid any debt outstanding as of [date]; (e) mortgaged, pledged or subjected to any Lien any of its properties or assets, tangible or intangible, except for Permitted Liens; (f) acquired or disposed of any assets or properties, or entered into any agreement or other arrangement for such acquisition or disposition, except in the ordinary course of business; (g) forgiven or cancelled any debts or claims, or waived any rights except in the ordinary course of business; (h) entered into any agreement, commitment or other transaction other than agreements involving an expenditure of [$5,000] or less in the aggregate and other than agreements in the ordinary course of business, or entered into any agreement which, pursuant to its terms, is not cancellable without penalty on less than 30 days' notice; (i) paid any bonus to any officer, director or employee or granted to any officer, director or employee any other increase in compensation in any form; (j) adopted or amended in any material respect, any employment, collective bargaining, bonus, profitsharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement, trust, fund or arrangement for the benefit of employees (whether or not legally binding); (k) suffered any damage, destruction or loss (whether or not covered by insurance) which may have had (individually or in the aggregate) a Material Adverse Effect; (1) suffered any strike or other employmentrelated problem which may have had (individually or in the aggregate) a Material Adverse Effect; (m) suffered any loss of employees or customers which may have had (individually or in the aggregate) a Material Adverse Effect; (n) amended its certificate of incorporation or bylaws (or comparable documents); (o) changed in any respect its accounting practices, policies or principles; (p) incurred any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise with respect to the obligations of others), except in the ordinary course of business; (q) granted any rights or licenses under any of its trademarks, tradenames or patents or entered into any licensing or distributorship agreements; or (r) made any material changes in policies or practices relating to selling practices, returns, discounts or other terms of sale or accounting therefor or in policies of employment. SECTION 4.16 Accounts Receivable. Except as disclosed in Schedule 4.16, the accounts receivable reflected on the USC Balance Sheet arose from, and the accounts receivable existing on the Closing Date will have arisen from, the sale of Inventories or services in the ordinary course of the businesses of USC and constitute valid, undisputed and subsisting claims and are not subject to valid claims, counterclaims or setoffs. SECTION 4.17 Insurance. The business of USC and the Transferred Assets are covered by valid and currently effective insurance policies issued in favor of USC. Schedule 4.17 contains a list and brief description (including the name of the insurer, the type of coverage provided, the amount of the annual premium for the current policy period, the amount of remaining coverage and deductibles and the coverage period) of all policies and Contracts of insurance held by USC and/or the employees currently or previously employed in the business of USC. Except as disclosed in Schedule 4.17, all such policies are in full force and effect and transferable by USC to the Partnership. All premiums due thereon have been paid and USC and its Affiliates have complied in all respects with the provisions of such policies. Such policies (i) are sufficient for compliance with all requirements of law and are substantially consistent with all (A) Contracts to which USC is a party and (B) leases, mortgages, deeds of trust, trust deeds and deeds to secure debt to which USC is a party, and (ii) are reasonable in scope and amount, in light of the risks attendant to the businesses and activities in which USC is or has been engaged. There is no default with respect to any provision contained in any such policy and there has not been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as disclosed in Schedule 4.17, no notice of cancellation or non-renewal with respect to, or disallowance of any claim under, any such policy has been received by USC, neither has USC been refused insurance with respect to its assets or operations, nor has its coverage been previously cancelled or materially limited, by any insurer to which it has applied for such insurance or with which it has held insurance. SECTION 4.18 Sufficiency of Transferred Assets. (a) Except as disclosed in Schedule 4.18, all of the Transferred Assets are suitable for the uses in which they are currently employed, are in good operating condition and are free from any defects (subject to normal wear and tear), except such minor defects as do not interfere with the continued use of such properties and equipment in the conduct of the normal operations of the business of USC, and the Transferred Assets include supplies of spare parts for the equipment and machinery included in the Transferred Assets in amounts consistent with past practices of USC. (b) None of the Transferred Assets is used by USC or any of its Affiliates in connection with any business or enterprise other than the business of USC. SECTION 4.19 Foreign Assets. The Transferred Assets do not include any interest in any real property or tangible or intangible personal property or other assets located outside the continental limits of the United States of America. SECTION 4.20 Certain Payments. All payments by USC to agents, consultants and others have been in payment of bona fide fees and commissions and not as bribes or illegal or improper payments. USC has complied with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder ("FCPA") and, in each case, have not made any payment to or on behalf of any person with respect to which a deduction could be disallowed under Section 162(c) of the Code. Neither the IRS nor any other U.S. federal, state, local or foreign government agency or entity has initiated or threatened any investigation of any payment made by USC of, or alleged to be of, the type described in this Section. SECTION 4.21 Affiliate Transactions. Schedule 4.21 contains a complete and correct list of all agreements or arrangements (whether or not written) between USC and any shareholder, officer, director or employee (or immediate family member thereof) of USC currently in effect or to be performed in the future. Other than such agreements or arrangements, if any, or as further disclosed on Schedule 4.21, there has been no transaction between USC and any shareholder, officer, director or employee (or immediate family member of any thereof) of USC in effect within the two-year period immediately preceding the date hereof which involved payments to, or from, or for the benefit of, any such shareholder, officer, director or employee (or immediate family member of any thereof) (other than (a) salary and bonus paid as part of the employment relationship for services rendered (including directors' fees) and (b) contributions by USC under any of its Plans). Except as set forth in Schedule 4.21, no shareholder, officer, director or employee (or immediate family member of any thereof) of USC owns directly or indirectly, on an individual or joint basis, greater than a 5% interest in, or serves as an officer, director or employee of, any customer, competitor or supplier of USC or any person or entity which has a contract or arrangement with USC. SECTION 4.22 Suppliers. Except as disclosed on Schedule 4.22, to the knowledge of USC none of the suppliers of inventory, equipment or services of USC will cease to sell such equipment or services to the Partnership as a result of the transactions contemplated by this Agreement which cessation will materially disrupt the business of the Partnership. SECTION 4.23 Environmental Conditions and Governmental Authorizations. Except as specified in Schedule 4.23: (a) All real property owned, leased, occupied or used by USC is free from contamination from any Hazardous Materials. USC has not caused or suffered, nor, to the best knowledge of USC after due inquiry, has any other party previously involved in operations at any such property caused or suffered, any Environmental Damages. (b) Neither USC nor, to the best of its knowledge, any prior owner or occupant of real property owned, leased, occupied or used by USC has received notice of any alleged violation of Environmental Requirements, or notice of any alleged liability for Environmental Damages, and there exists no writ, injunction, decree, order or judgment outstanding, nor any claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation, pending or threatened, relating to the ownership, use, maintenance or operation of the Premises by any Person, or to alleged violation of Environmental Requirements, or to the suspected presence of Hazardous Material thereon, nor does there exist any basis for such claim, suit, proceeding, citation, fine, penalty, directive, summons or investigation being instituted or filed. (c) There is not constructed, placed, deposited, stored, disposed of or located on any real property owned, leased, occupied or used by USC any polychlorinated biphenyls ("PCBs") or transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs, or any asbestos. (d) USC has no knowledge of any alleged liability for Environmental Damages of any alleged violation of Environmental Requirements asserted against any of the owners or occupants of any related property located in the vicinity of any of any real property owned, leased, occupied or used by USC. (e) USC has in its possession all permits required to operate in compliance with all applicable laws, and USC is presently in material compliance with each of such permits. SECTION 4.24 Leases of Personal Property. (a) Schedule 4.24 correctly describes each lease under which USC is the lessee of any personal property (collectively, the "Personal Property Leases"). The property described in all of the Personal Property Leases is presently used in the businesses of USC. USC has all right, title and interest of the lessee under the terms of all of the Personal Property Leases to which it is a party. Other than any related consents listed in Schedule 4.24, no consent is necessary for the assignment of any Personal Property Lease held by USC to the Partnership. (b) No event has occurred which (with the passage of time or the giving of notice) would materially impair any right of USC to exercise and obtain the benefits of any options contained in any Personal Property Lease. There is no substantial default or basis for acceleration or termination, nor has any event occurred (assuming any related consent referenced in Section 5.02(f) is obtained prior to the Closing) which (with the passage of time or the giving of notice) would constitute such a default or result in or permit the acceleration of any Personal Property Lease. SECTION 4.25 Full Disclosure; Materiality. No representation or warranty by USC herein, nor any statement or certificate furnished to DRS and/or DRS/MS pursuant hereto, or in connection with the transactions contemplated hereby, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made and, together with the Schedules attached hereto, not materially misleading. The Schedules attached hereto completely and correctly present the information required by this Agreement to be set forth therein, do not contain any untrue statement of a material fact and do not omit to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made and, together with the representations and warranties by USC herein, not materially misleading. The aggregate total of any loss, liability or expenditure, whether contingent or not, of all Material Adverse Effects referenced in Sections 4.02, 4.08, 4.13 and 4.15 does not exceed $25,000.00. Originals or true and complete copies of all documents listed in such Schedules have heretofore been made available for examination by DRS and/or DRS/MS, including, without limitation, deeds, leases, mortgages, deeds of trust, trust deeds, deeds to secure debt, security instruments, permits, trademarks, patents and other Intellectual Property Rights, litigation files, Contracts, employee agreements and licenses in the form existing on the date hereof. SECTION 4.26 Books and Records. USC has previously furnished to DRS/MS true and correct copies of the Certificate of Incorporation (or other charter document) and Bylaws of USC as in effect on the date hereof. The minute books and stock books of USC have been made available to DRS/MS and are correct and complete as of the date hereof in all material respects, and will be correct and complete at the Closing. SECTION 4.27 Accounts. Schedule 4.27 correctly identifies each bank account maintained by or on behalf or for the benefit of USC and the name of each Person with any power or authority to act with respect thereto. ARTICLE V. COVENANTS SECTION 5.01 Covenants of DRS/MS. DRS/MS covenants with USC that: (a) Compliance with Laws. DRS/MS is in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. DRS/MS will not take or omit to take any action which would result in the inaccuracy on the Closing Date of any of their representations and warranties (including any and all Schedules thereto) contained in Article III. It is expressly understood by USC that a change in control of DRS/MS, whether by merger, acquisition, share exchange, sale or pledge of stock or otherwise, shall not by such change of control alone constitute a breach of any representation or warranty or otherwise breach this Agreement. (c) Covenant not to Compete. Neither DRS, DRS/MS nor their Affiliates will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures and/or markets and/or sells any ultrasound medical imaging equipment (or other medical imaging products based on the core technology currently being used by USC) except that either DRS or its Affiliates or DRS/MS may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. SECTION 5.02 Covenants of USC. USC covenants with DRS and DRS/MS that: (a) Compliance with Laws. USC is in all material respects in compliance with all laws applicable to it; (b) Maintain Accuracy of Representations. USC will not take or omit to take any action which would result in the inaccuracy on the Closing Date of any of their representations and warranties (including any and all Schedules thereto) contained in Article IV; (c) No Shop. Until the earlier of the termination of this Agreement in accordance with its terms or the Closing, USC shall not directly or indirectly, through any Affiliate, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the stock of USC or the Transferred Assets or any business combination with USC or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. USC immediately shall cease and cause to be terminated any existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. USC shall notify DRS/MS promptly of any such proposal or offer, or any inquiry or contract with any Person with respect thereto, is made and shall, in any such notice to DRS/MS, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact; (d) Access to Information; Confidentiality. (i) From the date hereof to the Closing Date, USC shall and shall cause any Affiliates, employees, auditors and agents of USC to, afford the officers, employees and agents of DRS and DRS/MS access during regular business hours to the officers, employees, agents, properties, offices, plants and other facilities, books and records of USC, and shall make available to DRS and DRS/MS all financial, operating and other data and information as DRS and DRS/MS, through their officers, employees or agents, may reasonably request; (ii) Pursuant to a Confidentiality Agreement dated March 30, 1995, all information obtained by DRS and DRS/MS pursuant to this Section 5.02 shall be kept confidential; (iii) No investigation or knowledge of any matter or condition by DRS or DRS/MS shall affect any representation or warranty or any condition to their obligations or any right to terminate this Agreement; (e) Conduct of Business. Between the date hereof and the Closing Date, without the consent of DRS/MS and except as contemplated by the Transaction Documents, USC shall: (i) conduct its business only in the usual, regular and ordinary course of business consistent with past practice; (ii) except either in the usual, regular and ordinary course of business and consistent with past practice or as necessary to comply with the provisions of this Agreement, refrain from: (A) making any purchases, sales, transfers, or leases of any Transferred Assets or mortgaging, pledging or otherwise creating a security interest in, or any encumbrance of, any of the Transferred Assets (other than Permitted Liens); (B) entering into any Contract, license, or lease in relation to the business of USC or taking any other action which would, if entered into or taken on the date hereof, be required to be disclosed on a Schedule to this Agreement or the Partnership Agreement; (C) making any change in the compensation or benefits payable or to become payable to any employee employed by USC or making any new bonus payment or arrangement or benefit to or with any such employee; (D) making any changes in the customary methods of operation of the business of USC, including marketing, selling and pricing practices and policy; and (E) taking any other action which would have a material negative impact on the business of USC or on the prospects of the business of USC; (iii) use all reasonable efforts to preserve its business organization intact, to keep its insurance policies intact, to keep available the services of its present employees and officers, and to preserve the relationships with and the goodwill of all suppliers, customers, sales representatives and others having business relations with USC; (iv) maintain the Premises and all of the other properties used in the operation of its business in customary repair, order and condition, reasonable wear and tear excepted, and perform all of its obligations under any leases; (v) maintain its books, accounts and records in connection with its business in the usual manner on a basis consistent with past practices; (vi) refrain from amending, modifying in any material respect or consenting to the termination of any Material Contract or other material contract to be transferred to the Partnership under this Agreement and the Partnership Agreement or USC's material rights with respect thereto; (vii) except in the ordinary course of business, refrain from increasing the total number of employees employed in connection with its business; and (viii) refrain from agreeing, whether in writing or otherwise, to do any of the foregoing; (f) Third Party Consents; Further Actions. (i) USC shall use its best reasonable efforts to obtain at the earliest practicable date after the date hereof, and, in any event, prior to the Closing Date, all consents of parties to Contracts contemplated by this Agreement or any Transaction Document; (ii) USC shall use its best reasonable efforts to obtain, and to assist DRS/MS or the Partnership in obtaining, all waivers, licenses, authorizations, qualifications, orders, permits, consents and approvals required to be obtained by it or them and to effect, and to assist DRS/MS or the Partnership in effecting, all registrations, filings and notices with or to third parties or governmental or public bodies or authorities required to be made which are necessary or desirable in connection with the transactions contemplated by this Agreement or any Transaction Documents; (iii) USC shall obtain the release of all Liens on or against any of the Transferred Assets, other than Permitted Liens; (g) Employee Matters. Prior to the Closing, USC will not terminate without good business reasons, lay off or transfer any of its employees without the consent of DRS/MS. USC shall use its reasonable best efforts to preserve intact the availability of such employees so as to permit the Partnership to hire those employees as the Partnership desires, effective upon the Closing Date. USC will not do anything to dissuade any of the employees of USC from accepting employment with the Partnership after the Closing; (h) Renewal of Permits. USC shall take such steps as are customary in the industry to file any necessary applications for the renewals of all licenses and permits referred to in Section 4.23 including, without limitation, Environmental Permits, if any such license or permit is required to be obtained prior to the Closing; (i) Powers of Attorney. USC shall revoke all powers of attorney relating to the Transferred Assets upon the Closing; (j) Notification of Certain Matters. USC shall give prompt notice to DRS/MS of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate and (ii) any failure of USC to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; (k) Disclosure Schedules. No later than four weeks after the date hereof, USC shall deliver to DRS/MS complete Schedules to this Agreement and the Transaction Documents which are to be provided by USC together with any supporting documentation which DRS/MS may reasonably request and, within seven business days after receipt of such Schedules and supporting documentation either (i) DRS/MS will accept such Schedules in which case they shall become a part of this Agreement and the appropriate Transaction Documents, (ii) the parties hereto will agree upon mutually acceptable revisions to such Schedules in which case such revised Schedules shall become a part of this Agreement and the appropriate Transaction Documents or (iii) DRS/MS will terminate this Agreement pursuant to Article IX hereof. (l) Covenant Not to Compete. Neither USC nor its Affiliates (other than the Shareholders whose covenants not to compete are set forth below) will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures and markets any ultrasound medical imaging equipment. Neither USC nor its Affiliates (other than the Shareholders) will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures, markets, sells and/or introduces technology or technologically based products (whether or not based on USC's core technology) to the medical imaging field in general except that either USC or its Affiliates may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. For the period beginning on the Closing Date and ending on the later of the third anniversary of the Closing Date or the first anniversary of the relevant Shareholder's termination of employment from the Partnership, neither the Shareholders nor any of them (nor their Affiliates) will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner, director, officer, employee or otherwise: (i) any business which develops, manufactures, markets and/or sells any ultrasound medical imaging equipment or any product developed, manufactured, marketed and/or sold by the Partnership (or contemplated to be developed, manufactured, marketed and/or sold by the Partnership in the reasonably foreseeable future); (ii) any entity which has been or proposes to be a customer of the Partnership during the 18 month period immediately preceding the termination of the relevant Shareholder's employment by the Partnership; and/or (iii) any entity which proposes to supply or has supplied the Partnership with technologically-related products during the 18 month period immediately preceding the termination of the relevant Shareholder's employment by the Partnership, except that any and all of the Shareholders may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. Each Shareholder additionally agrees that he shall not, directly or indirectly, in any capacity whatsoever: (a) hire or solicit for employment, directly or indirectly, any Partnership personnel in any capacity whatsoever (which shall be deemed to include, without limitation, any existing or prospective employee of the Partnership or any person who has been such an employee of the Partnership within 150 days prior to the Closing Date); (b) attempt directly or indirectly, to induce any such Partnership personnel to leave the employ of, or discontinue such person's business association with, the Partner-ship; (c) solicit, directly or indirectly, any client or account or bona fide prospective client or account of the Partnership with which the Partnership has had good faith discussions in connection with the sale of goods and/or services directly or indirectly competitive with the business of the Partnership; or (d) interfere with, disrupt, or attempt to disrupt, the business relationships, contractual or otherwise, between the Partnership and any of its customers, suppliers or employees. SECTION 5.03 Insurance Matters. Each party agrees to use its best efforts to assist the Partnership in arranging insurance coverage for the business of the Partnership to be effective upon the Closing. Such insurance shall be of the types, in amounts and of an extent and scope at least equal to the insurance currently covering such businesses. SECTION 5.04 Closing Conditions. Each party agrees to use its best efforts to satisfy the conditions precedent to Closing specified in Article VI. SECTION 5.05 Net Worth Statements. Promptly after the execution of this Agreement, USC and DRS/MS shall prepare a mutually agreed upon balance sheet (the "Preliminary Balance Sheet") of USC in accordance with GAAP as of December 31, 1995, and, based on the Preliminary Balance Sheet, shall prepare a Pro Forma Statement of Net Worth of the Partnership as of December 31, 1995 (the "Preliminary Pro Forma Net Worth Statement"). The Preliminary Pro Forma Net Worth Statement shall reflect agreed-upon adjustments to the net worth of USC as reported in the Preliminary Balance Sheet and shall eliminate any assets or liabilities included in the USC Balance Sheet, other than the Transferred Assets and Assumed Liabilities, as herein defined. As soon as practicable after the Closing, and in any event no more than 60 days after the Closing Date, USC will prepare, and DRS/MS will internally review, a final statement of net worth of the Partnership as of the most recent date practicable prior to the Closing (the "Final Pro Forma Net Worth Statement"). All physical inventories in connection with the Final Pro Forma Net Worth Statement shall be taken as near as practicable to the Closing Date. The Final Pro Forma Net Worth Statements shall be prepared in a manner that is consistent with the preparation of the Preliminary Pro Forma Net Worth Statement. To the extent that the Final Pro Forma Net Worth Statements reflects that Assumed Liabilities are greater than Transferred Assets (a "deficit"), then for each dollar of such deficit, the Partnership shall have the option of either reducing on a dollar-for-dollar basis the Assumed Liabilities, or reducing any monetary payments, whether or not then due, to the Shareholders [and/or USC] on a present value basis, or choosing any combination of such two options so as to eliminate such deficit. ARTICLE VI. CONDITIONS PRECEDENT TO THE CLOSING SECTION 6.01 Conditions Precedent to Obligations of DRS/MS. The obligation of DRS/MS to make the DRS/MS Capital Contribution and to perform its other obligations hereunder and under the Transaction Documents is subject to the satisfaction or waiver of the conditions precedent that: (a) Documents. DRS/MS shall have received on or before the Closing Date the following, each dated the Closing Date, in form and substance satisfactory to DRS/MS: (i) counterparts of each of the following Transaction Documents duly executed and, to the extent appropriate, acknowledged by all appropriate parties other than DRS/MS and its affiliates, together with all documents to be delivered to DRS/MS thereunder on the Closing Date: (1) the Partnership Agreement; (2) the Employment Agreements; and (3) the Asset Transfer Documents referred to in Section 2.03(b); (ii) a Certificate of USC, signed on behalf of USC by the President or a Vice President and the Secretary or any Assistant Secretary (the statements made in which Certificate shall be true on and as of the Closing Date), certifying fulfillment of the conditions specified in subsections (b) and (c) below; (iii) copies of resolutions of the board of directors and the shareholders of USC, certified by the Secretary of USC, authorizing the execution, delivery and performance of this Agreement and the Transaction Documents and all other documents and instruments to be delivered pursuant hereto and thereto; and (iv) opinion of counsel to USC, substantially in the form attached as Exhibit D. (b) Representations and Warranties. The representations and warranties of USC contained in this Agreement, as modified by any Schedules delivered by USC pursuant to Section 5.02(k) hereof, shall be true and correct in all material respects on the date hereof and as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date, except for any representation and warranty expressly stated to have been made or given as of a specified date, which, at the Closing Date, shall be true and correct in all material respects as of the date expressly stated. (c) Performance. USC shall have performed and complied in all material respects with all of their respective agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by them prior to or at the Closing Date. (d) No Material Adverse Change. Since the date of the Balance Sheet there shall not have occurred an event or condition which has resulted or which reasonably may be expected to result in a Material Adverse Effect. (e) Net Worth. Assumed Liabilities shall not exceed Transferred Assets as reflected on the Preliminary Balance Sheet and as reflected on the Partnership's Pro Forma Net Worth Statement (prior to taking into account the DRS/MS Capital Contribution). (f) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions contemplated by this Agreement and the Transaction Documents shall have been obtained prior to Closing; provided, however, that USC may have the consent of Independence Bank ("USC Obligee") contingent upon the pay off on the Closing Date by USC of a certain loan from USC Obligee to USC upon presenting evidence of such contingent consent in form and substance satisfactory to DRS/MS prior to the Closing Date and upon presenting evidence of such pay off in form and substance satisfactory to DRS/MS at the time of Closing. (g) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either DRS/MS, USC or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. (h) Licenses; Permits. All operating licenses and permits necessary for the operation of the businesses of USC as conducted on the Closing Date (including, without limitation, Environmental Permits) to the extent transferable shall have been transferred by USC to the Partnership as of the Closing Date, or new permits issued in replace thereof, at the expense of the Partnership. (i) Other. DRS/MS shall have received such further assurances and documents as it may reasonably request. SECTION 6.02 Conditions Precedent to Obligations of USC. The obligations of USC to perform its other obligations hereunder and under the Transaction Documents are subject to satisfaction or waiver of the conditions precedent that: (a) Documents. USC shall have received on or before the Closing Date the following, each dated the Closing Date, in form and substance satisfactory to USC: (i) counterparts of each of the following Transaction Documents duly executed and, to the extent appropriate, acknowledged by all appropriate parties, together with all documents to be delivered thereunder on the Closing Date, all in form and substance reasonably satisfactory to USC: (1) the Partnership Agreement; (ii) a Certificate of DRS/MS, signed on behalf of DRS/MS by the President or a Vice President and the Secretary or any Assistant Secretary of DRS/MS (the statements made in which Certificate shall be true on and as of the Closing Date), certifying as to the fulfillment of the conditions specified in subsections (b) and (c) below; (iii) copies of resolutions of the board of directors of DRS/MS, certified by the Secretary of DRS/MS authorizing the execution, delivery and performance of this Agreement and the Transaction Documents to which each is a party and all other documents and instruments to be delivered pursuant hereto and thereto; and (iv) opinion of counsel to DRS/MS, substantially in the form attached as Exhibit E. (b) Representations and Warranties. The representations and warranties of DRS/MS contained in this Agreement shall be true and correct in all material respects on the date hereof and as of the Closing Date with the same effect as through such representations and warranties had been made or given again at and as of the Closing Date, except for any representation or warranty expressly stated to have been made or given as of a specified date, which, at the Closing Date, shall be true and correct in all material respects as of the date expressly stated. (c) Performance. DRS/MS shall have performed and complied in all material respects with all of its agreements, covenants and conditions required by this Agreement and each Transaction Document to be performed or complied with by it prior to or at the Closing Date. (d) Consents, etc. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from, governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required to have been obtained in connection with the transactions contemplated by this Agreement and the Transaction Document shall have been obtained prior to Closing. (e) No Proceeding or Litigation. (i) No preliminary or permanent injunction or other order shall have been issued by any court of competent jurisdiction, whether federal, state or foreign, or by any governmental or regulatory body, whether federal, state or foreign, nor shall any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, whether federal, state or foreign, be in existence or effect, which prevents the consummation of the transactions contemplated by this Agreement or any Transaction Document. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body or authority, whether federal, state or foreign, shall have been commenced and be pending against either DRS/MS or USC or any of their respective Affiliates, associates, officers or directors seeking to prevent the consummation of the transactions contemplated by this Agreement or any Transaction Document or asserting that such transactions would be illegal. (f) DRS/MS Capital Contributions. The Partnerships shall have received the DRS/MS Capital Contributions in accordance with the terms of the Partnership Agreement. (g) Other. USC shall have received such further assurances and documents as it may reasonably request. ARTICLE VII. [Intentionally Omitted] ARTICLE VIII. INDEMNIFICATION SECTION 8.01 Survival of Representations and Warranties. The representations and warranties of USC and DRS/MS shall survive the Closing for a period of three years from the Closing Date, provided however, that representations and warranties in Section 4.14 shall survive 90 days following expiration of the period during which claims may be pursued in respect of such matters pursuant to the applicable statute of limitations; and provided further that there shall be no temporal limitation of indemnification in respect of representations and warranties set forth in Section 4.04 (as such representations and waranties of Section 4.04 relate to Transferred Assets but not to Assumed Liabilities). SECTION 8.02 Indemnification by the Parties. Except as otherwise limited by this Article, each of the Partnership and its respective partners, officers, directors, employees, agents, successors and assigns (each an "Indemnified Party") shall be indemnified and held harmless by DRS/MS, on the one hand, and each of USC and the Shareholders on the other hand, (each an "Indemnifying Party") for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses and environmental engineering consultants' fees) actually suffered or incurred by the Indemnified Party (hereinafter a "Loss"), actually arising out of or resulting from: (a) the breach of any representation or warranty by the Indemnifying Party contained herein or contained in any of the Transaction Documents; or (b) the breach of any covenant or agreement by the Indemnifying Party contained herein or contained in any of the Transaction Documents; provided, however, that except for any Loss or Losses attributable to a breach of any representation or warranty under Section 4.04 (as such representations and waranties of Section 4.04 relate to Transferred Assets but not to Assumed Liabilities) and/or Section 4.14 (the indemnification of which shall be unlimited in amount), the aggregate amount of any Loss or Losses recoverable hereunder by an Indemnified Party from USC and/or the Shareholders shall be limited to the total of (i) the $1,200,000.00 in total bonus payments paid or payable to the Shareholders pursuant to the Employment Agreements ("Bonus Payments"), plus (ii) the amount of any Royalties not yet paid at the time the claim for indemnification is made ("Unpaid Royalties"), plus (iii) any interest or interests in the Partnership held by USC, the Shareholders and/or their successors in interest, and provided further that the aggregate amount of any Loss or Losses sought to be recovered hereunder by an Indemnified Party from all Indemnifying Parties must exceed $5,000.00 except for any Loss or Losses attributable to a breach in any representation or warranty contained in Section 4.14 or Section 4.04. In satisfying the indemnification obligations of the Shareholders and/or USC hereunder, the Indemnified Party agrees to offset any Loss or Losses: (i) first against Bonus Payments; (ii) if there are no or insufficient Bonus Payments remaining against which to offset such Loss or Losses, then such Loss or Losses shall be offset against any Unpaid Royalties due to be paid within six (6) months of a claim for indemnification; (iii) if there are no or insufficient Bonus Payments or Unpaid Royalties, then such Loss or Losses shall be satisfied by surrender of an appropriate portion of the Shareholder's and/or USC's interest in the Partnership (or by offset against any amounts due pursuant to Section 7.6 of the Partnership Agreement), and (iv) if the indemnification obligations remain unsatisfied pursuant to clauses (i) - (iii) above, then USC and/or the Shareholders shall satisfy any Loss or Losses by payment of cash. SECTION 8.03 General Indemnification Provisions. An Indemnified Party shall promptly give the Indemnifying Party notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, stating the amount of the Loss, if known, and method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. The obligations and liabilities of an Indemnifying Party under this Article with respect to Losses arising from claims of any third party that are subject to the indemnification provided for in this Article ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall give the Indemnifying Party prompt notice of such Third Party Claim and shall permit the Indemnifying Party, at its option, to participate in the defense of such Third Party Claim by counsel of its own choice and at its expense. If, however, the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claims (subject to the limitations set forth herein), then the Indemnifying Party shall be entitled, at its option, to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives prompt notice of intention to do so to the Indemnified Party. In the event the Indemnifying Party exercises its right to undertake the defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to it all such witnesses, records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim, except the settlement thereof which involves the payment of money only and for which the Indemnified Party is totally indemnified by the Indemnifying Party, may be settled by the Indemnifying Party without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld). Similarly, no Third Party Claim which is being defended in good faith by the Indemnifying Party shall be settled by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld). SECTION 8.04 Materiality. Notwithstanding anything in this Agreement to the contrary, for purposes of application of the indemnity provisions of this Article, the amount of any Loss arising from the breach of any representation, warranty, covenant or agreement shall be the entire amount of any Loss incurred by the respective Indemnified Party as a result of such breach and not just that portion of the Loss that exceeds the relevant level of materiality. ARTICLE IX. TERMINATION SECTION 9.01 Termination of Agreement. This Agreement may be terminated at any time prior to the Closing: (a) By mutual written consent of DRS/MS and USC; or (b) By either DRS/MS or USC, if the Closing shall not have occurred on or before February 29, 1996; or (c) By either DRS/MS or USC if any court of competent jurisdiction (whether federal, state or foreign) or any governmental body or agency (whether federal, state or foreign) shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or any Transaction Document, and such order, decree, ruling or other action shall have become final and nonappealable; or (d) By DRS/MS if DRS/MS has not received the Schedules and supporting documentation described in Section 5.02(k) on or before four weeks after the date hereof; or (e) At any time before the Closing Date, by DRS/MS if, at any time in the course of its legal, accounting, financial, operational or environmental due diligence investigation as to the Transferred Assets, the business of USC and the liabilities thereof (whether disclosed, undisclosed, direct, indirect, absolute, contingent, secured, unsecured, accrued or otherwise, whether known or unknown) including, without limitation, its continuing review of the Disclosure Schedules delivered by USC and any other materials delivered to DRS/MS, whether prior or subsequent to the date hereof, it shall have become aware of any facts or circumstances that materially and adversely effect the basis upon which DRS/MS determined to enter into the transactions contemplated hereby. SECTION 9.02 Procedure and Effect of Termination. In the event of termination of this Agreement by either or both of the parties pursuant to Section 9.01, written notice thereof shall forthwith be given to the other party specifying the provision hereof pursuant to which such termination is made and this Agreement shall forthwith become void and there shall be no liability on the part of the parties hereto (or their respective officers, directors or affiliates), except nothing herein shall relieve either party from liability for any willful breach hereof and except that the provisions of the Confidentiality Agreement entered into by USC and DRS on March 30, 1995 and the provisions of Section 11.02 dealing with payment of expenses shall survive such termination. The parties shall consult with each other before any public announcement of the termination, or of discussions regarding the termination, of this Agreement is made. ARTICLE X. RESOLUTIONS OF DISPUTES SECTION 10.01 Notice of Dispute. All disputes, without exception, between the parties to the Agreement arising hereunder, or under any other Agreement among any of such parties not expressly disclaiming the use of this process, shall be settled by means of alternative dispute resolution as provided in the New Jersey Alternative Procedure for Dispute Resolution Act, N.J.S.A. 2A:23A-1, et seq., as in effect on the date of this Agreement, (the "Act") upon written notice given by any party to the other (the "Dispute Notice"), and to the umpire hereafter established. Except to the extent required by law, the proceedings under the Act shall be confidential and shall not be disclosed or discussed with persons not parties to this Agreement without the consent of all parties to the dispute. In the event a party to a dispute may suffer irreparable harm or injury, such party shall have the ability to seek provisional remedies, including but not limited to injunctive relief and other equitable remedies, to the fullest extent permitted by law pending completion of the process provided under this Article X. SECTION 10.02 Umpires. (a) Within thirty (30) days after the Dispute Notice is given, the parties shall select three (3) umpires from among the persons listed in Subparagraphs (1) through (4) below in the order of priority listed below, i.e., if a person meeting the requirements of Subparagraph (1) is not able or willing to serve, a person meeting the requirements of Subparagraph (2) shall be selected, and so forth. In addition to meeting the requirements of Subparagraph (1), (2), (3) or (4) below, the umpires must also satisfy the requirements described in Subparagraphs (b) and (d) below. A potential umpire is: (1) Any retired judge of a United States District Court or a United States Circuit Court of Appeals; (2) Any retired judge of any State Superior, Appellate or Supreme Court; (3) Any attorney licensed to practice law for more than fifteen (15) years or certified public accountant who has been certified for more than fifteen (15) years; and, in either case, who has either directly or indirectly, no conflict of interest; or (4) Such other person upon whom the members of the selecting group agree. (b) In addition to the requirements described in Section 10.02 (a) above, the umpires selected hereunder must: (1) Be free of any potential for bias or conflict of interest with respect to either of the parties hereto, directly or indirectly or by virtue of any direct or indirect financial interest, family relationship or close friendship; and (2) Be in a position to immediately hear the dispute and thereafter render a resolution within the time specified in Section 10.07 below. (c) If the umpires are not selected within the period of time specified in Section 10.02(a) above, DRS/MS, on the one hand, and USC, on the other hand, each shall promptly select an umpire which umpires shall select a third umpire who shall be the sole umpire. If the parties fail to so select umpires pursuant to the foregoing provisions within twenty (20) days after the expiration of the period described in Section 10.02(a), the sole umpire shall be selected by the Chief Judge of the United States District Court for the District of New Jersey or, if the Chief Judge is unable or unwilling to act, by the Chief Judge of the Southern District of New York or the President of the Bar Association of the City of New York. Such selection shall be in accordance with the requirements of Sections 10.02(a) and 10.02(b) above. The umpire to be selected pursuant to this Section 10.02(c) must be designated within thirty (30) days after the expiration of the period described in Section 10.02(a) above. (d) Anything to the contrary herein notwithstanding, the following persons are not eligible to be an umpire under this Article: a party to this Agreement or any affiliate thereof; an employee or co-employee or any party to the dispute; or any person having material or undisclosed, financial or personal interests dependent on the success or failure of any of the parties. (e) An umpire shall disqualify himself if he is unable to handle the process promptly so as to render a resolution within a reasonable time, in no event to exceed forty-five (45) days after final testimony and/or briefs and in all events not to extend beyond six months from the date the umpire is chosen, or such longer period to which the parties to the dispute and the umpire may agree. SECTION 10.03 Time and Place of Alternative Resolution. The alternative resolution shall be held at such place as the umpire may determine within Essex County, New Jersey or such other location to which the parties may agree, to commence not later than ten (10) days after the umpire has been determined in accordance with Section 10.02. SECTION 10.04 Fees. All fees and expenses (including transcripts, room rental and fees of the umpire) of alternative dispute resolution, shall be paid as follows: 25% by the party or parties served with the Dispute Notice and 25% by the person(s) serving the Dispute Notice, with the remaining 50% allocated 10% to the prevailing party (or parties) and 40% to the non-prevailing party (or parties), as determined by the umpire (if the umpire does not determine a prevailing party then pro-rata to each of the material parties to the dispute as determined by the umpire) provided that the umpire shall have the right to order that such fees be paid in a different percentage if any of the parties has acted in bad faith (in which case he may shift the others' shares to the bad faith party(ies)). The fees payable to the umpire shall be his usual hourly rates for consulting or dispute resolution services, as the same may be in effect from time to time. Each party shall pay its own legal fees, costs and disbursements. SECTION 10.05 Discovery. Each party shall be entitled to discovery by way of oral deposition, inspection and copying of all relevant documents within the care, custody or control of a party or a witness, and when authorized by the umpire, by way of interrogatories. All discovery shall be complete within forty-five (45) days of the appointment of the umpire. All documents to be relied upon by any party to the proceeding shall be provided to the others no later than two weeks before the hearing date for the proceedings. The time periods for discovery may be extended by the umpire for good cause, provided that he is able to meet the time requirement of Section 10.07. SECTION 10.06 Provisional Remedies. When appropriate under applicable New Jersey substantive and procedural law, the umpire shall have full and complete authority to award provisional relief, on an ex parte basis or otherwise. SECTION 10.07 Time and Method for Resolution. The umpire shall make the award and serve notice thereof upon all parties within six (6) months of the date the umpire is designated, or such longer period to which the parties to the dispute and the umpire may agree. If the umpire fails to make his decision in accordance with substantive law, or to properly apply the facts to the law, the umpire's award will be deemed to have been procured by "undue means" and "beyond his power." Any party may apply to court in accordance with the Act to have the umpire's decision confirmed, reviewed, modified, affirmed or remanded to the umpire with directions. SECTION 10.08 Act and Agreement Govern. Except as otherwise provided herein, the Act shall govern the procedures and methods for any Alternative Dispute Resolution undertaken pursuant to this Agreement. Except as expressly provided above, the umpire may not modify the provisions of this Article. Except as expressly provided to the contrary above, and to the extent otherwise not inconsistent with this Agreement and the Act, proceedings under this Article, including efforts to mediate the dispute, shall be governed by the "Rules for Non-Administered Arbitration of Business Disputes" as adopted by the Center for Public Resources, Inc., New York (originally developed 1989 and amended 1993). ARTICLE XI. MISCELLANEOUS SECTION 11.01 Taxes. Each party shall pay any and all stamp and other taxes payable or determined to be payable by it in connection with the execution and delivery of this Agreement and the other documents to be delivered by it hereunder, and agrees to save the other party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION 11.02 Expenses. Whether or not the transactions contemplated in this Agreement are consummated, DRS/MS, on the one hand, and USC, on the other hand, shall each pay its own expenses incident to this Agreement and the Transaction Documents and in preparing to consummate the transactions provided for herein and therein. SECTION 11.03 Consents. Whenever this Agreement requires or permits consents by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as specified in Section 11.07. SECTION 11.04 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations herein shall be assigned by either party without the prior written consent of the other party. SECTION 11.05 Entire Agreement. This Agreement, the other documents referred to herein or delivered pursuant hereto which form a part hereof and other writings of even date herewith, together with the Transaction Documents and other writings referred to therein or delivered pursuant thereto, contain the entire understanding of the parties with respect to the subject matter hereof. This Agreement supersedes all prior agreements with respect to the subject matter hereof, including that Letter of Intent dated July 21, 1995. SECTION 11.06 Amendment. This Agreement may not be amended except by an instrument in writing signed by DRS/MS and USC. SECTION 11.07 Waiver. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefit thereof only by a written instrument signed by the party granting such waiver, but the failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of or estoppel with respect to said compliance and such failure shall not operate as a waiver of or estoppel with respect to any subsequent or other failure. SECTION 11.08 Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.09 Notices. All notices, claims, certificates, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given when personally delivered, telexed, sent by facsimile transmission (with telephone confirmation) or on the date of receipt or refusal indicated on the return receipt if mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: (a) If to DRS/MS: DRS/MS, Inc. 138 Bauer Drive Oakland, New Jersey 07436 Attn.: Mr. John V. Giordano with a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, NJ 07068-3788 Attn.: Nina Laserson Dunn, Esq. (b) If to USC: Universal Sonics Corporation 31 Industrial Avenue Mahwah, New Jersey 07430 Attn.: Mr. Ron Hadani, Chief Executive Officer with a copy to: Riker, Danzig, Scherer, Hyland & Perretti Headquarters Plaza One Speedwell Avenue Morristown, New Jersey 07962 Attn.: Robert Fischer III, Esq. (c) If to a Shareholder: To the Shareholder at the address of such Shareholder set forth at the beginning of this Agreement. or to such other address as the person to whom notice is to be given may have previously furnished to the other in writing in the manner set forth above. SECTION 11.10 LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW JERSEY, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. DRS/MS AND USC HEREBY CONSENT TO AND GRANT ANY APPROPRIATE COURT OF THE STATE OF NEW JERSEY JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF ANY SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN SUCH MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. SECTION 11.11 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which when taken together shall constitute one and the same agreement. SECTION 11.12 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their respective officers thereunto duly authorized as of the date first above written. ATTEST: UNIVERSAL SONICS CORPORATION By: By: Title: Its: ATTEST: DRS/MS, INC. By: By: Title: Its: RON HADANI HOWARD FIDEL THOMAS S. SOULOS Section 5.01(c) of this Agreement is acknowledged and agreed to by DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By:_______________________________ Name: Title: GUARANTY For ONE DOLLAR and other good and valuable consideration, Diagnostic/Retrieval Systems, Inc. (the "undersigned" or "DRS") guarantees to each of Universal Sonics Corporation ("USC"), Ron Hadani ("Hadani"), Howard Fidel ("Fidel") and Thomas Soulos ("Soulos") (each of USC, Hadani, Fidel and Soulos, an "obligee") prompt payment when due of all sums required to be paid by DRS/MS, INC. ("DRS/MS") under Section 2.02(i) of the above Joint Venture Agreement, under Section 7.6 of the Partnership Agreement between DRS/MS and USC, and under Section 3.1(b) of each of the Employment Agreements with Hadani, Fidel and Soulos, all of which agreements are dated as of the Closing Date (collectively, the "Obligations"). In the event of a default by DRS/MS in payment of any Obligation which may be due and payable, and following a thirty (30) day period in which DRS/MS may cure such default, such unpaid Obligation shall become due and payable by DRS hereunder. The undersigned hereby agrees that this is a continuing guaranty which shall bind the undersigned until such time as all of the Obligations due and payable to the obligees have been paid. ATTEST: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. __________________________ By:_______________________________ Name: Name: Secretary Title: JOINT VENTURE AGREEMENT By and Among DRS/MS, INC., UNIVERSAL SONICS CORPORATION, RON HADANI, HOWARD FIDEL, and THOMAS S. SOULOS DATED: FEBRUARY 6, 1996 TABLE OF CONTENTS PAGE ARTICLE I. DEFINITIONS ............................... 2 SECTION 1.01 Certain Defined Terms ...... 2 ARTICLE II. FORMATION OF PARTNERSHIP AND EXECUTION OF TRANSACTION DOCUMENTS ........ 7 SECTION 2.01 Formation of Partnerships and Execution of Trans- action Documents ........... 7 SECTION 2.02 Contributions .............. 7 SECTION 2.03 Closing .................... 7 SECTION 2.04 Method of Payment .......... 8 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF DRS/MS ................................... 8 SECTION 3.01 Corporate Existence ........ 8 SECTION 3.02 Authority Relative to this Agreement and Transaction Documents ...... 9 SECTION 3.03 No Litigation .............. 10 SECTION 3.04 Full Disclosure; Materiality ................ 10 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF USC AND THE SHAREHOLDERS ............... 10 SECTION 4.01 Corporate Existence ........ 10 SECTION 4.02 Authority Relative to this Agreement and Transaction Documents; Consents ........ 10 SECTION 4.03 No Litigation .............. 12 SECTION 4.04 Title to Transferred Assets; Assumed Liabilities ................ 12 SECTION 4.05 Compliance with Laws; Permits and Licenses ....... 12 SECTION 4.06 Intellectual Property ...... 13 SECTION 4.07 Litigation ................. 14 SECTION 4.08 Contracts .................. 14 SECTION 4.09 Labor Union Contracts ...... 16 SECTION 4.10 Employees, Labor Matters, etc. ....................... 16 SECTION 4.11 ERISA ...................... 16 SECTION 4.12 Brokers' or Finders' Fees ....................... 18 SECTION 4.13 Financial Information; Un- disclosed Liabilities ..... 18 SECTION 4.14 Taxes ...................... 19 SECTION 4.15 Absence of Changes ......... 20 SECTION 4.16 Accounts Receivable ........ 21 SECTION 4.17 Insurance .................. 22 SECTION 4.18 Sufficiency of Transferred Assets ..................... 22 SECTION 4.19 Foreign Assets ............. 22 SECTION 4.20 Certain Payments ........... 23 SECTION 4.21 Affiliate Transactions ..... 23 SECTION 4.22 Suppliers .................. 23 SECTION 4.23 Environmental Conditions and Governmental Authorizations ............. 23 SECTION 4.24 Leases of Personal Property ................... 24 SECTION 4.25 Full Disclosure; Materiality ................ 25 SECTION 4.26 Books and Records .......... 25 SECTION 4.27 Accounts ................... 25 ARTICLE V. COVENANTS ................................. 25 SECTION 5.01 Covenants of DRS/MS ........ 25 SECTION 5.02 Covenants of USC ........... 26 SECTION 5.03 Insurance Matters .......... 31 SECTION 5.04 Closing Conditions ......... 31 SECTION 5.05 Net Worth Statements ....... 31 ARTICLE VI. CONDITIONS PRECEDENT TO THE CLOSING ....... 32 SECTION 6.01 Conditions Precedent to Obligations of DRS/MS ...... 32 SECTION 6.02 Conditions Precedent to Obligations of USC ......... 34 ARTICLE VII. [Intentionally Omitted] ................... 36 ARTICLE VIII. INDEMNIFICATION ........................... 36 SECTION 8.01 Survival of Representa- tions and Warranties ...... 36 SECTION 8.02 Indemnification by the Parties .................... 36 SECTION 8.03 General Indemnification Provisions ................. 37 SECTION 8.04 Materiality ................ 38 ARTICLE IX. TERMINATION ............................ 38 SECTION 9.01 Termination of Agreement ... 38 SECTION 9.02 Procedure and Effect of Termination ................ 39 ARTICLE X. RESOLUTIONS OF DISPUTES ................... 39 SECTION 10.01 Notice of Dispute .......... 39 SECTION 10.02 Umpires .................... 40 SECTION 10.03 Time and Place of Alternative Resolution .... 41 SECTION 10.04 Fees ....................... 41 SECTION 10.05 Discovery .................. 42 SECTION 10.06 Provisional Remedies ....... 42 SECTION 10.07 Time and Method for Resolution ................. 42 SECTION 10.08 Act and Agreement Govern ... 42 ARTICLE XI. MISCELLANEOUS ............................. 42 SECTION 11.01 Taxes ...................... 43 SECTION 11.02 Expenses ................... 43 SECTION 11.03 Consents ................... 43 SECTION 11.04 Assignment ................. 43 SECTION 11.05 Entire Agreement ........... 43 SECTION 11.06 Amendment .................. 43 SECTION 11.07 Waiver ..................... 43 SECTION 11.08 Headings ................... 43 SECTION 11.09 Notices .................... 44 SECTION 11.10 LAW GOVERNING .............. 45 SECTION 11.11 Counterparts ............... 45 SECTION 11.12 Severability ............... 45 EX-10.92 14 PARTNERSHIP AGREEMENT PARTNERSHIP AGREEMENT OF DRS MEDICAL SYSTEMS THIS AGREEMENT, dated as of the 6th day of February, 1996, is by and between DRS/MS, Inc., a Delaware corporation ("DRS/MS"), and UNIVERSAL SONICS CORPORATION, a New Jersey corporation ("USC"). RECITALS A. USC and DRS/MS desire to form a general partnership (the "Partnership") for the purpose of developing, manufacturing and marketing low cost, high performance ultrasound medical imaging equipment and products that perform three-dimensional ultrasound medical imaging (the "Business") and engaging in other such related activities necessary or appropriate to effect the Business. B. In connection with the formation of the Partnership, USC and DRS/MS wish to set forth their respective rights and obligations as partners thereof. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, USC and DRS/MS agree as follows: ARTICLE 1. DEFINITIONS 1.1 Terms. When used in this Agreement, the following terms will have the meaning set forth below: (a) "Act" shall mean the New Jersey Uniform Partnership Law, N.J.S.A. 42: 1-1 et seq., as amended from time to time. (b) "Affiliate" shall mean, when used with reference to a specified Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person or (ii) any Person that is an executive officer or director of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity; and, (iii) when used with reference to a natural Person, any Person that is related to the specified Person by blood or marriage in the first degree of consanguinity; provided, however, that no natural Person shall be deemed to be controlled by any other Person. (c) "Agreement" shall mean this Partnership Agreement entered into between USC and DRS/MS, as amended from time to time. (d) "Bank" shall have the meaning specified in Section 6.2 to this Agreement. (e) "Business" shall have the meaning specified in the recitals to this Agreement. (f) "Capital Account" shall have the meaning specified in Section 4.3 to this Agreement. (g) "Capital Contributions" shall have the meaning specified in Sections 4.1 and 4.2 of this Agreement. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Documents" shall have the meaning specified in Section 6.1 to this Agreement. (j) "Document Holding Period" shall have the meaning specified in Section 8.6 to this Agreement. (k) "Executive Committee" shall have the meaning specified in Section 3.1 of this Agreement. (l) "Fiscal Year" shall mean the twelve-month period ending March 31 of each year. (m) "Joint Venture Agreement" shall mean that certain Joint Venture Agreement dated as of February 6, 1996 by and among USC, Ron Hadani, Howard Fidel, and Thomas Soulos on the one hand and DRS/MS on the other, as the same may be amended from time to time in accordance with the terms thereof. (n) "Partner" shall mean USC or DRS/MS. (o) "Partnership" shall have the meaning specified in the recitals to this Agreement. (p) "Partnership Account" shall mean a detailed statement of receipts, disbursements, costs, assets, liabilities and all other relevant financial matters of the Partnership prepared in accordance with generally accepted accounting principles. (q) "Person" shall mean any individual, firm, partnership, corporation, trustee or other entity. (r) "Partnership Percentage Interest" shall have the meaning specified in Section 2.2 of this Agreement. (s) "United States Partnership Tax Returns" shall have the meaning specified in Section 6.3 to this Agreement. ARTICLE 2. FORMATION OF THE PARTNERSHIP 2.1 Formation. USC and DRS/MS hereby enter into and form a general partnership pursuant to the Act for the specific purposes and scope set forth herein. Except as set forth herein, the rights and obligations of the parties hereto and the Partnership shall be governed by the Act. To the maximum extent permitted by law, if there is a conflict between the Act and the provisions hereof, this Agreement shall control. 2.2 Partners. Each Partner shall contribute cash or assets to the capital of the Partnership in accordance with Article 4 hereof. Each of the Partner's interest in the Partnership (the "Partnership Percentage Interest") shall be: DRS/MS 90% USC 10% 2.3 Name. The name of the business and the affairs of the Partnership shall be conducted under the name DRS Medical Systems or under such other name or names as the Executive Committee may from time to time determine. 2.4 Principal Place of Business. The principal place of business of the Partnership shall be located at 31 Industrial Avenue, Mahwah, New Jersey 07962, or such particular place or places as the Executive Committee may from time to time designate or establish. 2.5 Purposes and Scope. Subject to the provisions of this Agreement, the purpose of the Partnership is to form a general partnership between USC and DRS/MS for the purposes of conducting the Business of the Partnership and engaging in such other related activities necessary or appropriate to effect the Business. 2.6 Formation Documents. The Partnership shall execute and file any assumed or fictitious name certificate or certificates and any other documents required by law, including without limitation an application for a federal employer identification number, to be filed in connection with the formation and operation of the Partnership. 2.7 No Individual Authority. No Partner, acting alone, shall have any authority to act for, or to undertake or assume any obligation, debt, duty or responsibility on behalf of, any other Partner except as expressly otherwise provided in this Agreement, nor shall any Partner, acting alone, have the power to bind the Partnership except as expressly provided in this Agreement. 2.8 Property Interests. A Partner's interest in the Partnership shall be personal property for all purposes. All real and other tangible and intangible property owned by the Partnership shall be deemed to be owned by the Partnership as an entity and no Partner individually shall have any ownership interest in or possessory right to any of such property. 2.9 Limits of the Partnership. The relationship between and among the parties to this Agreement shall be limited to the specific purposes of the Partnership described herein. Except as otherwise contemplated by the Joint Venture Agreement, this Agreement has no relation to any operations conducted by either of the parties as separate corporate entities or to the joint operations of either with other parties or to any other joint operations, if any, between the parties. ARTICLE 3. MANAGEMENT OF THE PARTNERSHIP 3.1 Executive Committee. (a) In order to facilitate the disposition of all matters and questions in connection with the administration and performance of the Business on behalf of the Partnership, an Executive Committee shall be created. Except as otherwise expressly provided herein, the management of the Partnership shall be the obligation of and rest exclusively with the Executive Committee, which shall have all the rights and powers as are necessary, advisable, or convenient to the management of the business and affairs of the Partnership. DRS/MS shall appoint two representatives to serve on the Executive Committee to act in its interests with full and complete authority and to act on its behalf in all matters connected with, arising out of or related to the Partnership, and to act for and bind DRS/MS in any and all matters involving the Business of the Partnership. USC shall appoint one representative (the "USC Representative") to serve on the Executive Committee to act in its interests with full and complete authority and to act on its behalf in all matters connected with, arising out of or related to the Partnership, and to act for and bind USC in any and all matters involving the Business of the Partnership. USC shall also appoint one ex officio representative to serve on the Executive Committee. Such ex officio representative shall have no authority to act on behalf of USC in any matters connected with, arising out of or related to the Partnership, and shall have no authority to act for and bind USC in any matters involving the Business of the Partnership, provided, however, that such ex officio representative will act in place and in stead of the USC Representative with all the authority of the USC Representative, including without limitation the authority to bind USC, when the USC Representative is absent from, or otherwise not represented at, any meeting of the Executive Committee. The appointed representatives for each Partner shall be as follows: DRS/MS John Giordano Paul Casner USC Ron Hadani, the USC Representative Howard Fidel, ex officio representative Either party may at any time and from time to time change its representative(s) by notifying the other party, in writing, of the appointment of a new representative or representatives, but until such appointment and notice, the actions of the respective representatives shall be conclusively binding on that party to the Partnership. (b) The representatives on the Executive Committee shall meet from time to time as may be necessary or desirable to act on matters pertaining to the Business and the management of the Partnership. The representatives of either party shall have the power to call such meetings (which may be by telephone) when necessary in their opinion to conduct the affairs of the Partnership, or when requested by the other party. The representative who calls the meeting shall give the other representatives three (3) days written notice of said meeting unless the other representatives waive such notice requirement. The presence of at least a majority of the members of the Executive Committee shall constitute a quorum of the Executive Committee authorized to transact the business thereof. Whenever the USC Representative is present at any meeting, whether in person, by telephone or by proxy, the ex officio representative shall not be counted in determining the presence of a quorum, shall not have the power to vote and is not considered a member of the Executive Committee for any purpose. Each member of the Executive Committee shall have one vote. Action by the Executive Committee shall be taken upon the affirmative vote of not less than a majority of the members of the Executive Committee then in office, except as required under Section 4.2 of this Agreement. Any member of the Executive Committee may participate in and be present at a meeting either in person or by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. Any action which is required or permitted hereunder to be taken at a meeting of the Executive Committee may be taken without a meeting, without prior written notice and without a vote, if a consent in writing, specifying the action so taken, shall be signed by not fewer than the minimum number of members of the Executive Committee necessary to authorize or take such action at a meeting at which all members of the Executive Committee were present and voted. (c) The Executive Committee shall have the right to delegate all or any of its duties hereunder and, in furtherance of any such delegation, to appoint, employ, or contract with any Person it may in its sole discretion deem necessary or desirable for the transaction of the Business of the Partnership which Persons may, under the supervision of the Executive Committee, administer the day-to-day operations of the Partnership; may serve as the Partnership's advisors and consultants in connection with decisions made by the Executive Committee; may act as consultants, accountants, correspondents, attorneys, brokers, escrow agents, or in any other capacity deemed by the Executive Committee necessary or desirable; may investigate, select, and, on behalf of the Partnership, conduct relations with Persons acting in such capacities and may pay appropriate reasonable fees to, and enter into appropriate contracts with, or employ, or retain services performed or to be performed by, any of them in connection with the business of the Partnership; may perform or assist in the performance of such administrative or managerial functions necessary in the management of the Partnership as may be agreed upon by the Executive Committee; and may perform such other acts or services for the Partnership as the Executive Committee may approve. 3.2 Indemnification. The Partnership shall indemnify and hold harmless each member of the Executive Committee against all losses, costs and expenses (including court costs and reasonable attorneys' fees) arising out of or incurred as a result of any act or omission performed or omitted by any member of the Executive Committee in connection with the performance of its obligations under, or pursuant to the authority granted to it by, this Agreement and by the provisions of the Joint Venture Agreement, except for any such loss, cost or expense which arises out of or results from the Executive Committee's or such member's gross negligence, willfully fraudulent or dishonest conduct, bad faith or breach of an express provision of this Agreement (under circumstances in which such breach has not been consented to in writing by the Partners). Said indemnification shall extend only to the value of the Partnership's assets and neither Partner shall be jointly or severally liable for the indemnification of any loss, cost or expense that exceeds the value of the Partnership's assets at that time. Neither Partner shall be required to make Additional Capital Contributions pursuant to Section 4.4 for the purposes of indemnification. 3.3 Officers. The following persons shall serve as the initial senior management (the "Officers") of the Partnership: John Giordano Ron Hadani Howard Fidel Thomas Soulos Gaetana Kopchinsky The Officers shall be responsible for implementing the decisions of the Executive Committee and for conducting the ordinary and usual business and affairs of the Partnership. The Officers shall be subject to the direction of the Executive Committee. ARTICLE 4. CAPITAL CONTRIBUTIONS 4.1 Initial Capital Contribution of the Partners. (a) Upon and subject to the terms and conditions hereof, the Partners shall contribute to the Partnership at formation the cash, assets and liabilities shown in respect of each on Schedule 4.1. Each shall have such amount credited to its Capital Account. (b) As to the initial capital contribution of USC, in the event, in accordance with Section 5.05 of the Joint Venture Agreement, that the Final Pro Forma Net Worth Statement reflects that Assumed Liabilities are greater than Transferred Assets (a "deficit"), as all of such terms are defined under the Joint Venture Agreement, then for each dollar of such deficit, the Partnership shall have the option of either reducing on a dollar-for-dollar basis the Assumed Liabilities, or reducing any monetary payments, whether or not then due, to the Shareholders (as defined in the Joint Venture Agreement) and/or to USC on a present value basis, or may choose any combination of such two options so as to eliminate such deficit. 4.2 Additional Capital Contributions. The Executive Committee, after discussion of the advisability of so doing, may from time to time require additional capital contributions from the Partners in connection with the reasonable business needs of the Partnership, provided, however, that no such capital contributions shall be required or made by any Partner or its Affiliates during the first four years of this Agreement without the consent of all the parties hereto. In the event capital contributions are so required and appropriately consented to, the Executive Committee shall provide written notice (which notice shall set forth the aggregate additional capital contributions called for, the amount to be contributed by each Partner (which shall be proportional to each Partner's Partnership Percentage Interest), the bank account in which such contribution is to be deposited and the date on which the capital contribution is to be made) to each Partner no less than 30 days prior to the date on which such additional capital contribution is to be made. Thereupon, each Partner shall, on the date on which such additional capital contributions are to be made as set forth in such notice, make the additional capital contribution to the Partnership required to be made by such Partner. If either Partner shall fail to timely make such additional capital contribution, then the other Partner shall either make its capital contribution in the form of a loan or may seek additional capital from a third party or an Affiliate. 4.3 Capital Accounts. Except as provided in the Transaction Documents (as defined in the Joint Venture Agreement) to the contrary, the Partnership shall maintain a Capital Account (so defined) for each Partner pursuant to the provisions of Treasury regulations promulgated pursuant to Section 704(b) of the Code. ARTICLE 5. ALLOCATIONS, DISTRIBUTIONS AND INTERESTS 5.1 Allocation of Net Income or Net Loss. (a) For each Fiscal Year of the Partnership, except as provided in Section 5.1(c) below, any net income or any net loss of the Partnership shall be allocated among the Partners in accordance with the Partnership Percentage Interests then in effect. (b) All determinations of "net income" and "net loss" shall be made on the basis described in the Treasury Regulations promulgated pursuant to Section 704(b) of the Code. (c) Notwithstanding Section 5.1(a) above, any amortization or depreciation deduction attributable to the assets purchased from USC, pursuant to Section 2.02 of the Joint Venture Agreement, shall be allocated one hundred (100%) percent to DRS/MS. 5.2 Distributions. The Executive Committee may, in its sole discretion and from time to time, make distributions to the Partners in proportion to their Partnership Percentage Interests. A Partner may request a distribution to satisfy federal and/or state tax liabilities by certifying to the Partnership the amount of such Partner's actual tax liability. 5.3 DRS/MS Management Services. DRS/MS shall provide certain management and administrative services to the Partnership pursuant to a Management Agreement. Subject to the determination of the Executive Committee, the Partnership will reimburse DRS/MS for these management and administrative services provided to the Partnership. The Partnership will compensate DRS/MS for such services in the manner set forth in such Management Agreement. ARTICLE 6. BOOKS AND RECORDS; BANK ACCOUNTS; TAX RETURNS; LOANS 6.1 Books and Records. The Executive Committee shall keep or cause to be kept at the office of the Partnership as separate Partnership Accounts the books and records of the Partnership, setting forth a true, accurate and complete account of all business transactions with respect to the Partnership's business, as are usually maintained by persons engaged in similar businesses, including a fair presentation of all income, expenditures, assets and liabilities thereof. Each Partner and its authorized representatives shall have the right at all reasonable times to have access to, inspect, audit and copy the Partnership's books and records including, but not limited to, original books, records, files, vouchers, cancelled checks, employment records, bank statements, bank deposit slips, bank reconciliations, cash receipts and disbursement records, and other documents (the "Documents"). 6.2 Bank Accounts. All funds of the Partnership shall be deposited into such general account at a bank determined by the Executive Committee (the "Bank") in the name of the Partnership, to be maintained by the Executive Committee. The Bank shall be authorized to make payments against checks executed by persons authorized to make payments against checks drawn on said account. All income arising from operations of the Partnership shall be deposited in said general account, and all payments and disbursements shall be made from said general account; provided, that the Executive Committee may establish other bank accounts with such banks as it determines shall be necessary and proper for the efficient operation and management of the Partnership's activities. Idle funds in the various bank accounts of the Partnership shall be invested in interest bearing short term certificates of deposit, bank repurchase agreements (REPOs), government securities and similar instruments or such other instruments as may be approved from time to time by the Executive Committee; interest earned shall be for the benefit of the Partnership. 6.3 Tax Returns. At the end of each fiscal year, or as soon thereafter as practicable, the Executive Committee shall prepare or cause to be prepared on behalf of the Partnership a United States Partnership Information Tax Return and such other tax returns as are required of partnerships under the applicable federal, state and local laws, ordinances and/or regulations, and, upon the Executive Committee's review and approval, such tax returns shall be filed on a timely basis with the appropriate governmental authorities. 6.4 Loans. Subject to the provisions of Sections 4.2 and 7.7, any Partner may lend money to the Partnership or otherwise transact business with the Partnership under terms and conditions approved by the Executive Committee. ARTICLE 7. TRANSFERS OF INTERESTS IN PARTNERSHIP 7.1 Prohibited Transfers. Except (i) as agreed to by the parties hereto, (ii) as permitted by this Article 7 or the Transaction Documents, (iii) pursuant to the provisions of the Joint Venture Agreement, or (iv) when sold, transferred, assigned, or conveyed to a DRS/MS Affiliate, no Partner may sell, transfer, assign, convey, or subject to a security interest or otherwise charge or encumber all or any part of its Partnership Percentage Interest in the Partnership (either voluntarily or by operation of law, including the sale or transfer of a controlling interest in the Partner (or its direct or ultimate parent) in question) unless approved by the Executive Committee, and any act in violation of this Article 7 shall be null and void ab initio (a "Prohibited Transfer"). (a) In the event of a Prohibited Transfer, as defined above, such offending Partner shall be deemed to have offered its Partnership Percentage Interest in the Partnership to the other Partner for the Capital Account value of such Partnership Percentage Interest. The non-offending Partner shall have twenty (20) days after it learns of a Prohibited Transfer to elect to purchase such Interest at such Capital Account value. (b) In the event the non-offending Partner shall purchase the Partnership Percentage Interest of an offending Partner on account of this Section 7.1, the closing of such transaction of purchase and sale shall take place at 10:00 a.m. at the Partnership's principal office ten (10) business days after the option to purchase is exercised by the other Partner. (c) At the closing, the purchasing Partner shall pay 10% of the purchase price in cash and the balance in the form of a promissory note attached as Exhibit A, such note to bear interest at the prime rate then in effect at the Bank and to be payable in equal monthly installments over five (5) years. 7.2 USC Affiliate Transfer. USC may sell, transfer, assign, or convey all or any part of its Partnership Percentage Interest in the Partnership to Ron Hadani, Howard Fidel and/or Thomas Soulos (each a "USC Successor Individual") pro rata in accordance with their interests in USC and/or to any entity (a "USC Successor Entity"), provided such USC Successor Entity is owned wholly by Ron Hadani, Howard Fidel and/or Thomas Soulos pro rata in accordance with their interests in USC (each of the above USC Successor Individual and USC Successor Entity, a "USC Successor"), provided that any such USC Successor execute this Agreement pursuant to Section 7.10 hereof. With the prior written consent of DRS/MS, each of Ron Hadani, Howard Fidel and/or Thomas Soulos may transfer all or part of their respective interests in the Partnership to one another or to entities wholly owned by them, although not necessarily pro rata in accordance with their interests in USC. 7.3 Right of Sale and First Refusal. (a) If any Partner or any liquidator, receiver, trustee in bankruptcy or similar authority having control over a Partner or its assets receives a bona fide offer from an independent, unrelated, non-Affiliated third party person or entity ("third party") for the purchase of all or any portion of its Partnership Percentage Interest, which offer must comply with the provisions of Section 7.3(b) below and which offer the receiving Partner desires and intends to accept, or if any Partner (or a representative thereof as aforesaid) desires to enter into any contract to sell, transfer, assign, or convey all or any portion of its Partnership Percentage Interest to a third party, which contemplated contract must comply with the provisions of Section 7.3(b): (i) the Partner (or representative thereof) desiring to accept such offer or enter into such contract ("Movant") shall give written notice to the other Partners other than Movant or any Affiliate of Movant ("Respondent") of all the terms, provisions, and conditions with respect to such offer, including a copy of the proposed offer or contract and the items required by Section 7.3(b)(iv), and Movant shall offer to sell to Respondent Movant's Partnership Percentage Interest which is the subject of such offer or contract (the "Offered Interest") on the same terms, provisions, and conditions as are set forth in such offer or contract. (ii) Respondent shall have a period of forty-five (45) days from the date of its receipt of the written notice from Movant to accept such offer on the same terms, provisions, and conditions stated in such written notice, which acceptance must be in writing and be received by Movant prior to the expiration of such forty-five (45) day period. Any purported acceptance made orally shall be ineffective, and any purported acceptance which varies the terms of such offer shall be deemed a rejection thereof for all purposes. If Respondent accepts such offer in accordance with the foregoing provisions, Respondent shall be bound to purchase the Offered Interest in accordance with such offer or contract, and Movant shall be bound to sell the Offered Interest on the terms and conditions set forth in Movant's written notice except that the purchase price paid by Respondent to Movant shall be net of any loans or other indebtedness, including accrued interest, created under the terms of this Agreement, owed by Movant to Respondent. In the event there is more than one Respondent, those desiring to purchase the Offered Interest of Movant, shall be entitled to purchase a pro rata portion (based on the respective Partnership Percentage Interests of the Respondents desiring to purchase) of Movant's Offered Interest. The closing of the purchase by Respondent shall be held at the time and place specified in the written notice from Movant, or such later date as is mutually agreed to by Respondent and Movant, but in no event shall closing take place earlier than seventy-five (75) days from the date of receipt by Respondent of the written notice from Movant. (iii) In the event Respondent delivers written notice of rejection to Movant, or in the event Respondent fails to accept the offer in the manner required by Section 7.3(a)(ii) hereof, the offer made by Movant shall be deemed to have been rejected by Respondent, and Movant shall be free to sell, transfer, assign, or convey such interest in the Partnership to the third party on the terms, provisions, and conditions set forth in the written notice to Respondent or other terms and conditions not less favorable to Movant; provided, however, that such purchaser, transferee or assignee shall not become a Partner unless and until it agrees to abide by Section 7.10 hereof. (iv) In the event that such transaction is not consummated as provided in Section 7.3(a)(iii) hereof on or before sixty (60) days after the closing date specified in the notice from Movant to Respondent, or, in the event any terms and provisions of such transaction are changed following a rejection by Respondent in a manner which renders such terms less favorable to Movant, no sale, transfer, assignment, or conveyance of such Offered Interest of the Partnership may be made unless the provisions of this Section 7.3(a) are again complied with. (v) In the event that such transaction is consummated as provided in Section 7.3(a)(iii) hereof, the purchaser shall become a new Partner in the Partnership, under the terms and provisions of this Agreement, together with all of the rights, duties, and obligations pertaining thereto and allocable to the Offered Interest so purchased including the rights and restrictions contained in this Article 7 with respect to subsequent sales of any Partnership Percentage Interest. (b) Movant shall not be entitled to exercise its rights under Section 7.3(a) above with respect to any offer to purchase or offer to sell its Partnership Percentage Interest unless such an offer complies with the following requirements: (i) the proposed purchase price (which shall be net of any Partnership debts or liabilities which the proposed purchaser will assume) is payable solely in lawful money of the United States and, if not payable in its entirety in cash, under no circumstances may payment of the deferred portion of the proposed purchase price be secured by any charge, encumbrance or hypothecation of a Partnership Percentage Interest or any property of the Partnership; (ii) the offer contains provisions whereby the proposed third party purchaser is obligated to comply with the provisions of Section 7.3(a)(iii) prior to or at closing; (iii) it is an offer by or to a principal, identified in the offer, and not an agent acting on behalf of an undisclosed principal, and such principal shall not be a Person with respect to which Movant has any direct or indirect ownership or control; (iv) the prospective third party purchaser shall provide to Respondent (x) reasonable evidence of its business character, reputation, and financial capacity to carry out all obligations of a Partner under this Agreement and all related agreements, which shall include the audited financial statements of such prospective purchaser for the two (2) most recent fiscal years of such prospective purchaser, and (y) a statement signed by such prospective purchaser to the effect that (1) such purchaser is a principal acting for its own account and not as an agent acting on behalf of an undisclosed principal and (2) such principal is not a Person with respect to which Movant has any direct or indirect ownership or control or is otherwise an Affiliate of Movant. 7.4 Specific Performance. It is expressly agreed that the remedy at law for breach of any of the obligations set forth in Section 7.3 is inadequate in view of (i) the complexities and uncertainties in measuring the actual damages that would be sustained by reason of the failure of a Partner to comply fully with each of said obligations, and (ii) the uniqueness of the Partnership business and the Partnership relationship. Accordingly, each of the aforesaid obligations shall be, and is hereby expressly made, enforceable by specific performance. If the purchasing Partner is not in default under the obligations set forth in Section 7.3 and the selling Partner refuses or fails to consummate the sale to the purchasing Partner the selling Partner shall have no further rights under this Agreement with respect to the Offered Interest being so purchased with the exception of the right to receive the purchase price due and payable under Section 7.3. 7.5 Termination of Obligations. As of the effective date of any transfer not prohibited hereunder by a Partner of its Partnership Percentage Interest, such Partner's rights and obligations hereunder shall terminate as to the Partnership Percentage Interest transferred, except as to items accrued as of such date and except as to any indemnity obligations of such Partner attributable to acts or events occurring prior to such date. Thereupon, except as limited by the preceding sentence, this Agreement shall terminate as to the transferring Partner with respect to the Partnership Percentage Interest transferred. In the event of a transfer of all or a portion of its Partnership Percentage Interest by a Partner to the other Partner, the Partner to whom such interest is transferred shall indemnify, defend and hold harmless the transferring Partner from and against any and all claims, demands, losses, liabilities, expenses, actions, lawsuits and other proceedings, judgments, awards, and costs and expenses (including reasonable attorneys' fees) incurred in or arising, directly or indirectly, in whole or in part, out of operation of the business of the Partnership and allocable to the Partnership Percentage Interest transferred, excluding only those liabilities, if any, accruing prior to the date of such transfer. 7.6 USC Put. (a) Notwithstanding anything herein to the contrary, at any time following the fourth anniversary of the execution of this Agreement but prior to the sixth anniversary of the execution of this Agreement, USC or a USC Successor (whether a USC Successor Individual or a USC Successor Entity) shall have the right to demand that DRS/MS purchase the entire Partnership Percentage Interest of USC or such USC Successor at a price equal to the fair market value of such Partnership Percentage Interest. (b) Prior to such fourth anniversary, USC or a USC Successor Entity shall have the right to demand that DRS/MS purchase one third (1/3) of the USC initial Partnership Percentage Interest at a price equal to the fair market value thereof, and a USC Successor Individual shall have the right to demand that DRS/MS purchase the Partnership Percentage Interest he owns, but in no event in excess of a three and one third percent (3 1/3%) interest in the Partnership, at a price equal to the fair market value thereof, provided, however, that such demand correspond with the involuntary termination (including death or disability) as an employee of the Partnership of any of Ron Hadani, Howard Fidel or Thomas Soulos, to whomever of them such Partnership Percentage Interest relates, any such termination to be for a reason other than the involuntary termination for cause under such employee's Employment Agreement dated of even date herewith. (c) For purposes of this Section fair market value shall be determined by an independent appraiser mutually agreed upon by DRS/MS and the party exercising the put. In the event the parties cannot agree mutually upon such an appraiser, then each party shall select an independent appraiser and such appraisers together shall select a third independent appraiser. Such third independent appraiser or such mutually agreed upon independent appraiser shall determine the fair market value of such Partnership Percentage Interest. The decision of such appraiser shall be binding on the parties, absent willful misconduct or negligence by such appraiser. (d) The written demand by USC (or a USC Successor) shall also state a proposed date upon which the sale will be consummated, which proposed date shall be no fewer than 90 days following receipt of the written demand by the other Partner or Partners. The other Partner or Partners may change such proposed date of sale to another date within ten (10) business days of such USC proposed date. To the extent that the purchase price of the interest purchased hereunder exceeds $50,000.00, at the closing the purchasing Partner or Partners shall pay the greater of $50,000.00 or 10.00% of the purchase price in cash, and the balance shall be payable, to the extent necessary, in equal annual installments of the same amount as paid at closing for each of the next four (4) years. At the fifth anniversary of such closing, all remaining balances shall be due and payable. The purchasing Partner or Partners shall have the right to prepay any and all amounts due hereunder. The obligation of the purchasing Partner or Partners shall be evidenced in the form of an unsecured promissory note attached as Exhibit A, such note to bear interest at the prime rate quoted in the Wall Street Journal on the business day preceding the day of the closing. Diagnostic/ Retrieval Systems shall guarantee payment of such note pursuant to the Guaranty made a part of the Joint Venture Agreement. In the event that there are any indemnification claim payments due under Article VIII of the Joint Venture Agreement, payments due under the Put shall be held in abeyance pending resolution of the claims and payment of the Loss or Losses as defined under the Joint Venture Agreement. If the purchase fails to be consummated due to a failure to surrender such Partnership Percentage Interest by USC (or a USC Successor), the other Partner or Partners shall be entitled to buy USC's Partnership Percentage Interest at a price of 20% less than the value of USC's fair market value on the original date of demand. Notwithstanding anything herein to the contrary, the right of USC to demand purchase of its Partnership Percentage Interest is personal to USC and is not transferable, saleable, conveyable, encumberable, or assignable, except to a USC Successor. 7.7 Anti-Dilution. In the event that the Partnership is in need of additional capital and wants to raise such capital through the admittance of an additional Partner or Partners which are unaffiliated with DRS/MS, notwithstanding anything herein to the contrary, the parties hereby warrant, covenant and agree that they will not cause the Partnership to sell, transfer, assign, or otherwise convey any interest in the Partnership prior to the fourth anniversary of the execution of this Agreement without first offering such interest to the Partners. Each Partner shall have the right, but shall not be obligated, to purchase such portion of the interest as is sufficient to maintain said Partner's Partnership Percentage Interest, or any lesser amount that said Partner may choose to purchase, on the same terms offered to any other party. 7.8 Co-Sale Right In the case of a transfer of any or all of DRS/MS' Partnership Percentage Interest in the Partnership by DRS/MS to any third party (as defined in Section 7.3) when such transfer would result in DRS/MS retaining less than a 50% interest in the Partnership following such transfer, at least 30 days prior to such transfer, DRS/MS will deliver a written notice to the other Partner or Partners specifying the identity of the prospective transferee(s) and disclosing in reasonable detail the terms and conditions of the proposed transfer. Such other Partner or Partners may elect to participate in the proposed transfer by delivering written notice to DRS/MS within such 30 day period. If any Partner elects to participate in such transfer, each participating Partner will be entitled to sell in such proposed transfer, at the same price and on the same terms as DRS/MS, a percentage of its Partnership Percentage Interest equal to the product of (i) the fraction the numerator of which is such Partner's Partnership Percentage Interest and the denominator of which is the aggregate Partnership Percentage Interests then held by all of the Partners, multiplied by (ii) the amount of interest in the Partnership proposed to be transferred. 7.9 Execution of this Agreement. Any purchaser, transferee, or assignee of an interest hereunder not already a Partner in the Partnership shall not become a Partner in the Partnership unless such purchaser, transferee, or assignee (A) executes and acknowledges this Agreement and such instruments and amendments to this Agreement as the Executive Committee may reasonably deem necessary in connection therewith, including the acceptance and adoption by such Person of the provisions of this Agreement; and (B) pays a transfer fee to the Partnership which is sufficient to cover all reasonable expenses connected with the cost of admitting such Person as a Partner as determined by the Executive Committee. 7.10 Restraining Order. In the event that any Partner shall at any time transfer or attempt to transfer its Partnership Percentage Interest or any portion thereof in violation of the provisions of this Agreement and any rights hereby granted, then the other Partners shall, in addition to all rights and remedies hereunder, at law and in equity, be entitled to seek a decree or order restraining and enjoining such transfer, and the offending Partner shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed by the parties hereto that damages at law will be an inadequate remedy for a breach or threatened breach or violation of the provisions concerning transfer set forth in this Agreement. ARTICLE 8. DISSOLUTION 8.1 Dissolution Events. The Partnership shall be dissolved upon the first to occur of any of the following: (a) the occurrence of any event which makes it unlawful for the business of the Partnership to be carried on or for the members to carry it on in Partnership; (b) the Partnership is (A) voluntarily adjudicated bankrupt or insolvent, (B) seeks consent to or does not contest the appointment of a receiver or trustee for itself or for all or any substantial part of its property, (C) files a petition for bankruptcy or reorganization, (D) makes a general assignment for the benefit of its creditors, or (E) admits in writing its inability to pay its debts as they mature; (c) the affirmative vote of the Executive Committee as provided in Section 3.1(b) (a "Voluntary Dissolution"); (d) a court decrees that the Partnership be dissolved pursuant to any relevant provision of the Act. 8.2 Voluntary Dissolution. (a) In the event the Executive Committee votes to dissolve the Partnership, the Executive Committee shall give written notice to all of the Partners of such decision at least six (6) months prior to the intended date of dissolution and in such notice shall set forth a price at which any Partner or Partners may purchase the assets and liabilities of the Partnership. Any or all of the Partners shall have the right to accept the offer to purchase the Partnership on the terms and conditions set forth in the Executive Committee's notice within thirty (30) days of the date notice was given by notifying the Executive Committee of such acceptance by written notice. (b) In the event the Partnership is dissolved by Voluntary Dissolution, the Partnership shall assign to USC (or any USC Successor) any and all rights the Partnership shall have in and to any and all Royalties as defined in the Joint Venture Agreement. 8.3 Termination and Winding Up. In the event the Partnership is dissolved, an accounting of the Partnership's assets, liabilities and operations through the last day of the month in which the dissolution occurs shall be made by the Executive Committee and the affairs of the Partnership shall be wound up and terminated. The Executive Committee shall serve as the liquidating trustee of the Partnership. The liquidating trustee shall be responsible for winding up and terminating the affairs of the Partnership and shall determine all matters in connection therewith (including, without limitation, the arrangements to be made with creditors, the terms of the sale of any asset of the Partnership, and the amount or necessity of cash reserves to cover contingent liabilities) as it deems advisable and proper. The liquidating trustee shall thereafter liquidate the assets of the Partnership as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: (a) to the payment and discharge of all of the Partnership's debts and liabilities to persons other than the Partners and their Affiliates and the expenses of liquidation; (b) to the payment and discharge of any loans plus accrued interest and advances made by either Partner to the Partnership; (c) to the Partners in accordance with their positive Capital Accounts; (d) the balance, if any, shall be distributed to the Partners in accordance with their respective Partnership Percentage Interests. 8.4 Work in Progress. If the Partnership is dissolved for any reason while there is work in progress, winding up of the affairs and termination of the business of the Partnership may include completion of the work in progress to the extent the liquidating trustee may determine such work to be necessary to bring the matters to a state of completion convenient to permit a sale of the Partnership's interest in such work, giving due regard to the interests of the Partners. 8.5 Non-Cash Assets. Every reasonable effort shall be made to dispose of the assets of the Partnership upon a dissolution so that the distribution may be made to the Partners in cash. If at the time of the termination of the Partnership, the Partnership owns any assets in the form of work in progress, notes, deeds of trust or other non-cash assets, such assets, if any, shall be distributed in kind to the Partners, in lieu of cash, proportionate to their right to receive the assets of the Partnership on an equitable basis reflecting the book value of the assets so distributed. For purposes of determining Capital Accounts, each such non-cash asset shall be treated as having been sold at book value. 8.6 Disposition of Documents and Records. All documents and records shall be delivered to DRS/MS upon termination of the Partnership. Such Partner shall retain such documents and records for such a period of time ("Document Holding Period") as may be required by any regulation, decree, code, ordinance, rule or law of any city, county, state, or federal government or governmental agency having jurisdiction (including the requirements of the Internal Revenue Service) and shall make the documents available during normal business hours to the other Partner for inspection and copying at the other Partner's cost and expense. In the event any Partner ("Withdrawing Partner") for any reason ceases to be a Partner at any time prior to termination of the Partnership, and the Partnership is continued without the Withdrawing Partner, the documents for the period prior to the date of the termination of the Withdrawing Partner's interest shall be maintained by the non-withdrawing Partner for the Document Holding Period; provided, however, that if there is an audit or threat of audit, such documents shall be retained until the audit is completed and any tax liability finally determined. Said documents shall be available for inspection, examination and copying by the Withdrawing Partner in the same manner as provided above in this Section 8.6 with respect to a termination of the Partnership. ARTICLE 9. MISCELLANEOUS 9.1 Resolution of Disputes: (a) Notice of Dispute. All disputes, without exception, between the parties to this Agreement arising hereunder, or under any other agreement between the parties not expressly disclaiming the use of this process, shall be settled by means of alternative dispute resolution as provided in the New Jersey Alternative Procedure for Dispute Resolution Act, N.J.S.A. 2A:23A-1, et seq., as in effect on the date of this Agreement, (the "Act") upon written notice given by any party to the other (the "Dispute Notice"), and to the umpire hereafter established. Except to the extent required by law, the proceedings under the Act shall be confidential and shall not be disclosed or discussed with persons not parties to this Agreement without the consent of all parties to the dispute. In the event a party to a dispute may suffer irreparable harm or injury, such party shall have the ability to seek provisional remedies, including but not limited to injunctive relief and other equitable remedies, to the fullest extent permitted by law pending completion of the process provided under this Section 9.1. (b) Umpires. (i) Within thirty (30) days after the Dispute Notice is given the parties shall select three (3) umpires from among the persons listed in Subparagraphs (1) through (4) below in the order of priority listed below, i.e., if a person meeting the requirements of Subparagraph (1) is not able or willing to serve, a person meeting the requirements of Subparagraph (2) shall be selected, and so forth. In addition to meeting the requirements of Subparagraph (1), (2), (3) or (4) below, the umpires must also satisfy the requirements described in Subparagraphs (b)(ii) and (b)(iv) below. A potential umpire is: (1) Any retired judge of a United States District Court or a United States Circuit Court of Appeals; (2) Any retired judge of any State Superior, Appellate or Supreme Court; (3) Any attorney licensed to practice law for more than fifteen (15) years or certified public accountant who has been certified for more than fifteen (15) years and, in either case, who has either directly or indirectly, no conflict of interest; or (4) Such other person upon whom the members of the selecting group agree. (ii) In addition to the requirements described in Section 9.1(b)(i) above, the umpires selected hereunder must: (1) Be free of any potential for bias or conflict of interest with respect to either of the parties hereto, directly or indirectly or by virtue of any direct or indirect financial interest, family relationship or close friendship; and (2) Be in a position to immediately hear the dispute and thereafter render a resolution within the time specified in Section 9.1(g) below. (iii) If the umpires are not selected within the period of time specified in Section 9.1(b)(i) above, DRS/MS, on the one hand, and USC on the other hand, each shall promptly select an umpire which umpires shall select a third umpire who shall be the sole umpire. If the parties fail to so select umpires pursuant to the foregoing provisions within twenty (20) days after the expiration of the period described in Section 9.1(b)(i), the sole umpire shall be selected by the Chief Judge of the United States District Court for the District of New Jersey or, if the Chief Judge is unable or unwilling to act, by the Chief Judge of the Southern District of New York or the President of the Bar Association of the City of New York. Such selection shall be in accordance with the requirements of Sections 9.1(b)(i) and 9.1(ii) above. The umpire to be selected pursuant to this Section 9.1(b)(iii) must be designated within thirty (30) days after the expiration of the period described in Section 9.1(b)(i) above. (iv) Anything to the contrary herein notwithstanding, the following persons are not eligible to be an umpire under this Article: a party to this Agreement or any affiliate thereof; an employee or co-employee or any party to the dispute; or any person having material or undisclosed, financial or personal interests dependent on the success or failure of any of the parties. (v) An umpire shall disqualify himself if he is unable to handle the process promptly so as to render a resolution within a reasonable time, in no event to exceed forty-five (45) days after final testimony and/or briefs and in all events not to extend beyond six months from the date the umpire is chosen, or such longer period to which the parties to the dispute and the umpire may agree. (c) Time and Place of Alternative Resolution. The alternative resolution shall be held at such place as the umpire may determine within Essex County, New Jersey or such other location to which the parties may agree, to commence not later than ten (10) days after the umpire has been determined in accordance with Section 9.1(b). (d) Fees. All fees and expenses (including transcripts, room rental and fees of the umpire) of alternative dispute resolution, shall be paid as follows: 25% by the party or parties served with the Dispute Notice and 25% by the person(s) serving the Dispute Notice, with the remaining 50% allocated 10% to the prevailing party (or parties) and 40% to the non-prevailing party (or parties), as determined by the umpire (if the umpire does not determine a prevailing party then pro-rata to each of the material parties to the dispute as determined by the umpire) provided that the umpire shall have the right to order that such fees be paid in a different percentage if any of the parties has acted in bad faith (in which case he may shift other's shares to the bad faith party(ies)). The fees payable to the umpire shall be his usual hourly rates for consulting or dispute resolution services, as the same may be in effect from time to time. Each party shall pay its own legal fees, costs and disbursements. (e) Discovery. Each party shall be entitled to discovery by way of oral deposition, inspection and copying of all relevant documents within the care, custody or control of a party or a witness, and when authorized by the umpire, by way of interrogatories. All discovery shall be complete within forty-five (45) days of the appointment of the umpire. All documents to be relied upon by any party to the proceeding shall be provided to the others no later than two weeks before the hearing date for the proceedings. The time periods for discovery may be extended by the umpire for good cause, provided that he is able to meet the time requirement of Section 9.1 (g). (f) Provisional Remedies. When appropriate under applicable New Jersey substantive and procedural law, the umpire shall have full and complete authority to award provisional relief, on an ex parte basis or otherwise. (g) Time and Method for Resolution. The umpire shall make the award and serve notice thereof upon all parties within six (6) months of the date the umpire is designated, or such longer period to which the parties to the dispute and the umpire may agree. If the umpire fails to make his decision in accordance with substantive law, or to properly apply the facts to the law, the umpire's award will be deemed to have been procured by "undue means" and "beyond his power." Any party may apply to court in accordance with the Act to have the umpire's decision confirmed, reviewed, modified, affirmed or remanded to the umpire with directions. (h) Act and Agreement Govern. Except as otherwise provided herein, the Act shall govern the procedures and methods for any Alternative Dispute Resolution undertaken pursuant to this Agreement. Except as expressly provided above, the umpire may not modify the provisions of this Article. Except as expressly provided to the contrary above, and to the extent otherwise not inconsistent with this Agreement and the Act, proceedings under this Article, including efforts to mediate the dispute, shall be governed by the "Rules for Non-Administered Arbitration of Business Disputes" as adopted by the Center for Public Resources, Inc., New York (originally developed 1989 and amended 1993). 9.2 Non-Competition. (a) USC NON-COMPETITION. Neither USC nor its Affiliates (other than Ron Hadani, Thomas Soulos and Howard Fidel, whose non-competition agreements are contained in the Joint Venture Agreement and in the employment agreement of each) will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures and markets any ultrasound medical imaging equipment. Neither USC nor its Affiliates will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures, markets, sells and/or introduces technology or technologically based products (whether or not based on USC's core technology) to the medical imaging field in general except that either USC or its Affiliates may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. (b) DRS/MS NON-COMPETITION. Neither Diagnostic/Retrieval Systems ("DRS"), DRS/MS, nor their Affiliates will own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or assist in any manner with, or be connected with or have any interest in, as a stockholder, agent, consultant, partner or otherwise, or have any agent as a director, officer, or employee of, any business which develops, manufactures and/or markets and/or sells any ultrasound medical imaging equipment (or other medical imaging products based on the core technology currently being used by USC) except that either DRS or its Affiliates or DRS/MS may make passive investments in a competitive enterprise the shares of which are publicly traded if such investment constitutes less than one half of one percent of the equity of such enterprise. 9.3 Interpretation. In the event of any dispute between the parties as to the meaning and legal effect of this Agreement, this Agreement shall be interpreted in accordance with the laws of the State of New Jersey. 9.4 Notices. All notices, claims, certificates, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given when personally delivered, telexed, sent by facsimile transmission (with telephonic confirmation) or on the date of receipt or refusal indicated on the return receipt if mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: (a) If to DRS/MS: DRS/MS, Inc. 138 Bauer Drive Oakland, NJ 07436 Attn.: Mr. John Giordano with a copy to: Hannoch Weisman A Professional Corporation 4 Becker Farm Road Roseland, NJ 07068-3788 Attn.: Nina Laserson Dunn, Esq. (b) If to USC: Universal Sonics Corporation 31 Industrial Avenue Mahwah, New Jersey 07430 Attn.: Mr. Ron Hadani with a copy to: Riker, Danzig, Scherer, Hyland & Perretti Headquarters Plaza One Speedwell Avenue Morristown, New Jersey 07962 Attn.: Robert Fischer III, Esq. or to such other address as the person to whom notice is to be given may have previously furnished to the other in writing in the manner set forth above. 9.5 Amendment. This Agreement may not be amended, altered or modified except by written instrument, signed by all parties. 9.6 Headings. All headings herein are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. 9.7 Severability. If any provision of this Agreement or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 9.8 Complete Agreement. This Agreement and the other agreements referred to herein constitute the complete and exclusive statement of the agreement between the Partners with respect to the subject matter hereof, and replaces and supersedes all prior agreements by and among the Partners. This Agreement supersedes any and all prior written or oral statements and no representation, statement, or condition or warranty not contained in this Agreement or the Transaction Documents shall be binding on the Partners or have any force or effect whatsoever. 9.9 Additional Documents and Acts. In connection with this Agreement, as well as all transactions contemplated by this Agreement, each Partner agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be reasonably necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement, and all such transactions including, without limitation, the documents necessary to transfer the Transferred Assets to the Partnership as described in the Joint Venture Agreement. 9.10 Terms. Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular, and plural, as the identity of the person or persons, firm or corporation may in the context require. Any reference to the Code or other statutes or laws shall include all amendments, modifications, or replacements of the specific sections and provisions concerned. 9.11 References to this Agreement. Numbered or lettered articles, sections and subsections herein contained refer to articles, sections and subsections of this Agreement unless otherwise expressly stated. The words "herein," "hereof," "hereunder," "hereby," "this Agreement" and other similar references shall be construed to mean and include this Partnership Agreement and all amendments thereof and supplements thereto unless the context shall clearly indicate or require otherwise. 9.12 Binding Effect. Subject to the provisions of this Agreement relating to transferability, this Agreement shall be binding upon and inure to the benefit of the parties signatory hereto, and their respective distributees, successors and permitted assigns. 9.13 Counterparts. This Agreement may be executed in a number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DRS/MS, INC. By:_______________________________ Name:__________________________ Title:_________________________ UNIVERSAL SONICS CORPORATION By: ______________________________ Name:_________________________ Title:________________________ SCHEDULE 4.1 Initial Capital Contribution of DRS/MS: $400,000 in cash and managerial expertise and manufacturing capabilities. SCHEDULE 4.1 - Continued Initial Capital Contribution of USC: All of the Transferred Assets (other than those assets delineated on Schedule 2.02 of the Joint Venture Agreement and net of Royalties, as such terms are defined in the Joint Venture Agreement), subject to certain liabilities to be assumed by the Partnership, as specifically set forth below: PARTNERSHIP AGREEMENT OF DRS MEDICAL SYSTEMS BY AND BETWEEN DRS/MS, INC. AND UNIVERSAL SONICS CORPORATION Dated as of February 6, 1996 TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS 1.1 Terms ................................... 1 ARTICLE 2 FORMATION OF THE PARTNERSHIP 2.1 Formation ............................... 3 2.2 Partners ................................ 3 2.3 Name .................................... 3 2.4 Principal Place of Business ............. 3 2.5 Purposes and Scope ...................... 3 2.6 Formation Documents ..................... 4 2.7 No Individual Authority ................. 4 2.8 Property Interests ...................... 4 2.9 Limits of the Partnership ............... 4 ARTICLE 3 MANAGEMENT OF THE PARTNERSHIP 3.1 Executive Committee ..................... 4 3.2 Indemnification ......................... 6 3.3 Officers ................................ 7 ARTICLE 4 CAPITAL CONTRIBUTIONS 4.1 Initial Capital Contribution of the Partners ................................ 7 4.2 Additional Capital Contributions ........ 7 4.3 Capital Accounts ........................ 8 ARTICLE 5 ALLOCATIONS, DISTRIBUTIONS AND INTERESTS 5.1 Allocation of Net Income or Net Loss .... 8 5.2 Distributions ........................... 8 5.3 Management Services ..................... 9 ARTICLE 6 BOOKS AND RECORDS; BANK ACCOUNTS; TAX RETURNS; LOANS 6.1 Books and Records ....................... 9 6.2 Bank Accounts ........................... 9 6.3 Tax Returns ............................. 10 6.4 Loans ................................... 10 ARTICLE 7 TRANSFERS OF INTERESTS IN PARTNERSHIP 7.1 Prohibited Transfers .................... 10 7.2 USC Affiliate Transfer .................. 11 7.3 Right of Sale and First Refusal ......... 11 7.4 Specific Performance .................... 13 7.5 Termination of Obligations .............. 14 7.6 USC Put ................................. 14 7.7 Anti-Dilution ........................... 15 7.8 Co-Sale Right ........................... 16 7.9 Execution of this Agreement ............. 16 7.10 Restraining Order ....................... 16 ARTICLE 8 DISSOLUTION 8.1 Dissolution Events ...................... 17 8.2 Voluntary Termination ................... 17 8.3 Termination and Winding Up .............. 17 8.4 Work in Progress ........................ 18 8.5 Non-Cash Assets ......................... 18 8.6 Disposition of Documents and Records .... 19 ARTICLE 9 MISCELLANEOUS 9.1 Resolution of Disputes .................. 19 9.2 Non-Competition ......................... 22 9.3 Interpretation .......................... 23 9.4 Notices ................................. 23 9.5 Amendment ............................... 24 9.6 Headings ................................ 24 9.7 Severability ............................ 24 9.8 Complete Agreement ...................... 24 9.9 Additional Documents and Acts ........... 24 9.10 Terms ................................... 25 9.11 References to this Agreement ............ 25 9.12 Binding Effect .......................... 25 9.13 Counterparts ............................ 25 EX-10.93 15 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as of February ___, 1996, by and among Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"). Seller is sometimes referred to in this Agreement as "Selling Party" or "Selling Parties." RECITALS A. Seller is in the business of manufacturing, selling and distributing magnetic recording heads (the "Business"). B. Seller desires to sell certain specified property and assets and to assign certain specified agreements to Purchaser, and Purchaser desires to acquire such property and assets, and assume such agreements, on the terms and conditions specified in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties contained in this Agreement, the parties hereto agree as follows: 1. Purchase and Sale of Assets: Assumption of Certain Liabilities. 1.1 Assets Purchased. Upon the terms and subject to the conditions of this Agreement, Purchaser shall purchase, and Seller shall sell, assign, transfer and convey to Purchaser at the Closing (as defined in Section 9 hereof), all of the following tangible and intangible assets, properties, licenses, and rights (collectively the "Assets"), free and clear of all liens, claims, options, rights of third parties and encumbrances, whether contingent or otherwise: 1.1.1 All equipment, machinery, furniture, fixtures, leasehold improvements, tools, trade fixtures, and other tangible property of Seller (whether such property constitutes real, personal or mixed property), listed on Schedule 1.1.1 hereof ("Fixed Assets"). 1.1.2 All inventory, work in progress, and stock in trade of Seller as of the Closing Date. 1.1.3 All rights of Seller under all accounts receivable, customer sales/purchase orders for Seller's products, distributor agreements, supply and maintenance contracts, personal property leases (and the remaining term under the Lease (as defined in Section 1.3.2 below)), purchase orders and barter arrangements, and the rights of Seller to all prepaid expenses and benefits under the foregoing, as set forth in Schedule 1.1.3 attached hereto. 1.1.4 All service marks, patents, trademarks, copyrights, designs, brand names, trade names, know-how, processes, symbols, inventions, programs, trade secrets, logos and telephone numbers related to or connected with the Business, including, without limitation, the product catalogues used or distributed by Seller in connection with the Business and the names "MEC" and "Mag-Head Engineering Company," and all derivations thereof, all lists of suppliers, customers and prospects, all Federal and state applications for protection or registration of any of the foregoing and all intangibles appurtenant thereto, and all rights and properties listed on Schedule 1.1.4 ("Proprietary Rights"). 1.1.5 All files and correspondence pertaining to customers, prospects and suppliers, including, without limitation, customer service, sales, manufacturing and warranty files and records, and all other documents, materials and supplies related to the Business ("Business Records"). 1.2 Excluded Assets. It is expressly agreed that Purchaser shall purchase only those Assets described in this Agreement (including without limitation, the Schedules attached hereto). In particular, and without otherwise limiting or reducing the scope of the preceding sentence, the parties specifically acknowledge that Purchaser shall not purchase any of the following ("Excluded Assets"): (i) any tangible or intangible assets listed in Schedule 1.2 hereof. 1.3 Assumption of Certain Liabilities. Purchaser shall assume no liabilities or obligations of Seller whatsoever, except for the following liabilities ("Assumed Liabilities") which Purchaser shall assume, discharge, perform when due, and indemnify Seller against: 1.3.1 Seller's obligations from and after the Closing Date with respect to the personal property leases and agreements identified on Schedule 1.3 hereto. 1.3.2 Seller's obligations from and after the Closing Date with respect to the real property lease covering the premises on which Seller conducted the Business and identified on Schedule 1.3 hereto (the "Lease"), pursuant to an Assignment of Lease, executed by Seller and the landlord for such premises, and in substantially the form set forth in Schedule 1.3. 1.3.3 Those certain accounts payable of Seller identified on Schedule 1.3 attached hereto. 1.4 Liabilities Not Assumed. Notwithstanding anything in this Agreement to the contrary, Purchaser shall not assume, discharge or indemnify Seller against any debt, obligation or liability of any kind not expressly assumed pursuant to Section 1.3 hereof. In particular, and without otherwise limiting or reducing the scope of the preceding sentence, the parties specifically acknowledge that Purchaser shall not assume, discharge, or indemnify Seller against any of the following: 1.4.1 Debts, liabilities, obligations or commitments arising out of or related to or created by this Agreement or the transactions contemplated hereby (including, without limitation, any federal or state income or franchise tax liabilities or sales or use tax liabilities). 1.4.2 Debts, liabilities, obligations or commitments arising out of, or related to the Assets (unless expressly assumed pursuant to this Agreement) or the Business of Seller, including, without limitation, debts, liabilities, obligations or commitments arising out of or related to Seller's payroll obligations (including, without limitation, vacation pay, severance pay, bonuses, etc.), utilities, leases of real property, retirement or profit sharing plans, medical plans, insurance policies, and worker's compensation obligations. 2. Purchase Price; Adjustments. 2.1 Purchase Price. The purchase price (the "Purchase Price") for the Assets shall consist of the sum of (a) $225,000, and (b) the amount of (x) cash and accounts receivable less (y) accounts payable and accrued payroll expenses, as indicated on the October 31, 1995 balance sheet of Seller, which is one of the Financial Statements (as defined in Section 3.3, below). Purchaser shall be entitled to a credit against the Purchase Price for an amount equal to the accrued but unused vacation pay of Seller's employees, which accrued prior to November 1, 1995, but was paid by Seller between November 1, 1995 and the Closing Date. 2.2 Payment. At Closing, Purchaser shall pay to Seller the Purchase Price in cash, subject to credits and adjustments under this Agreement. 2.3 Adjustment to Purchase Price. The Purchase Price shall be adjusted as follows: 2.3.1 The Purchase Price shall be reduced to reflect certain changes in the accounts receivable and accounts payable of the Seller and payments made by Seller not in the ordinary course of business of Seller (including, without limitation, (i) costs arising in connection with the consummation of the transactions under this Agreement, and (ii) payroll and other employee expenses arising from Seller's termination of employees) between October 31, 1995 and the Closing Date, and such other adjustments as mutually agreed by the parties in good faith. 2.3.2 Purchaser shall be entitled to a credit against the Purchase Price equal to the amount of cash of Seller on hand at Closing (as defined in Section 9), as certified by Seller, in form and substance acceptance to Purchaser, that is not surrendered to Purchaser at Closing. 2.4 Allocation. The Purchase Price and the Assumed Liabilities shall be allocated among the Assets in the manner set forth in Schedule 2.4 hereof, as may be required pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended. Purchaser and Seller shall report this transaction for federal and state income tax purposes in accordance with such allocation. 3. Representations and Warranties of Seller. Seller represents and warrants to Purchaser as follows: 3.1 Corporate Existence and Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Seller has the requisite corporate power and authority to own, lease and operate its properties and assets, including without limitation the Assets, and to carry on its Business as is now being conducted. 3.2 Authority. Seller has full corporate power and authority to execute and to deliver this Agreement and all other agreements executed and delivered or to be executed and delivered by Seller in connection with the transactions contemplated hereby, including, without limitation, the documents specified in Section 9 hereof to be executed and delivered by Seller. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Seller and approved by the vote of the shareholders of Seller, and no other corporate proceedings on the part of Seller and no approvals or consents of any other persons are necessary to authorize the execution and delivery of this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller and constitutes a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms. Seller has the number of shares of a single class of common stock ("Shares") set forth on Schedule 3.2 hereto. Schedule 3.2 sets forth the total number of Shares issued and outstanding and the sole beneficial and record owners of all such Shares. 3.3 Financial Statements; Absence of Certain Changes. Seller has heretofore delivered to Purchaser the following financial statements for the period ending October 31, 1995 (the "Financial Statements") set forth on Schedule 3.3 attached hereto. The Financial Statements present fairly the financial position of Seller as of their respective dates. The Seller's outside accountant has performed an overview of the Financial Statements, and, shall represent in writing to Purchaser, in a form satisfactory to Purchaser, that such accountant is unaware of any material circumstance or event resulting in the Financial Statements not fairly presenting the financial condition of Seller, and that the accountant is not aware of any material event that would adversely affect the financial condition of Seller as so presented. Since October 31, 1995, Seller has not: (i) materially increased the compensation of any employee or altered its policies with respect to employee compensation; (ii) sold, leased or otherwise transferred any Assets (except in the ordinary course of business), or (iii) incurred any debts or liabilities (except in the ordinary course of business). 3.4 Assumed Liabilities. Seller has delivered to Purchaser a true, complete, and correct copy of each written instrument or document governing the Assumed Liabilities. All of the Assumed Liabilities of Seller are set forth in Schedule 1.3, attached hereto, none of which have been amended or modified except as disclosed in Schedule 1.3. Seller is not in default under any of the Assumed Liabilities and is not aware of any actions or omissions which might result in such default upon notice or the passage of time, or both. 3.5 No Default; Consents and Approvals. Neither the execution and delivery of this Agreement, nor the consummation of any of the transactions contemplated herein will (i) violate any provision of the Articles of Incorporation or Bylaws of Seller (true and complete copies of which have heretofore been delivered to Purchaser by Seller); (ii) violate, conflict with or result in the breach or termination of, or otherwise give any other contracting party the right to terminate, or constitute a default (by way of substitution, novation or otherwise) under the terms of, any agreement, lease, indenture or instrument to which the Seller is a party, including, without limitation, the Assumed Liabilities, or by which it or any of the Assets may be bound; (iii) result in the creation of any lien, charge or encumbrance upon the Assets; (iv) violate any judgment, order, injunction, decree or award against, or binding upon, Seller, the Assets or Assumed Liabilities; or (v) constitute a violation by Seller of any law or regulation applicable to Seller, the Assets or the Assumed Liabilities. All consents, releases or waivers from third parties (including, without limitation, governmental and regulatory authorities) which may be necessary to prevent the transactions provided for herein causing a breach, acceleration or default of the type specified in this Section 3.5 have been obtained. 3.6 Intentionally Deleted. 3.7 Title to Assets. Seller has good and marketable title to all Assets, whether real, personal or mixed, all of which are free and clear of any restrictions on or conditions to transfer or assignment and free and clear of any mortgages, liens, security interests, encumbrances, claims, charges or adverse interests of any kind or character (collectively, "Encumbrances") of any other person or entity. All work- in-progress and Inventory has been fully paid for (except for any Assumed Liabilities) and is not subject to any conditional sales contract, consignment or other Encumbrances whatsoever, nor does any third party have any interest or claim therein. 3.8 Condition of Assets. Except for ordinary wear and tear, to Seller's knowledge, all of the Fixed Assets are in good operating condition and repair, adequate for the uses to which they are being put in the Business. All property and excise taxes for the Assets have been fully paid for all tax years, except for any installment not yet due and payable with respect to the current tax year. 3.9 Compliance With Laws. The conduct of the Business by Seller, the condition and Seller's occupancy of the Premises, and the condition and use of the Assets have not violated any material applicable federal, state and local statutes, laws and regulations, including (without limitation) any material applicable laws and regulations relating to building, zoning, environmental, health and safety, employee safety and the employment of labor (including those laws and regulations relating to wages, workers' compensation, hours, collective bargaining, non-discrimination in employment and the withholding and payment of taxes and contributions). Seller has not received any notice of any such violation. 3.10 Real Property. Schedule 3.10 to this Agreement contains the common description of the Premises. Seller has no knowledge that the zoning for the Premises prohibits the existing improvements or continuation of the Business being conducted on such Premises. Seller has not commenced, nor has Seller received notice of the commencement of, any proceeding that would affect the present zoning classification of such Premises. There are no unrecorded easements (including prescriptive easements), subleases, licenses or other rights of occupancy existing with respect to the Premises granted by Seller. 3.11 Hazardous Substances. Except as set forth in Schedule 3.11 hereto, neither the Assets nor the Premises contain, to the best knowledge of Seller after diligent review and inquiry, any Hazardous Substances (as defined below), whether located upon or beneath Premises, and no debris has been buried beneath the surface of the Premises. Seller has not discharged, and has no knowledge that any other person has discharged, any Hazardous Substances on Premises. Seller is in compliance with the terms and conditions of all statutes, use ordinances and regulations, federal, state and local, pertaining to the Assets and the sanitization or cleanup of the Premises with respect to Hazardous Substances. Seller has provided access to and copies of any data and/or documents dealing with potentially Hazardous Substances used at the Premises and any disposal practices followed. Buyer shall have the right to make inquiries of governmental agencies regarding such matters, without liability for the outcome of such discussions. "Hazardous Substances" means any material or substance that is (a) a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. SECTION 9601(14), Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. SECTION 1321; (b) a "hazardous waste" pursuant to Section 1004 or Section 1001 of the Resource Conservation and Recovery Act, 42 U.S.C. SECTIONSECTION 6903, 6921; (c) a toxic pollutant under Section 307(a)(1) of the Federal Water Pollution Act, 33 U.S.C. SECTION 1317(a)(1); (d) a "hazardous air pollutant" under Section 112 of the Clean Air Act, 42 U.S.C. SECTION 7412; (e) a "hazardous material" under the Hazardous Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. SECTION 1802(4); (f) toxic or hazardous pursuant to regulations promulgated under the aforementioned laws; or (g) a risk to the environment that is a toxic or hazardous substance, material, pollutant or waste under any other applicable federal, state or local laws, ordinances or regulations. 3.12 Employee Agreements. Except as set forth on Schedule 3.12, Seller is not a party to any collective bargaining agreement or other similar labor agreements, or any medical, life insurance, pension, retirement, deferred compensation, profit sharing or other incentive or fringe benefit plan, agreements or arrangements providing for employee remuneration or benefits. Seller represents and warrants that Paul Michael is an employee- at-will of Seller. 3.13 Customers. Seller has not received notification and has no reason to believe that any of the current customers or suppliers of the Business, including, without limitation, the customers and suppliers designated in Schedule 3.13 attached hereto, will cease doing business, or will reduce the amount of business such suppliers and customers currently conduct with respect to the Business. 3.14 Bulk Sales Information. Seller has complied, any and all steps have been taken and all waiting periods have expired for compliance, with any and all applicable bulk sales laws; and as a consequence thereof, neither Seller nor Purchaser are liable to any creditor of Seller with respect thereto. 3.15 Proprietary Rights. The Proprietary Rights, including, without limitation, the Proprietary Rights listed or described in Schedule 1.1.4 hereto, are the sole and exclusive property of Seller. No licenses, sublicenses, or other rights have been granted or entered into by Seller with respect to the Proprietary Rights. All of the Proprietary Rights, including without limitation, the Proprietary Rights listed in Schedule 1.1.4, are current, unexpired and in good standing and free and clear of all security interests, liens, encumbrances, and other restrictions. Seller has not at any time knowingly taken, or permitted to be taken, any action, or permitted any use, nor is Seller aware of any such action or use that would impair the validity or enforceability of any of the Proprietary Rights, or Purchaser's exclusive ownership thereof. 3.16 Litigation. There is no suit or action (equitable, legal, administrative or otherwise), proceeding or investigation of any kind pending (or to the knowledge of Seller threatened) against Seller, or which relates to the Assets or Assumed Liabilities, nor is there any factual basis of which Seller is aware for any such suit, action, proceeding or investigation (including, without limitation, any relating to environmental, health, safety or Hazardous Substances matters) against Seller or which could affect the Assets, the Assumed Liabilities or the Premises, or which could affect the ability of Seller to carry out the transactions contemplated hereunder in accordance with the terms hereof. 3.17 Books and Records. The books and records of Seller accurately reflect all material transactions and correctly account for all material receipts, disbursements and expenditures in connection with the Assets and the Assumed Liabilities. 3.18 Certain Pre-Closing Representations and Warranties of Seller. 3.18.1 Information. Seller has furnished or caused to be furnished to Purchaser all data and information concerning the Premises, the Assets, the Assumed Liabilities, existing insurance policies, and all manufacturer's warranties pertaining to the Assets that have been requested by Purchaser. 3.18.2 Maintenance of Insurance. From November 1, 1995 to the Closing, Seller has continued to carry its existing insurance for the Premises and the Assets. 3.18.3 Third Party Consents. Seller has obtained and delivered to Purchaser the written consent of any persons, to the extent the consent of such persons is required, in order to validly convey good, marketable and unencumbered title to the Assets to Purchaser. 3.18.4 Conduct of Business. From November 1, 1995 through the Closing, Seller has carried on the Business in substantially the same manner as carried out prior to November 1, 1995, and did not institute any unusual or novel methods of inventory purchase, management, accounting or operation, or incur or pay any liability or expense, that varied materially from the ordinary course of business of Seller as of November 1, 1995. 3.18.5 Employees. Seller agrees that Purchaser shall have no obligation whatsoever to employ any person employed by Seller with respect to the Business. Notwithstanding the foregoing, Seller has used its best efforts to keep available to Purchaser Seller's employees to the extent that Purchaser advised Seller that it desired to employ one or more of the persons currently employed by Seller with respect to the Business. Any such persons employed by Purchaser, if any, will be treated and deemed as "new hires" by Purchaser for all purposes. Seller agrees that Purchaser shall have the right, but not the obligation, to employ any one or more of Seller's employees, and between November 1, 1995 and the Closing, Seller has not made any change in compensation payable or which became or will become payable to any employee (including severance or vacation pay, and compensation payable pursuant to bonus or pension plans or other employee plans or other benefits to such employees). 3.18.6 Capitalization of Seller. From November 1, 1995 until the Closing, Seller did not make or pay any distribution or dividend to any shareholder, issue any additional shares of its capital stock, or issue or create any warrants, obligations, subscriptions, options, convertible securities or other commitments under which any additional shares of its capital stock could be issued, nor did it agree to do any such acts. 3.18.7 Dispositions of Assets. From November 1, 1995 until the Closing, Seller did not (a) sell, assign, transfer, distribute or encumber any of the Assets, or agree to do so (except for the use of raw materials, work-in-progress and inventory in the regular course of business), or (b) sell, transfer, assign, lease or otherwise grant any right to any third party to lease the Premises in any respect, nor agree to do so. 3.19 Full Disclosure; Knowledge. None of the representations and warranties made by Seller in this Agreement, or in any certificate or document furnished or to be furnished by Seller, or any officer thereof, or any of them, or on their behalf, contains or will contain any untrue statement of a material fact, or omit or state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. All of Seller's representations and warranties contained in Section 3.8 through 3.18 are being made hereunder solely to the best knowledge of Seller, after due inquiry and review of its officers, directors and employees. 4. Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller as follows: 4.1 Corporate Existence and Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and otherwise operate its properties and assets. 4.2 Authority. Purchaser has full corporate power and authority to execute and to deliver this Agreement and all other agreements executed and delivered or to be executed and delivered by Purchaser in connection with the transactions contemplated hereby, including, without limitation, the documents specified in Section 9 hereof to be executed and delivered by Purchaser. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Purchaser, and no other corporate proceedings on the part of Purchaser and no approvals or consents of any other persons are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms. 5. Certain Seller Obligations. 5.1 Manufacturer's Warranties. Seller covenants and warrants that it shall use its best efforts to obtain a transfer to Purchaser of all manufacturer's warranties relating to the Assets. 5.2 Sales Tax. Seller shall be responsible for and bear the cost of all Minnesota sales, excise, transfer and use taxes arising by virtue of the purchase and sale of Assets hereunder. 5.3 Payment of Creditors. Seller shall pay all amounts owing its creditors when due. 5.4 Further Assurances. Seller represents, warrants and covenants that, from and after the Closing Date, Seller shall furnish any additional information, execute and deliver such documents and do all such things as may be reasonably necessary or appropriate to carry out the intent and accomplish the purposes of this Agreement, or otherwise consummate the transactions contemplated by this Agreement according to its terms, and will do all things necessary or appropriate to effect compliance with the requirement of any laws of the United States or any state arising from the transactions contemplated hereby. 6. Purchaser's Conditions to Closing. The obligation of Purchaser to purchase the Assets and consummate the related transactions provided for under this Agreement are subject to the fulfillment or waiver by Purchaser in writing, at or prior to Closing, of each and all of the conditions precedent listed below to be delivered by any Seller at Closing. 6.1 Execution and Delivery of Documents. Seller shall have executed and delivered to Purchaser all of the documents and agreements specified in Section 9 below, to be delivered by Seller at Closing. 6.2 Performance. Seller shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by Seller on or before the Closing Date. 6.3 Consents. All necessary agreements and consents of any third parties to the consummation of the transactions contemplated by this Agreement shall have been obtained by Seller and delivered to Purchaser. 6.4 Proceedings. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance satisfactory to Purchaser and its counsel, and Purchaser shall have received counterpart originals or certified copies of such documents as it may reasonably request. 6.5 Bulk Transfer. Seller shall have complied with all applicable transferor requirements of all applicable bulk sales laws. 6.6 No Material Adverse Change. During the period from the date of balance sheet included in the Financial Statements to the Closing Date, none of the Assets shall have sustained any material loss or damage (whether or not such damage or loss is insured) nor shall there have been any material adverse change in the financial condition or prospects of the Seller. 6.7 Accuracy of Representations and Warranties. All warranties and representations by Seller in this Agreement, or in any schedule, exhibit, document or certificate furnished to Purchaser in connection with the transactions contemplated by this Agreement, shall be true in all material respects on and as of the Closing Date. 7. Other Covenants; Post-Closing Obligations. 7.1 Additional Agreements with Seller. 7.1.1 Non-Competition Agreement. Seller, and Paul Michael and Willy Schrepfer, shall enter into a covenant not to compete substantially in the form set forth at Schedule 7.1.1 hereto (the "Non-Competition Agreement") and providing that during the period specified in the Non-Competition Agreement neither Seller nor such parties shall, directly or indirectly, within any areas identified in the Non-Competition Agreement, compete in the business of the manufacturing, marketing, or sale of products or goods sold by, or substantially similar in style to the products or goods sold by, Seller as of the Closing Date, all as more fully set forth in the Non-Competition Agreement. 7.2 Use of Name. On the Closing Date, Seller shall take all actions necessary to cause its name to be changed to a name which bears no resemblance to its current name, including, without limitation, deletion of the words "Mag-Head" from its name, and shall file with the Office of the Minnesota Secretary of State a certificate of amendment to Seller's Articles of Incorporation reflecting such change of name. Neither Seller nor Shareholder shall use the name "Mag-Head" or "MEC," in connection with any business operated by Seller or Shareholder after the Closing without the prior written consent of Purchaser. Seller shall cooperate with any application by Purchaser to use the name "Mag- Head" or "MEC," or any similar name, in connection with Purchaser's operation of the Business acquired by Purchaser. 7.3 Receipt of Mail. From and after the Closing Date, Purchaser shall have the sole and exclusive right to receipt of all mail addressed to Seller. Purchaser shall forward to Seller any such mail not applicable to the Assets or the Business, within four (4) business days of Purchaser's receipt thereof. 7.4 Certain Discounts. Schedule 7.4 hereto contains a list of Seller's suppliers who have agreed to provide price or other discounts or concessions to Seller with respect to merchandise or services purchased from such suppliers and a description of each such arrangement, including the amounts involved and the terms thereof. Seller and Purchaser agree that the benefit of all such discounts and concessions shall inure to the benefit of Purchaser and the parties hereto agree to take such steps as are necessary to effect such agreement. 7.5 Further Assurances. Purchaser and Seller each represents, warrants and covenants to the other that if at any time after the execution of this Agreement, the other party shall reasonably consider or be advised that any further assignments or assurances in law are necessary or desirable to carry out the intent and accomplish the purposes of this Agreement according to its terms, such party shall execute and make all such proper assignments and assurances and do all things necessary or appropriate to carry out the intent and accomplish the purposes of this Agreement and to consummate the transactions contemplated by this Agreement according to its terms. 8. Seller's Conditions to Closing. The obligations of Seller to sell the Assets and consummate the related transactions provided for under this Agreement are subject to the fulfillment or waiver by Seller in writing, at or prior to Closing, of each and all of the conditions precedent listed below. 8.1 Execution and Delivery of Documents; Performance. Purchaser shall have executed and delivered to Seller all of the documents and agreements specified in Section 9 below to be executed and delivered by Purchaser, and performed and complied with all covenants and agreements of Purchaser required to be performed or complied with prior to Closing. 8.2 Accuracy of Representations and Warranties. All representations and warranties of Purchaser contained in this Agreement shall be true on and as of the Closing Date as though such representations and warranties were made on and as of that date. 9. Closing. 9.1 Time of Closing. The closing of the transactions contemplated herein (the "Closing") shall be at 10:00 A.M., on February 7, 1996, or at such other time as the parties hereto shall mutually agree to (the "Closing Date"). This Agreement and all agreements and documents to be executed and delivered in connection with the Closing may be executed in counterparts, each of which shall be an original of such respective agreement and document, but all counterparts of which shall together constitute one instrument thereof, respectively. Delivery by a party of an executed counterpart by facsimile may be relied on by the other party as an original, and any party delivering a counterpart by facsimile shall promptly deliver an executed original to the other party. The failure by a party to do so shall not invalidate any prior facsimile delivery of such counterpart by such party. The parties mutually acknowledge and agree for the purposes of this Agreement that time is of the essence. If the Closing does not occur on or before the Closing Date by reason of any default of Seller under this Agreement, in addition to, and not by way of limitation of any other right or remedy of Purchaser, Purchaser shall be relieved of its obligation to consummate the Closing. 9.2 Delivery of Cash and Documents. On the Closing Date, the parties shall deliver to each other the following respective documents: 9.2.1 Two original, fully executed copies of a Warranty Bill of Sale in the form of Schedule 9.2.1 hereto, signed by Seller and Purchaser, together with such other instruments and documents as Purchaser shall reasonably require to vest Purchaser with marketable title to the Assets, free and clear of all liens, charges, and encumbrances. 9.2.2 Two original, fully executed copies of an Assignment of Intangibles in the form of Schedule 9.2.2 hereto, signed by Seller and Purchaser. 9.2.3 Two original, fully executed copies of an Assignment and Assumption of Contracts in the form of Schedule 9.2.3 hereto, signed by Seller and Purchaser. 9.2.4 Intentionally deleted. 9.2.5 Two originals of an affidavit, signed by Seller, to the effect that Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate within the meaning of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, substantially in the form of Schedule 9.2.5 hereto. 9.2.6 The Purchase Price, to be paid by Purchaser in accordance with Section 2.2, subject to applicable adjustments and credits hereunder. 9.2.7 Two original, executed certificates in the form of Schedule 9.2.7(a) and 9.2.7(b), signed by officers of the Seller and Purchaser, respectively. 9.2.8 Two original, fully executed copies of the Non-Competition Agreement in the form of Schedule 7.1.1 hereto, signed by Seller and Purchaser. 9.2.9 An original opinion of legal counsel for Seller, in the form set forth in Schedule 9.2.9 hereto, to be delivered by Seller. 9.2.10 Two original, executed copies of an Assignment of the Lease (with executed Consent of Landlord), in the form of Schedule 1.3.1 hereto, and signed by Seller, the landlord under the Lease and Purchaser. 9.3 Actions at Closing. All requirements with respect to Closing shall be considered as having taken place simultaneously, and no delivery shall be considered as having been made until all deliveries and closing transactions have been accomplished. 9.4 Allocation. Except as otherwise provided in Sections 10 and 11, the parties' responsibility for personal and real property taxes, utilities and other similar charges relating to the Assets, shall be allocated between the parties with Seller paying all such expenses applicable to ownership of the Assets prior to the Closing Date and Purchaser paying all such expenses applicable to ownership of the Assets thereafter. 10. Indemnity. 10.1 Seller's Indemnity. Seller hereby, agrees to indemnify, defend and hold harmless Purchaser against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including, without limitation, interest, penalties and reasonable attorneys' fees and court costs (collectively "Claim(s)"), that Purchaser shall incur or suffer, which arise, result from, or relate to (i) any breach of, or failure by Seller to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, document, exhibit or other instrument furnished or to be furnished by Seller under this Agreement, and (ii) except as otherwise expressly assumed by Purchaser as an Assumed Liability hereunder (and in such case solely to the extent of such assumption), any actual or alleged tort, breach of contract, wrongdoing, cause of action or Claim arising in connection with, incurred with respect to or relating to (a) the conduct of the Business of Seller, or (b) the Premises or the Assets (and any Hazardous Substances with respect any of the foregoing) prior to the Closing Date. 10.2 Purchaser's Indemnity. Purchaser hereby agrees to indemnify, defend and hold harmless Seller, against and in respect of any and all Claims that Seller shall incur or suffer, which arise, result from or relate to (i) any breach of, or failure by Purchaser to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, document, exhibit or other instrument furnished or to be furnished by Purchaser under this Agreement, and (ii) any actual or alleged tort, breach of contract, wrongdoing, cause of action or Claim (a) incurred or relating to the conduct by Purchaser after the Closing Date of its business (and any Hazardous Substances with respect thereto) on the Premises, or (b) incurred by Purchaser following the Closing Date with respect to the Assets or the Assumed Liabilities. 11. Taxes. Any and all Minnesota sales, excise, transfer and use taxes applicable to the conveyance and transfer to Purchaser of the Assets shall be borne and paid for solely by Seller. Seller represents and warrants that all personal property taxes arising prior to the Closing with regard to the Assets have been timely and fully paid. Purchaser shall have no responsibility or liability for any income, excise, property, business, occupation, withholding or similar tax, or for taxes of any other kind or type on the Business or Seller's operations and activities at the Premises, related to any period prior to the Closing Date, and Seller shall indemnify Purchaser under Section 10.1 with respect to any such liability. 12. Miscellaneous Provisions. 12.1 Expenses. Except as otherwise provided in this Agreement, each party hereto shall pay its own expenses (including, without limitation, legal and accounting fees) incident to the origination, negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby, regardless of whether such transactions are consummated. 12.2 Schedules and Exhibits. Each of the schedules and exhibits attached hereto are incorporated herein by reference and made a part hereof for all purposes. 12.3 Amendments or Waivers. Except as otherwise specifically stated herein, any provision of this Agreement may be amended by, and only by, a written agreement executed by Purchaser, on the one hand, and Seller, on the other. Either party may extend the time for or waive the performance of any obligation of the other party, waive any inaccuracies in the representations or warranties of the other party, waive fulfillment of any conditions or contingencies to such party's obligations to consummate the transactions provided for hereunder, or waive compliance by the other party with any of the terms and conditions contained in this Agreement; provided that, each and every such extension or waiver shall be in writing. 12.4 Further Assurances. From and after the Closing Date, the parties shall, on request, cooperate with one another by furnishing any additional information, executing and delivering any additional documents and instruments, and taking any and all other actions as may reasonably be required by the parties or their respective counsel to consummate or otherwise implement the transactions provided for in this Agreement. 12.5 Successors and Assigns. This Agreement shall apply to, and inure to the benefit of, and be binding upon and enforceable against the parties hereto and their respective successors and permitted assigns. 12.6 Governing Law; Venue. This Agreement, and the ancillary agreements and documents executed and delivered in connection herewith, and the rights and obligations of the parties hereto and thereunder shall be governed by and construed in accordance with the laws of the State of Minnesota. 12.7 Notices. Any notice, demand, approval, consent, request, waiver or other communication which may be given or which is required to be given pursuant to this Agreement shall be in writing and shall be deemed given on the earlier of the day actually received or on the close of business on the third business day following the date deposited in the United States mail, postage pre-paid, certified or registered, addressed to the party at the address set forth after its respective name below, or at such different address as such party shall have theretofore advised the party of in writing, with copies sent to the persons indicated: To Seller: MHD Minnesota, Inc. 11278 65th Place North Maple Grove, Minnesota 55369 Attn: Mr. Willy Schrepfer To Purchaser: Ahead Technology Acquisition Corporation c/o 3105 Patrick Henry Drive Santa Clara, California 95054 Attn: Steve Conlisk or to such other address as such party shall have specified by notice in writing to the other. 12.8 Invalid Provisions. If any provision hereof shall be held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, with the remaining provisions hereof remaining in full force and effect and unaffected by the illegal, invalid or unenforceable provision or by its severance herefrom. In lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part hereof a provision as similar in terms as the illegal, invalid or unenforceable provision as may be possible and, at the same time, be legal, valid and enforceable. 12.9 Entirety of Agreement. This Agreement (including exhibits, schedules and agreements referenced herein) and any other agreements and instruments delivered at the Closing (or after the Closing pursuant hereto) contain the entire Agreement between the parties. No representations, inducements, promises or agreements, whether oral or otherwise, which are not embodied herein or therein shall be of any force or effect. 12.10 No Commission or Finder's Fee. Seller and Purchaser each represent and warrant that no brokerage, finder's or similar fee or commission has been incurred by them or it in connection with the transactions provided for in this Agreement. Seller, on the one hand, and Purchaser, on the other, hereby indemnify and hold harmless the other party under Section 10 hereof from any brokerage, finder's or similar fee or commission incurred by such identifying party in connection with the transactions contemplated by this Agreement. 12.11 Joint and Several Liabilities. Intentionally deleted. 12.12 Counterparts; Effectiveness. This Agreement may be executed in counterparts, each of which shall be deemed an original for all purposes and all of which shall be deemed, collectively, one Agreement. This Agreement shall become effective when executed and delivered by all parties hereto. 12.13 Confidentiality. Seller and Seller's officers, directors and other representatives shall hold in strict confidence the terms and condition of this Agreement, except to the extent required to be provided to any tax or other governmental authority. Seller waives any cause of action, right or claim arising out of the access of Purchaser or its representatives to any trade secrets or other confidential information of Purchaser from the date of this Agreement until the Closing Date, except for the intentional, competitive misuse by Purchaser of such trade secrets or other confidential business information if the Closing does not take place. 12.14 Parties In Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons or entities other than the parties hereto, and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the liability or obligation of any third persons to any party to this Agreement or give any third persons any right of subrogation or action over against any party to this Agreement. 12.15 Attorneys' Fees. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 12.16 Nature and Survival of Representations and Warranties. Representations and warranties made by the parties to this Agreement shall be deemed to be continuing and shall survive the Closing. 12.17 Purchaser's Right of Specific Performance. The Assets to be transferred under this Agreement cannot be readily purchased or sold, as the case may be, in the open market and for that reason, among others, it is agreed that Purchaser will be irreparably damaged by a failure of consummation of the transactions contemplated by this Agreement resulting from a breach by Seller of its obligations hereunder. Accordingly, in the event of any default by Seller under this Agreement, the rights of Purchaser shall be enforceable by decree of specific performance. Such remedy, however, shall be cumulative and not exclusive, and shall be in addition to any other remedies that Purchaser may have. 12.18 Counsel. Each party hereto acknowledges and agrees that such party has been represented by counsel of his or its choice in connection with execution and delivery of this Agreement and this Agreement has been reviewed by such counsel to such party's satisfaction. IN WITNESS WHEREOF, this Agreement has been signed by duly authorized representatives on behalf of each of the parties hereto on the date first written above. MAG-HEAD ENGINEERING COMPANY, INC. By: /s/ Paul S. Michael Paul S. Michael, President By: /s/ Willy Schrepfer Willy Schrepfer, Secretary AHEAD TECHNOLOGY ACQUISITION CORPORATION By: /s/ Steve Conlisk Title: V.P. Finance Schedule 1.1.1 Description of Fixed Assets See Attached. MC Software, Inc. MAG-HEAD ENGINEERING COMPANY, INC. 11/30/95 GREP11 Account Details Report Page 1 All Departments All Periods Account Dept Description Date Per PR JB Reference Amount Balance 1500 00 LEASEHOLD IMPROVEMENTS 02/28/95 01 511 GL Balance Forward Year 489.78 489.78 1550 00 MACHINERY & EQUIPMENT 02/28/95 01 511 GL Balance Forward Year 269400.04 269400.04 RECORD MARSHALL 06/30/95 04 550 GL IND PURCS 397.70 269797.74 08/31/95 06 562 AP A/P Capital 3 1570.00 271367.74 1570 00 OFFICE EQUIPMENT 02/28/95 01 511 GL Balance Forward Year 5874.36 5874.36 05/31/95 03 529 AP A/P 4 Office Eq 1795.87 7670.23 08/31/95 06 562 AP A/P 4 Office Eq 716.26 8386.49 MEC ENGINEERING, INC. FIXED ASSETS - BOOK METHOD/ A/D A/D DATE DESCRIPTION LIFE COST 2/28/95 EXPENSE 2/28/96 LEASEHOLD IMPROVEMENTS: 9/18/86 BUILDING SIGN SL 7YR 244.00 244.00 244.00 9/1/87 W.W. SL 7YR 245.78 245.78 ___ 245.78 GRAINGER TOTAL 489.78 489.78 0.00 489.78 MACHINERY & EQUIPMENT: 1986 Various SL 7YR 43,951.22 43,951.22 43,951.22 1987 Various SL 7YR 81,208.97 81,208.97 81,208.97 1988 Various SL 7YR 45,168.67 41,942.40 3,226.27 45,168.67 1989 Various SL 7YR 28,886.10 22,696.22 4,126.59 26,822.81 2/90 Equipment SL 7YR 886.26 633.04 126.61 759.65 4/90 Finishing SL 7YR 10,000.00 7,023.81 1,428.57 8,452.38 Machines(2) 4/90 Tooling-X- SL 7YR 1,066.00 748.74 152.29 901.02 Talk 5/90 X-Talk SL 7YR 275.00 189.88 39.29 229.17 Fixture 5/90 Microscope SL 7YR 848.00 585.52 121.14 706.67 5/90 MEC Lapping SL 7YR 2,400.00 1,657.14 342.86 2,000.00 Blocks 6/90 OMICRON Tools SL 7YR 700.00 475.00 100.00 575.00 8/90 Impedence SL 7YR 755.53 494.69 107.93 602.63 Bridge 10/90 6-Finishing SL 7YR 5,207.00 3,285.37 743.86 4,029.23 Machines 10/90 Grinding SL 7YR 565.32 356.69 80.76 437.45 Wheel Hub 10/90 Hull SL 7YR 330.00 208.21 47.14 255.36 Amplifier 5/90 Chest SL 7YR 5,614.42 3,074.56 802.06 3,876.62 Council Improvement (5-90) 12/90 A/R SL 7YR 695.00 421.96 99.29 521.25 Software 1/91 High SL 7YR 1,010.00 601.18 144.29 745.47 Voltage Power Supply 3/91 12- SL 7YR 2,400.00 1,371.43 342.86 1,714.29 Position Finishing Holders (2) 3/91 Blank Die- SL 7YR 447.20 255.54 63.89 319.43 Wrap Shield 3/91 Cabinet SL 7YR 280.00 153.33 40.00 193.33 4/91 Casing SL 7YR 728.00 398.67 104.00 502.67 Shim Die 7/91 Scopes & SL 7YR 1,524.89 762.45 217.84 980.29 Stations 8/91 Laminator SL 7YR 1,700.00 870.24 242.86 1,113.10 Mold 8/91 Bobbin SL 7YR 650.00 332.74 92.86 425.60 Mold 9/91 Rebuilt SL 7YR 470.20 235.10 67.17 302.27 Core Holder Insert 9/91 Temporary SL 7YR 1,100.00 550.00 157.14 707.14 Case Die 10/91 Heat Treat SL 7YR 3,131.66 1,528.55 447.38 1,975.93 Furnace 10/91 Various SL 7YR 1,715.00 837.08 245.00 1,082.08 Electronic Equipment 10/91 Lapping SL 7YR 250.00 122.02 35.71 157.74 Machine (Modified) 11/91 Merlyn SL 7YR 650.03 309.54 92.86 402.40 Phone System 11/91 Drafting SL 7YR 350.00 166.67 50.00 216.67 Table 11/91 Precision SL 7YR 262.38 124.94 37.48 162.43 Oven 1/92 Four SL 7YR 3,200.00 1,447.62 457.14 1,904.76 Cavity Bobin Mode 1/92 Equipment SL 7YR 329.18 148.91 47.03 195.94 2/92 Equipment SL 7YR 1,395.00 614.46 199.29 813.74 3/92 Window Die SL 7YR 860.00 368.57 122.86 491.43 (SCI) 3/92 Permanent SL 7YR 4,800.00 2,057.14 685.71 2,742.86 Tooling Case (SCI) 3/92 Assembly SL 7YR 490.00 210.00 70.00 280.00 Fixtures (SCI) 3/92 Finishing SL 7YR 580.00 248.57 82.86 331.43 Fixture (SCI) 3/92 Positioning SL 7YR 596.45 255.62 85.21 340.83 Fixtures for Write & Read (SCI) 3/92 Winding SL 7YR 350.00 150.00 50.00 200.00 Chuck Flash Taping Fixture (SCI) 4/92 4 Cavity SL 7YR 250.00 104.17 35.71 139.88 Cable Potting Mold 4/92 Ganged SL 7YR 1,975.47 823.11 282.21 1,105.32 Arbor Saws 7/92 4 Position SL 7YR 600.00 228.57 85.71 314.29 Form Grinding Fixture (7 Track) 8/92 Slotting & SL 7YR 490.00 180.83 70.00 250.83 Drilling Fixtures & Gang Saws 9/92 Equipment SL 7YR 1,010.00 360.71 144.29 505.00 9/92 Refrigerat SL 7YR 393.81 140.65 56.26 196.91 or 9/92 Equipment SL 7YR 290.00 103.57 41.43 145.00 10/92 Equipment SL 7YR 405.00 139.82 57.86 197.68 11/92 Punch SL 7YR 927.03 309.01 132.43 441.44 Press 11/92 Large SL 7YR 1,000.00 333.33 142.86 476.19 Winder 11/92 Small SL 7YR 400.00 133.33 57.14 190.48 Winder 11/92 Mill SL 7YR 250.00 83.33 35.71 119.05 12/92 Software SL 7YR 1,711.00 549.96 244.43 794.39 1/93 Window Die SL 7YR 965.00 298.68 137.86 436.54 5/94 4 Station SL 7YR 905.25 107.77 129.32 237.09 Grind Fixture TOTAL 269,400.04 226,970.68 17,379.29 244,349.97 OFFICE EQUIPMENT: 1986 Various SL 7YR 376.30 376.30 376.30 1987 Various SL 7YR 744.65 744.65 744.65 1989 Various SL 7YR 2,381.16 1,870.91 340.17 2,211.08 8/90 G/L SL 7YR 695.00 438.51 99.29 537.80 Software 8/90 A/P SL 7YR 695.00 438.51 99.29 537.80 Software 8/90 Bookcase, SL 7YR 413.40 260.84 59.06 319.89 Computer Stand, Metal Shelving, Black Cabinet 5/91 Office SL 7YR 196.10 107.39 28.01 135.40 Equipment 4/92 Computer SL 7YR 372.75 155.22 53.25 208.47 TOTAL 5,874.36 4,392.33 679.06 5,071.39 Schedule 1.1.3 Description of Orders and Agreements 1. Lease, dated September 12, 1990 (as amended by a certain (i) Rider, dated September 12, 1990, (ii) Amendment to Lease, dated November 19, 1990, and (iii) Agreement to Extend Lease, dated January 14, 1994), between Lutheran Brotherhood, a Minnesota corporation, and Mag-Head Engineering, Inc. (now known as Mag-Head Engineering Company, Inc.), a Minnesota corporation, by which the premises therein commonly described as 684-686 Mendelssohn Avenue North, Golden Valley, Minnesota are demised for a term commencing on September 12, 1990 and ending on January 31, 1997, a copy of which has been provided by Seller to Purchaser. Also, all lease deposits thereunder. 2. All Accounts Receivable Trade (including, without limitation, those identified on attached pages hereto) of Seller. 3. All GPT - A/R (including, without limitation, those identified on attached pages hereto) of Seller. 4. Copier lease with "Imaging Systems," provided to Purchaser by Seller. 5. All customer sales/purchase orders (including, without limitation, those identified on attached pages hereto) of Seller. MAG-HEAD ENGINEERING CUSTOMER SHIPPING SCHEDULE NOVEMBER 1995 MEC DUE DATE INV. # CUSTOMER QTY. $ VALUE DATE SHIPPED QTY. $ VALUE # 1096 DOD 15 $1,480.50 10-25 1014 B.E. 25 875.00 10-30 1014 B.E. 50 1,750.00 10-30 1205 GEORGENS 43 2,401.55 11-06 11-20 153 $8,545.05 3756 1041 ITC 11-21 2 264.00 3759 1084 HALL 3 195.00 11-10 1003 LORAL 100 6,430.00 11-15 1014 FIDELIPA 35 1,292.20 11-15 C 1004 LORAL 100 6,430.00 11-15 1082 PR&E 11-21 5 675.00 3758 1076 B&D 10 3,600.00 11-17 1084 ITC 64 2,459.52 11-20 1206 GEORGENS 100 5,585.00 11-20 1043 FIDELIPA 20 691.00 11-20 C 1206 GEORGENS 100 5,585.00 11-27 1119 LOCKHEED 42 6,827.52 11-29 11-21 8 1,300.45 3757 9 CH 3M 2 3,624.44 11-30 $49,226.73 SHIPPED: $10,784.53 TO BE SHIPPED: $49,226.73 NOV TOTAL: $60,011.26 DECEMBER 1995 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1206 GEORGENS 100 $5,585.00 12-4 1014 B.E. 50 1,750.00 12-7 1206 GEORGENS 40 2,234.00 12-11 1014 FIDELIPAC 35 1,292.20 12-15 1003 LORAL 120 7,716.00 12-15 1004 LORAL 100 6,430.00 12-15 1076 B&D 10 3,600.00 12-15 1084 ITC 80 3,074.40 12-18 2 GAP BRANDT 10 1,700.00 12-19 1043 FIDELIPAC 20 691.00 12-20 1096 DOD 200 19,740.00 12-24 TOOL PRECISION 1 815.00 12-27 REFURB PRECISION 2 600.00 12-27 1003 DOD 40 4,720.00 12-29 9 CH 3M 2 3,624.44 12-30 ??1069 SYGNETRON 3 250.00 12-30 7 $63,822.04 JANUARY 1996 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1004 LORAL 150 $10,117.50 1-3 SPACER 3M 200 3,116.00 1-4 S 1035 B.E. 25 695.00 1-8 1072 B.E. 15 483.75 1-8 1014 FIDELIPAC 35 1,292.20 1-15 1076 B&D 10 3,600.00 1-19 1043 FIDELIPAC 20 691.00 1-20 1084 ITC 80 3,074.40 1-22 1096 DOD 200 19,740.00 1-24 9 CH 3M 2 3,624.44 1-30 1157 PRIMUS 10K 48,800.00 1-30 $95,234.29 FEBRUARY 1996 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1014 B.E. 50 $1,750.00 2-7 1004 LORAL 150 10,117.50 2-9 1003 LORAL 100 6,745.00 2-9 1076 B&D 10 3,600.00 2-16 1157 PRIMUS 5000 24,400.00 2-13 1084 ITC 80 3,074.40 2-26 9 CH 3M 2 3,624.44 2-29 1157 PRIMUS 5000 24,400.00 2-27 $77,711.34 MARCH 1996 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1003 LORAL 100 $6,745.00 3-15 1076 B&D 10 3,600.00 3-15 9 CH 3M 2 3,624.44 3-30 $13,969.44 APRIL 1996 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1003 LORAL 100 $6,745.00 4-12 1004 LORAL 100 6,745.00 4-16 1076 B&D 10 3,600.00 4-19 $17,090.00 MAY 1996 DUE MEC # CUSTOMER QTY. $ VALUE DATE 1003 LORAL 100 $6,745.00 5-10 1076 B&D 10 3,600.00 5-17 $10,345.00 TOTAL BACKLOG 95- 96 $236,767.6 7 TOTAL BACKLOG: $278,172.1 1 UNSCHEDULED: DUE MEC # CUSTOMER QTY. $ VALUE DATE CASES MOS 3825 $5,163.75 1072 B.E. 170 5,482.50 1035 B.E. 325 9,035.00 1014 B.E. 400 14,000.00 $33,681.25 Schedule 1.1.4 Proprietary Rights All proprietary rights, service marks, patents, trademarks, copyrights, designs, brand names, trade names, processes, know-how, symbols, inventions, programs, trade secrets, logos and telephone numbers related to or connected with the Business, including, without limitation, the product catalogues used or distributed by Seller in connection with the Business and the names "MEC" and "Mag-Head Engineering Company," and all derivations thereof, all lists of suppliers, customers and prospects, all Federal and state applications for protection or registration of any of the foregoing and all intangibles appurtenant thereto. Schedule 1.2 Excluded Assets Prepaid insurance premiums and other prepaid expenses (excluding lease deposits). Schedule 1.3 Assumed Liabilities 1. Lease, dated September 12, 1990 (as amended by a certain (i) Rider, dated September 12, 1990, (ii) Amendment to Lease, dated November 19, 1990, and (iii) Agreement to Extend Lease, dated January 14, 1994), between Lutheran Brotherhood, a Minnesota corporation, and Mag-Head Engineering, Inc. (now known as Mag-Head Engineering Company, Inc.), a Minnesota corporation, by which the premises therein commonly described as 684-686 Mendelssohn Avenue North, Golden Valley, Minnesota are demised for a term commencing on September 12, 1990 and ending on January 31, 1997, a copy of which has been provided by Seller to Purchaser. Also, all lease deposits thereunder. 2. Copier lease with "Imaging Systems," provided to Purchaser by Seller. 3. All accounts payable identified on the attached pages hereto (unless otherwise paid for by Seller prior to the Closing) and all other unpaid accounts payable (which shall not, in any circumstance include (i) costs arising in connection with the consummation of the transactions under this Agreement and (ii) payroll and other employee expenses arising from Seller's termination of employees) incurred in the ordinary course of business of Seller from February 6, 1996 to the Closing.
MC Software, Inc. MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 PREP05 Accounts Payable - Aged Trial Balance Page 1 Aged on 10/31/95 ACCOUNT BALCURRENT DUE PAST DUE CREDIT 1-30 31-60 61-90 91-120 PRIOR ABR001 Abrasive Systems, Inc. 612-424-7400 175.90 0.00 175.90 0.00 87.95 87.95 0.00 0.00 0.00 AEI001 AEI Electronics Inc. 612-338-4754 21.48 0.00 21.48 0.00 0.00 21.48 0.00 0.00 0.00 AMP001 AMP Incorporated 708-351-5030 48.99 0.00 48.99 0.00 48.99 0.00 0.00 0.00 0.00 BAC001 Bacon Industries 617-926-2560 202.10 0.00 202.10 0.00 202.10 0.00 0.00 0.00 0.00 BOB-LESKO BOB LESKO 412-746-0899 225.60 0.00 225.60 0.00 0.00 225.60 0.00 0.00 0.00 BRO001 Browning Ferris Ind. 612-941-8394 104.42 0.00 104.42 0.00 104.42 0.00 0.00 0.00 0.00 BOS001 BT Office Products Intn'l 612-553-9500 30.98 0.00 30.98 0.00 30.98 0.00 0.00 0.00 0.00 CIMCO CIMCO 714-546-4460 360.05 0.00 360.05 0.00 0.00 360.05 0.00 0.00 0.00 COP001 Copy Duplicating Products 612-861-2412 115.02 0.00 115.02 0.00 115.02 0.00 0.00 0.00 0.00 DAC001 Dacon Manufacturing Co. 612-785-1400 15672.95 0.00 15672.95 0.00 14966.15 706.80 0.00 0.00 0.00 DEM001 Dempsey Industries, Inc. 90.92 0.00 90.92 0.00 90.92 0.00 0.00 0.00 0.00 EAS001 Eastech Chemical Inc. 215-537-1000 50.11 0.00 50.11 0.00 50.11 0.00 0.00 0.00 0.00 EEM001 Eemus Manufacturing Corp. 818-331-1776 2019.39 0.00 2019.39 0.00 2019.39 0.00 0.00 0.00 0.00 ELE003 Electrical Insulations 414-251-9650 268.22 0.00 268.22 0.00 157.82 110.40 0.00 0.00 0.00 EIT ENHANCED TELEMANAGEMENT 342-2255 266.61 266.61 0.00 0.00 0.00 0.00 0.00 0.00 0.00 EXP001 Express Messenger 612-623-5900 28.05 0.00 28.05 0.00 28.05 0.00 0.00 0.00 0.00 FID001 Fidelity Products Co. 612-536-6500 37.97 0.00 37.97 0.00 37.97 0.00 0.00 0.00 0.00 AMERICAN FUNDS SERVICE CO 1353.06 0.00 1353.06 0.00 1353.06 0.00 0.00 0.00 0.00 GOLFSMITH GOLFSMITH 800-456-5344 194.55 0.00 194.55 0.00 89.35 105.20 0.00 0.00 0.00 GRA001 W.W. Grainger, Inc. 612-559-0406 22.91 0.00 22.91 0.00 0.00 22.91 0.00 0.00 0.00 GRANT GRANT THORNTON 332-0001 425.00 425.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 GTE GTE DIRECTORIES 831-5553 16.20 16.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 HARDCOAT HARDCOAT, INC. 612-935-5715 70.00 0.00 70.00 0.00 70.00 0.00 0.00 0.00 0.00 HONEYWELL HONEYWELL EMPLOYEE'S CLUB 31.99 0.00 31.99 0.00 31.99 0.00 0.00 0.00 0.00 IND002 Industrial Plastics, Mpls 612-721-6444 445.20 0.00 445.20 0.00 445.20 0.00 0.00 0.00 0.00 INVEST INVEST CAST INC 788-6965 2295.11 0.00 2295.11 0.00 2295.11 0.00 0.00 0.00 0.00 KUI001 Kuipers Hardware 612-545-9627 32.43 11.91 20.52 0.00 20.52 0.00 0.00 0.00 0.00 116.75 0.00 116.75 0.00 116.75 0.00 0.00 0.00 0.00 NEW001 New England Electric Wire 803-838-6628 486.10 0.00 486.10 0.00 486.10 0.00 0.00 0.00 0.00 NOR002 Northern Airgas, Inc. 612-421-8980 26.64 13.54 13.10 0.00 0.00 13.10 0.00 0.00 0.00 OMI001 Omicron Tool 612-856-4142 1685.30 130.00 1556.30 0.00 227.50 1327.80 0.00 0.00 0.00 PACKNET PACKNET LTD 612-884-7517 771.26 432.62 338.64 0.00 338.64 0.00 0.00 0.00 0.00 PATRYAN PAT RYAN GOLF PRODUCTS 922-6924 62.46 0.00 128.46 -66.00 62.46 0.00 0.00 0.00 66.00 PRECISION PRECISION REPAIR, INC 612-784-1704 269.25 0.00 269.25 0.00 269.25 0.00 0.00 0.00 0.00 TADSON TADSON INC 612-441-4410 336.00 0.00 336.00 0.00 336.00 0.00 0.00 0.00 0.00 TWI001 Twin City Oxygen Co. 612-628-4848 42.66 25.06 17.60 0.00 0.00 17.60 0.00 0.00 0.00 UNI002 United Parcel Service 800-378-0700 188.36 0.00 188.36 0.00 188.36 0.00 0.00 0.00 0.00 US-WEST US WEST DIRECT 800-422-1234 38.80 0.00 38.80 0.00 38.80 0.00 0.00 0.00 0.00 VISA BANKCARD CENTER800-344-5696 254.83 0.00 254.83 0.00 254.83 0.00 0.00 0.00 0.00 WAR001 Warner Industrial Supply 612-378-7300 242.98 0.00 242.98 0.00 34.62 208.36 0.00 0.00 0.00 WIFFLER MARK WIFFLER 10.97 10.97 0.00 0.00 0.00 0.00 0.00 0.00 0.00 WLG001 W.L. Gore & Associates 512-276-7800 2078.02 0.00 2078.02 0.00 0.00 2078.02 0.00 0.00 0.00 31205.59 1331.91 29839.68 -66.00 24596.41 5275.27 0.00 0.00 66.00
MC Software, Inc. MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 PREP07 Accounts Payable Invoice Register Page 1 OPEN INVOICES DISC. INVOICE # TYPE P/ORDER DATE DUE DATE AMOUNT BALANCE DIS DATE AMOUNT TOTAL PAY ABR001 Abrasive Systems, Inc. 0018867 INVOICE 5048 09/11/95 10/11/95 87.95 87.95 0.00 87.95 0020318 INVOICE 5048 10/09/95 11/08/95 87.95 87.95 0.00 87.95 ________ ________ _______ _______ 175.90 175.90 0.00 175.90 AEI001 AEI Electronics Inc. 094008-0 INVOICE 5078 09/26/95 10/26/95 21.48 21.48 0.00 21.48 ________ ________ _______ _______ 21.48 21.48 0.00 21.48 AMP001 AMP Incorporated F1450373 INVOICE 10/01/95 10/31/95 48.99 48.99 0.00 48.99 ________ ________ _______ ________ 48.99 48.99 0.00 48.99 BAC001 Bacon Industries 0076730 INVOICE 5057 10/19/95 11/18/95 202.10 202.10 0.00 202.10 ________ ________ _______ ________ 202.10 202.10 0.00 202.10 BOB-LESKO BOB LESKO COMM-PAY INVOICE 09/29/95 09/29/95 225.60 225.60 0.00 225.60 ________ ________ _______ ________ 225.60 225.60 0.00 225.60 BRO001 Browning Ferris Ind. 9001049873 INVOICE 10/01/95 10/31/95 104.42 104.42 0.00 104.42 ________ ________ _______ ________ 104.42 104.42 0.00 104.42 001 BT OFFICE PRODUCTS INTN'L 2948530 INVOICE 5101 10/24/95 11/23/95 30.98 30.98 0.00 30.98 ________ ________ _______ ________ 30.98 30.98 0.00 30.98 CIMCO CIMCO 0044896 INVOICE 5034 09/26/95 10/26/95 350.05 350.05 0.00 350.05 ________ ________ _______ ________ 350.05 350.05 0.00 350.05 COP001 Copy Duplicating Products 2207660 INVOICE 10/01/95 10/31/95 115.02 115.02 0.00 115.02 ________ ________ _______ ________ 115.02 115.02 0.00 115.02 DAC001 Dacon Manufacturing Co. 0031673 INVOICE 5053 09/21/95 10/21/95 706.80 706.80 0.00 706.80 0031720 INVOICE 5000 10/01/95 10/31/95 3075.60 3075.60 0.00 3075.60 0031721 INVOICE 4729 10/01/95 10/31/95 3510.00 3510.00 0.00 3510.00 0031746 INVOICE 5056 10/06/95 11/05/95 1728.23 1728.23 0.00 1728.23 0031816 INVOICE 4764 10/20/95 11/19/95 485.40 485.40 0.00 485.40 0031817 INVOICE 4764 10/20/95 11/19/95 510.30 510.30 0.00 510.30 0031855 INVOICE 4729 10/27/95 11/26/95 1029.60 1029.60 0.00 1029.60 0031856 INVOICE 4729 10/27/95 11/26/95 1006.20 1006.20 0.00 1006.20 0031857 INVOICE 5000 10/27/95 11/26/95 1782.45 1782.45 0.00 1782.45 0031858 INVOICE 5000 10/27/95 11/26/95 1838.37 1838.37 0.00 1838.37 ________ ________ _______ ________ 15672.95 15672.95 0.00 15672.95 IBM001 Dempsey Industries, Inc. 0085582 INVOICE 5082 10/01/95 10/31/95 90.92 90.92 0.00 90.92 ________ ________ _______ ________ 90.92 90.92 0.00 90.92 EAS001 Eastech Chemical Inc. 0086450 INVOICE 5071 10/24/95 11/23/95 50.11 50.11 0.00 50.11 ________ ________ _______ ________ 50.11 50.11 0.00 50.11 EEM001 Eemus Manufacturing Corp. I-94582 INVOICE 5001 10/02/95 11/01/95 2019.39 2019.39 0.00 2019.39 ________ ________ _______ ________ 2019.39 2019.39 0.00 2019.39 ELE008 Electrical Insultations 6598905 INVOICE 5079 09/26/95 10/26/95 110.40 110.40 0.00 110.40 6638755 INVOICE 5097 10/26/95 11/25/95 157.82 157.82 0.00 157.82 ________ ________ _______ ________ 268.22 268.22 0.00 268.22 ETI ENHANCED TELEMANAGEMENT DUE110995 INVOICE 10/31/95 11/09/95 266.61 266.61 0.00 266.61 ________ ________ _______ ________ 266.61 266.61 0.00 266.61 EXP001 Express Messenger 08-169229 INVOICE 10/15/95 11/14/95 28.05 28.05 0.00 28.05 ________ ________ _______ ________ 28.05 28.05 0.00 28.05 FID001 Fidelity Products Co. 0512918 INVOICE 5080 10/04/95 11/03/95 37.97 37.97 0.00 37.97 ________ ________ _______ ________ 37.97 37.97 0.00 37.97 K AMERICAN FUNDS SERVICE CO 0100695 INVOICE 10/06/95 10/06/95 676.53 676.53 0.00 676.53 102095-401 INVOICE 10/20/95 10/20/95 676.53 676.53 0.00 676.53 ________ ________ _______ ________ 1363.06 1363.06 0.00 1363.06 GOLFSMITH GOLFSMITH 4146018 INVOICE 09/20/95 10/20/95 105.20 105.20 0.00 105.20 4211113 INVOICE 10/24/95 11/23/95 89.35 89.35 0.00 89.35 ________ ________ _______ ________ 194.55 194.55 0.00 194.55 GRA001 W.W. Grainger, Inc. 4952971663 INVOICE 5081 09/25/95 10/25/95 22.91 22.91 0.00 22.91 ________ ________ _______ ________ 22.91 22.91 0.00 22.91 GRANT GRANT THORNTON 401K-SEMI INVOICE 10/31/95 11/30/95 425.00 425.00 0.00 425.00 ________ ________ _______ ________ 425.00 425.00 0.00 425.00 GTE GTE DIRECTORIES GPT-AD INVOICE 10/31/95 11/15/95 16.20 16.20 0.00 16.20 ________ ________ _______ ________ 16.20 16.20 0.00 16.20 HARDCOAT HARDCOAT, INC. 10239683 INVOICE 5096 10/23/95 11/22/95 70.00 70.00 0.00 70.00 ________ ________ _______ ________ 70.00 70.00 0.00 70.00 HONEYWELL HONEYWELL EMPLOYEE'S CLUB GPT795 INVOICE H 10/19/95 11/03/95 31.99 31.99 0.00 31.99 ________ ________ _______ ________ 31.99 31.99 0.00 31.99 IND002 Industrial Plastics, Mpls 0022871 INVOICE 5066 10/04/95 11/03/95 445.20 445.20 0.00 445.20 ________ ________ _______ ________ 445.20 445.20 0.00 445.20 INVEST INVEST CAST INC 0026761 INVOICE 5033 10/01/95 10/31/95 2295.11 2295.11 0.00 2295.11 ________ ________ _______ ________ 2295.11 2295.11 0.00 2295.11 KUI001 Kuipers Hardware 0010276 INVOICE 10/27/95 11/26/95 2.08 2.08 0.00 2.08 0100295 INVOICE 10/02/95 11/01/95 2.32 2.32 0.00 2.32 0100495 INVOICE 10/04/95 11/08/95 16.12 16.12 0.00 16.12 0103095 INVOICE 10/31/95 11/30/95 11.91 11.91 0.00 11.91 ________ ________ _______ ________ 32.43 32.43 0.00 32.43 DUE110895 INVOICE 10/19/95 11/03/95 116.75 116.75 0.00 116.75 ________ ________ _______ ________ 116.75 116.75 0.00 116.75 NEW001 New England Electric Wire 0009606 INVOICE 5059 10/01/95 10/31/95 486.10 486.10 0.00 486.10 ________ ________ _______ ________ 486.10 486.10 0.00 486.10 NOR002 Northern Airgas, Inc. 0835355 INVOICE 09/30/95 10/30/95 13.10 13.10 0.00 13.10 0837254 INVOICE 10/31/95 11/30/95 13.54 13.54 0.00 13.54 ________ ________ _______ ________ 26.64 26.64 0.00 26.64 OMI001 Omicron Tool 0009909 INVOICE 5040 09/01/95 10/01/95 150.00 150.00 0.00 150.00 0009922 INVOICE 5024 09/14/95 10/14/95 125.00 125.00 0.00 125.00 0009923 INVOICE 4731 09/14/95 10/14/95 150.00 150.00 0.00 150.00 0009924 INVOICE 4631 09/14/95 10/14/95 187.50 187.50 0.00 187.50 0009925 INVOICE 5054 09/14/95 10/14/95 95.00 95.00 0.00 95.00 0009926 INVOICE 5075 09/18/95 10/18/95 195.30 195.30 0.00 195.30 0009927 INVOICE 5011 09/18/95 10/18/95 425.00 425.00 0.00 425.00 0009940 INVOICE 5085 10/12/95 11/11/95 86.00 86.00 0.00 86.00 0009941 INVOICE 5075 10/17/95 11/16/95 141.50 141.50 0.00 141.50 9XXXX-1914 INVOICE 5103 10/31/95 11/30/95 130.00 130.00 0.00 130.00 ________ ________ _______ ________ 1685.30 1685.30 0.00 1685.30 PACKNET PACKNET LTD 0041177 INVOICE 10/03/95 10/23/95 137.12 137.12 0.00 137.12 0041408 INVOICE 10/25/95 11/14/95 201.52 201.52 0.00 201.52 0041417 INVOICE 5068 10/31/95 11/20/95 432.62 432.62 0.00 432.62 ________ ________ _______ ________ 771.26 771.26 0.00 771.26 PATRYAN PAT RYAN GOLF PRODUCTS 0000746 INVOICE 10/19/95 11/18/95 24.46 24.46 0.00 24.46 0000756 INVOICE 10/30/95 11/29/95 38.00 38.00 0.00 38.00 0001486 INVOICE 04/11/95 05/11/95 66.00 66.00 0.00 66.00 0001486 CREDIT 04/30/95 04/30/95 -66.00 -66.00 0.00 -66.00 ________ ________ _______ ________ 62.46 62.46 0.00 62.46 PRECISION PRECISION REPAIR, INC 0102232 INVOICE 4781 10/01/95 10/16/95 240.00 240.00 0.00 240.00 0102320 INVOICE 4781 10/05/95 10/20/95 29.25 29.25 0.00 29.25 ________ ________ _______ ________ 269.25 269.25 0.00 269.25 TADSON TADSON INC 0006572 INVOICE 5084 10/04/95 11/03/95 336.00 336.00 0.00 336.00 ________ ________ _______ ________ 336.00 336.00 0.00 336.00 TWI001 Twin City Oxygen Co. 0362958 INVOICE 09/29/95 10/29/95 17.60 17.60 0.00 17.60 0364520 INVOICE 10/31/95 11/30/95 25.06 25.06 0.00 25.06 ________ ________ _______ ________ 42.66 42.66 0.00 42.66 UNI002 United Parcel Service 0102195 INVOICE 10/21/95 10/31/95 129.43 129.43 0.00 129.43 0102895 INVOICE 10/28/95 11/07/95 58.93 58.93 0.00 58.93 ________ ________ _______ ________ 188.36 188.36 0.00 188.36 US-WEST US WEST DIRECT 1756178000 INVOICE 10/22/95 11/06/95 38.80 38.80 0.00 38.80 ________ ________ _______ ________ 38.80 38.80 0.00 38.80 VISA BANKCARD CENTER QUALITY= INVOICE 5980 10/24/95 11/13/95 254.83 254.83 0.00 254.83 ________ ________ _______ ________ 254.83 254.83 0.00 254.83 WAR001 Warner Industrial Supply 1173980-01 INVOICE 5077 09/26/95 10/26/95 208.36 208.36 0.00 208.36 1173980-02 INVOICE 5077 10/24/95 11/23/95 34.62 34.62 0.00 34.62 ________ ________ _______ ________ 242.98 242.98 0.00 242.98 WIFFLER MARK WIFFLER COMM INVOICE 10/31/95 11/05/95 10.97 10.97 0.00 10.97 ________ ________ _______ ________ 10.97 10.97 0.00 10.97 WLG001 W.L. Gore & Associates 36083-10 INVOICE 5023 09/25/95 09/25/95 2078.02 2078.02 0.00 2078.02 ________ ________ _______ ________ 2078.02 2078.02 0.00 2078.02 ========= ========= ======= ======== 31205.59 31205.59 0.00 31205.59
MC Software, Inc. MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 PREP05 Accounts Receivable - Aged Trial Balance Page 1 Aged on 10/31/95 ACCOUNT BALCURRENT DUE PAST DUE CREDIT 1-30 31-60 61-90 91-120 PRIOR 3-M 3M ACCOUNTS PAYABLE 9422.55 4122.55 5300.00 0.00 300.00 5000.00 0.00 0.00 0.00 AIWA AIWA CO., LTD TECH CENTER ###-##-#### 1091.00 0.00 1091.00 0.00 0.00 1091.00 0.00 0.00 0.00 B&D B. & D. INSTRUMENTS INC. 316-786-1223 7208.50 0.00 7208.50 0.00 0.00 7208.50 0.00 0.00 0.00 BRO001 Broadcast Electronics Inc 217-224-9600 3585.75 1184.72 2401.03 0.00 0.00 2401.03 0.00 0.00 0.00 FT MEAD ACCOUNTS PAYABLE 301-859-5710 56764.90 19641.30 37123.60 0.00 21830.00 15293.60 0.00 0.00 0.00 ESI001 ELECTRO SOUND INC. 899.09 899.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 FID001 FIDELIPAC CORPORATION 609-235-3900 152.68 152.68 0.00 0.00 0.00 0.00 0.00 0.00 0.00 GEORGENS GEORGENS INDUSTRIES INC 619-481-8114 34712.55 13944.63 20767.72 0.00 13298.54 7469.18 0.00 0.00 0.00 HAL001 HALL ELECTRONICS 804-964-4255 717.18 197.93 519.25 0.00 0.00 519.25 0.00 0.00 0.00 ICT001 ICT, Ltd. Unit 74 01144932572215 3212.95 0.00 3212.95 0.00 0.00 3212.95 0.00 0.00 0.00 ITC001 International Tapetronics 309-828-1381 9191.32 0.00 9191.32 0.00 1818.38 4621.97 2750.97 0.00 0.00 LOR001 Loral Fairchild Corp. 813-376-6922 35345.50 22485.50 12860.00 0.00 0.00 12860.00 0.00 0.00 0.00 OTA001 Otari Corporation 415-341-6900 773.25 0.00 773.25 0.00 0.00 773.25 0.00 0.00 0.00 PAC001 Pacific Recorders & Eng. 619-436-3911 681.25 0.00 681.25 0.00 0.00 681.25 0.00 0.00 0.00 SCI001 SCI Systems, Inc. 205-882-4800 36106.25 0.00 36106.25 0.00 0.00 36106.25 0.00 0.00 0.00 SEAGATE SEAGATE 66.00 0.00 66.00 0.00 0.00 66.00 0.00 0.00 0.00 XEL001 XEL COMMUNICATIONS, INC. 303-369-7000 24.40 0.00 24.40 0.00 0.00 24.40 0.00 0.00 0.00 199965.12 62628.60 137326.52 0.00 37246.92 97328.63 2750.97 0.00 0.00
OCTOBER 1995 HONEYWELL SALES INVOICE COMM COMM AMOUNT DATE A/R HOW DIV # CUSTOMER SALE AMOUNT SALES $ TAX LABOR FREIGHT TOTAL TOTAL % PAID PAID DUE PAY?? ____ __________ ___________ ________ _____ _____ _______ _______ _____ _____ _______ _______ ______ _______ 609 ROD WALK 7-6-95 $200.22 769 TOM RAPPO 9-20-95 $202.50 10-20-95 AMP CHECK AMP SERVICES 774 EDITH KLAUSER 9-95 130.50 10-31-95 CHECK 5743 781 EDITH KLAUSER $67.00 $0.00 $0.00 $0.00 $67.00 $4.69 $0.07 67.00 10-31-95 CHECK 5743 782 TONY PRICE 8.58 0.56 0.00 0.00 8.14 0.60 0.07 9.14 10-4-95 CASH 783 WIILY 25.71 1.67 0.00 0.00 27.38 1.50 0.07 27.38 10-4-95 CASH 784 DOUG SWANSON 0.00 0.00 0.00 0.00 5.00 0.35 0.07 6.00 10-17-95 CASH 785 COLETTE OSBERG 150.00 9.75 0.00 0.00 159.75 10.50 0.07 159.75 10-11-95 CHECK 7111 786 JERRY AUGESON 0.00 0.00 25.00 0.00 25.00 1.75 0.07 25.00 10-11-95 CHECK 8382 787 COLETTE OSBERG 12.00 0.78 4.50 0.00 17.28 1.16 0.07 17.28 10-11-95 CHECK 7111 788 BOB RETHSEN 10.00 0.65 4.00 0.00 14.65 0.98 0.07 14.65 10-13-95 CASH 789 WILLY 13.65 0.89 0.00 0.00 14.54 0.96 0.07 14.54 10-13-95 VISA 790 VOID VOID VOID VOID VOID VOID VOID VOID VOID VOID VOID VOID VOID VOID 791 RON ROOFES 23.50 1.53 0.00 0.00 25.08 1.65 0.07 25.08 10-24-95 CHECK 4138 792 GUY FIRAS 100.00 6.50 0.00 0.00 106.50 7.00 0.07 106.50 10-16-95 CHECK 1086 793 AL INGALLS 18.00 1.17 4.00 0.00 23.17 1.54 0.07 23.17 10-18-95 CHECK 5309 794 BOB RETHSEN 8.75 0.57 7.50 0.00 16.82 1.14 0.07 16.82 10-18-95 CASH 795 DOUG HECQUIST 158.00 $199.99 13.00 0.00 0.00 181.00 11.76 0.07 212.98 10-20-95 CHECK 3677 (31.99) HONEYWELL $ 796 DOUG HECQUIST 165.00 10.73 0.00 0.00 175.73 11.56 0.07 175.73 10-20-95 CHECK 3677 797 DOUG HECQUIST 78.50 5.10 0.00 0.00 83.60 5.50 0.07 83.80 10-25-95 CHECK 3632 798 GENE BERGSTROM 424.50 0.00 0.00 0.00 424.50 29.72 0.07 424.50 10-25-95 VISA 799 ART HONEGGER 336.00 0.00 0.00 17.00 362.00 23.45 0.07 $352.00 800 JIM BUDLA 75.00 4.88 0.00 0.00 79.88 5.25 0.07 79.88 10-27-95 CHECK 5672 801 JIM JOROAN 338.00 0.00 0.00 0.00 338.00 23.66 0.07 338.00 802 BEN S LER 268.00 17.42 0.00 0.00 285.42 18.76 0.07 VISA IN 10-31-95 285.42 VISA 10-31 TRANSIT $2,289.19 $199.99 $75.18 $50.00 $17.00 $2,431.37 $163.74 7% $1,788.96 $1,175.64 CLAYTON
Schedule 1.3.1 Assignment of Lease See attached. ASSIGNMENT OF LEASE Assignment of the Lease ("Lease"), dated September 12, 1990 (as amended by a certain (i) Rider, dated September 12, 1990, (ii) Amendment to Lease, dated November 19, 1990, and (iii) Agreement to Extend Lease, dated January 14, 1994), between Lutheran Brotherhood, a Minnesota corporation ("Landlord"), and Mag-Head Engineering, Inc. (now known as Mag-Head Engineering Company, Inc.), a Minnesota corporation ("Tenant"), by which the premises herein commonly described as 684-686 Mendelssohn Avenue North, Golden Valley, Minnesota (the "Premises") are demised for a term commencing on September 12, 1990 and ending on January 31, 1997. ASSIGNMENT BY TENANT For value received, Tenant does hereby assign all of Tenant's right, title and interest in and to the Lease from and after February __, 1996 (the "Assignment Date") unto Ahead Technology Acquisition Corporation, a Delaware corporation ("Assignee"). The Premises are to be used and occupied for office, warehouse and manufacturing purposes in connection with the electrical component, magnetic recording head and golf club business, and all related or reasonably comparable purposes, and for no other purpose. Tenant shall not be liable for obligations arising under the Lease following the Assignment Date. Notwithstanding the foregoing, it is expressly agreed that this assignment shall not release or relieve Tenant from any liability under the Lease for any obligations or events incurred or arising, or activities conducted on or condition of the Premises, prior to the Assignment Date. Dated: February __, 1996 TENANT: MAG-HEAD ENGINEERING, INC. (not known as MAG-HEAD ENGINEERING COMPANY, INC.) By: ______________________ Its: ______________________ ACCEPTANCE OF TENANT'S ASSIGNMENT In consideration of the above Assignment and of the written consent of Landlord thereto, Assignee (binding also Assignee's heirs, successors and assigns) hereby assumes and agrees to make all payments and to perform and keep all promises, covenants and conditions and agreements of the Lease by Tenant to be made, kept and performed from and after the Assignment Date. Notwithstanding the foregoing, it is expressly agreed that Assignee shall not be liable under the Lease for any obligations or events incurred or arising, or activities conducted on or condition of the Premises, prior to the Assignment Date. Dated: February __, 1996 ASSIGNEE: AHEAD TECHNOLOGY ACQUISITION CORPORATION By: ______________________ Its: ______________________ CONSENT TO TENANT'S ASSIGNMENT Landlord hereby consents to the foregoing assignment of the Lease by Tenant to Assignee in consideration of the Tenant's promises, covenants and agreements herein above expressed, and upon the express condition that Tenant shall remain liable for any obligations or events incurred or arising, or activities conducted on or condition of the Premises, prior to the Assignment Date, and in consideration likewise of the covenants, promises and agreements of Assignee above set forth. Landlord does not consent to any further assignment of the Lease nor to any subletting of the Premises or any part thereof. Landlord has not at any time in the past engaged in nor permitted, and has no knowledge that any third person or entity engaged in or permitted any operations or activities upon, or any use or occupancy of the Premises, or any portion thereof, for the purpose of or in any way involving the handling, manufacturing, treatment, storage, use, transportation, spillage, leakage, dumping, discharge or disposal (whether legal or illegal, accidental or intentional) of any hazardous substances, materials or wastes, or any wastes regulated under any local, state or federal law. Dated: February __, 1996 LANDLORD: LUTHERAN BROTHERHOOD By: ______________________ Its: ______________________ Schedule 2.4 Allocation Asset Allocation Cash $ 72,503.00 Deposits 1,685.00 Accounts Receivable 201,130.00 Inventory 175,643.00 Fixed Assets 36,030.00 $486,991.00 Less: Accounts Payable as of 10/31/95 30,965.00 Purchase Price $456,026.00 Schedule 3.2 Capitalization See Attached. Sheet 1 MEC stockholders as provided [9/28/95] Total shares 561,362 outstanding Initial Capitalization @ $1/ea. 561,362 Employees: # Shares Initial $ Value/ea. Loss Paul Michael 120,000 120,000 84,994.80 35,005.20 (President) Willy Schrepfer 38,000 38,000 26,915.02 11,084.98 (Operations) Outsiders: Dave Johnson 220,000 220,000 155,823.80 64,176.19 Haley 68,000 68,000 48,163.72 19,836.28 Christensen 66,000 66,000 46,747.14 19,252.86 Vladimir 50,000 50,000 35,414.50 14,585.50 Total shares 562,000 Present Networth 396,059 398,059 163,941 Present price/share 0.70829 Schedule 3.3 Financial Statements See Attached. MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 Balance Sheet Page 1 Tuesday, October 31, 1995 CURRENT ASSETS PETTY CASH 50 CASH-CHECKING 72453 CASH-SAVINGS 0 RENT DEPOSITS 1685 MED-GPT RENT/REVEIVABLE 0 ACCOUNTS RECEIVE TRADE 199955 GPT-A/R 1175 GPT-INVENTORY 20759 GPT-F/G 11211 INVENTORY - P/P 78133 INVENTORY - WIP 59251 INVENTORY - F/G 32673 SUSPENSE ACCOUNT 0 PREPAID EXPENSES 2356 TOTAL CURRENT ASSETS 479701 FIXED ASSETS LEASEHOLD IMPROVEMENTS 490 MACHINERY & EQUIPMENT 271368 OFFICE EQUIPMENT 8386 ACCUMULATED DEPRECIATE 244214 TOTAL FIXED ASSETS: 36030 OTHER ASSETS TOTAL ASSETS 515731 MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 Balance Sheet Page 2 Tuesday, October 31, 1995 CURRENT LIABILITIES ACCOUNTS PAYABLE 30965 GPT-A/P 0 ACCRUED PAYROLL 12822 NOTE PAYABLE-1ST BANK 0 MISC PAYROLL DEDUCTION ( 1) DIVIDENDS PAYABLE 0 FED/FICA TAX 0 STATE TAX 0 401K PAYABLE 386 GPT COMMISSIONS PAYABLE ( 1) GPT-EMPLOYEE COMM 1 GPT-HONEYWELL COMM 0 MEC SALES TAX PAYABLE 0 GPT-SALES TAX PAYABLE 75 ________ TOTAL CURRENT LIABIL 44247 LONG TERM LIABILITIES: TOTAL LONG-TERM LIA 0 TOTAL LIABILITIES 44247 EQUITY COMMON STOCK 5614 PAID IN CAPITAL 543386 RETAINED EARNINGS ( 150854) EARNINGS CURRENT 73360 TOTAL EQUITY 471495 TOTAL LIAB & EQUITY 615743 MAG-HEAD ENGINEERING COMPANY, INC. 10/31/95 Income Statement Page 1 Tuesday, October 31, 1995 Period %SALES Year to Date %SALES REVENUE SALES MANUFACTURED HEAD 99718 97.71 566524 75.66 SALES RETURNS 0 0.00 44 0.01 SALES-NOT MFG MEC 0 0.00 90009 12.02 GPT-SALES 2339 2.29 92238 12.32 TOTAL REVENUE 102057 100.00 748815 100.00 COST OF GOODS SOLD COST OF MATERIALS 28645 28.07 140970 18.83 GPT-COGS 1156 1.13 64722 8.64 DIRECT LABOR 15144 14.84 105619 14.10 GPT-DIRECT LABOR 0 0.00 7305 0.98 MFG ENG SALARY 5415 5.31 41561 5.55 OUTSIDE LABOR 200 0.20 8586 1.15 PRODUCTION SALARY 2877 2.82 22673 3.03 PAYROLL TAXES 1892 1.85 20104 2.68 OUTSIDE ENG SUPPORT 0 0.00 120 0.02 WORKERS COMP INS 845 0.83 3946 0.53 GENERAL INS 496 0.49 3968 0.53 HEALTH INS 1413 1.38 10690 1.43 BUILDING RENT 4583 4.49 36110 4.82 UTILITIES 485 0.48 4521 0.60 EQUIPMENT RENTAL 164 0.16 1742 0.23 SMALL TOOLS 0 0.00 296 0.04 PACKAGING SUPPLIES 771 0.76 3904 0.52 GPT-PACKAGING 0 0.00 0 0.00 GPT-PRODUCTION SUPPLIES 7 0.01 547 0.07 PRODUCTION SUPPLIES 257 0.25 6109 0.82 TOOLING MAINTENANCE 270 0.26 1803 0.24 BUILDING MAINTENANCE 242 0.24 1944 0.26 POSTAGE & FREIGHT 274 0.27 1068 0.14 GPT-FREIGHT 0 0.00 0 0.00 DEPRECIATION 1423 1.39 12361 1.65 OTHER PROD EXPENSES 0 0.00 0 0.00 COGS-NOT MFG MEC 0 0.00 69729 9.31 TOTAL COGS SOLD: 66559 65.22 570398 76.17 OPERATION EXPENSES ADMINISTRATIVE SALARIES 0 0.00 0 0.00 OFFICE SUPPLIES 12 0.01 525 0.07 GPT-OFFICE SUPPLIES 19 0.02 1550 0.21 PAYROLL TAXES 919 0.90 8296 1.11 TRAVEL 812 0.80 1903 0.25 TELEPHONE 373 0.37 3820 0.51 BAD DEBT EXPENSE 2487 2.44 2487 0.33 ENTERTAINMENT 0 0.00 161 0.02 CONSULTING 0 0.00 0 0.00 CONTRIBUTIONS 0 0.00 0 0.00 DUES & SUBSCRIPTIONS 24 0.02 519 0.07 GPT-SUBSCRIPTIONS 0 0.00 15 0.00 DESIGN ENG SALARIES 2178 2.13 27545 3.68 ACCOUNTING 93 0.09 2252 0.30 OFFICE SALARIES 1667 1.63 13395 1.79 SALES SALARIES 3470 3.40 26385 3.52 GPT SALES SALARIES 3215 3.15 10877 1.45 LEGAL 0 0.00 691 0.09 MISC ADMINISTRATIVE EXP 0 0.00 85 0.01 GPT-VISA SERVIC CHARGE 27 0.03 788 0.11 TOTAL OPER EXPENSES: 15494 15.18 102258 13.66 OTHER INCOME & EXPENSE 401K EXPENSE 663 0.65 2799 0.37 INTEREST INCOME 0 0.00 0 0.00 INTEREST EXPENSE 0 0.00 0 0.00 INCOME TAXES 0 0.00 0 0.00 LEGAL SETTLEMENT 0 0.00 0 0.00 TOTAL OTHER IN & EXP: ( 663) (0.65)( 2799) ( 0.37) NET INCOME (LOSS) 19342 18.95 73360 9.80 Schedule 3.10 Real Property 1. Lease, dated September 12, 1990 (as amended by a certain (i) Rider, dated September 12, 1990, (ii) Amendment to Lease, dated November 19, 1990, and (iii) Agreement to Extend Lease, dated January 14, 1994), between Lutheran Brotherhood, a Minnesota corporation, and Mag-Head Engineering, Inc. (now known as Mag- Head Engineering Company, Inc.), a Minnesota corporation, by which the premises therein commonly described as 684-686 Mendelssohn Avenue North, Golden Valley, Minnesota are demised for a term commencing on September 12, 1990 and ending on January 31, 1997, a copy of which has been provided by Seller to Purchaser. Also, all lease deposits thereunder. Schedule 3.11 Hazardous Substances Seller shall be solely responsible for the prompt and lawful removal from the Premises, disposal and required registration of the freon parts cleaner and freon degreaser identified on the attached page. Seller shall additionally be responsible for the payment of all expenses, fines, penalties and taxes related thereto. * Presence of a partially filled drum of spent freon parts cleaner at the loading dock area. Although Mag-Head stopped the use of freon for parts cleaning several years ago, the waste solvent has been stored at the site since that time. * A flammable material storage locker in the golf club fabrication area contained two five gallon cans of freon degreaser, one of which was labeled as "new" and the other as "used." This spent freon must be properly managed as a hazardous waste and is further subject to the requirements of management as an ozone depleting chemical (ODC). Proper disposal will include: * Mag-Head must register through Hennepin County as a small quantity hazardous waste generator. * After registration and obtaining an ID#, Mag-Head must arrange for proper pick-up, transport, and disposal of the spent freon. * There may be some liability for back taxes on the freon as an ODC (26 CFR 52). Schedule 3.12 Employee Agreements See Attached. August 1, 1995 Subject: Simplified Pay System For Clayton From: Paul Michael Pay Clayton $32,000.00/26 pay periods = $1,230.77/per pay period. We will review sales quarterly to determine where we stand regarding commission sales. The next review will be at the end of October. Our salary package with Clayton is $2,000.00 per month plus $7% of all golf sales. We also agreed to $32,000.00 per year as a minimum salary. We need to sell $115,000.00 per year in order to break even with the $1,230.77 per pay period for Clayton. I believe that we can exceed $115,000.00 and therefore the need for tracking sales will be to determine the extra pay that Clayton will receive. This will eliminate the need for a complicated accounting method to determine Clayton's pay. Schedule 3.13 Key Suppliers/Customers Local Primus U.S. Department of Justice Schedule 7.1.1 Form of Non-Competition Agreement Non-Competition Agreement THIS NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of February __, 1996, by and among Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"), Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Paul Michael and Willy Schrepfer (each, a "Shareholder" and, together, "Shareholders") (Shareholders and Seller are sometimes referred to herein as "Selling Parties"), with reference to the following: A. Seller is engaged in the business of the manufacture, production and sale of magnetic recording heads. B. Concurrent with the execution and delivery of this Agreement, Selling Parties have conveyed and assigned to Purchaser certain of the assets and properties of Seller and Purchaser has assumed certain liabilities of Seller pursuant to a certain Asset Purchase Agreement, dated as of February __, 1996, among Purchaser, and Selling Parties (the "Asset Purchase Agreement"). Capitalized terms used but not defined herein shall have the respective meanings attributed to such terms in the Assets Purchase Agreement. C. Shareholders are the holders of the respective shares of capital stock of Seller listed below, and hold the following respective offices of Seller: Shares of Shareholder Common Stock Office Paul Michael 120,000 President Willy Schrepfer 38,000 Vice President & Secretary Each Shareholder also is actively engaged in all aspects of Seller's operations. Each Shareholder knows or has access to confidential information which is competitively valuable and/or trade secrets associated with the operations of Seller. NOW, THEREFORE, in consideration of the respective covenants of the parties set forth in this Agreement and as an inducement for Purchaser to enter into, and consummate the transactions under, the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Non-Competition. Selling Parties, jointly and severally, agree that, for a period of eighteen (18) months after the Closing Date, within the territory set forth in Schedule 1 hereto, none of the Selling Parties, either jointly or severally, nor any of their respective associates or affiliates, shall directly or indirectly own, operate, become interested in, or carry on or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of Seller as conducted on or prior to the Closing, including, without limitation, the manufacture, production or sale of products similar in nature or type to that offered for sale by Seller on or prior to the Closing. Without limiting any of the foregoing, the parties agree that this covenant is intended to prohibit such Selling Parties, either jointly or severally, from engaging in such proscribed activities, either, as the case may be, as an individual, owner, partner, employee, consultant, stockholder (except as a holder of stock in a corporation whose stock is publicly traded and which is subject to the reporting requirements of the Securities Exchange Act of 1934, and then only to the extent of owning not more than one percent (1%) of the issued and outstanding stock of such corporation), agent or salesman for any person, firm or corporation, or otherwise. 2. Interference; Confidentiality. Selling Parties, jointly and severally, agree that: 2.1 For a period of eighteen (18) months after the Closing Date, neither the Selling Parties nor any of their associates or affiliates shall hire, directly or indirectly, any employee employed by Seller as of the Closing Date who is subsequently employed by Purchaser during the term hereof, or attempt to induce any such employee to leave such employ and to work, directly or indirectly, for or with the Selling Parties or any such associates or affiliates thereof. 2.2 For a period of eighteen (18) months after the Closing Date, neither the Selling Parties nor any of their associates or affiliates shall solicit, induce or attempt to induce any customer of Seller at the Closing Date to cease doing business in whole or in part with Purchaser. 2.3 All documents, inventions, customer, supplier and prospect lists, business, marketing and sales information and plans, catalogues, trademarks, processes, drawings, programs, designs, names, copyrights, customer requirements, price and cost information, records, techniques, know-how, business secrets and other information which has come into the possession of any of the Selling Parties from time to time in the course of and for the business of Seller prior to the Closing Date shall be deemed to be the confidential and proprietary information of Purchaser. Each of the Selling Parties shall keep confidential, and shall not divulge to any other party or use following the date of this Agreement, any confidential information or business secrets of Seller existing prior to the Closing Date, including, but not limited to, any matters deemed confidential and proprietary as provided in this section. 3. Separate Covenants. The parties intend that the covenants and subparagraphs contained in Paragraphs 1 and 2 hereof shall be construed as a series of separate covenants, one for each jurisdiction specified. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in the immediately preceding subparagraph. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in the immediately preceding subparagraph, then such unenforceable covenants shall be deemed eliminated from these provisions for the purpose of those proceedings solely to the extent necessary to permit the remaining separate covenants to be enforced. 4. Remedies. In the event that any party breaches any of its covenants under this Agreement, it is agreed that the non-defaulting party or parties shall be entitled to obtain from a court of competent jurisdiction injunctive relief (including but not limited to specific performance) directing that such defaulting party cease and desist from such prohibited conduct and enforcing the agreements of the defaulting party hereunder. Such right to injunctive relief shall be in addition to all other legal and equitable rights and remedies available to such non-defaulting party. 5. Miscellaneous 5.1 Notices. Any notice to Purchaser required or permitted under this Agreement shall be given in accordance with the provisions of the Asset Purchase Agreement. 5.2 Severability. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 5.3 Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior oral and written agreements, understandings, commitments and practices among the parties with respect thereto. No amendments, modifications or supplements to this Agreement may be made except by a writing signed by the party to be bound. 5.4 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Minnesota. 5.5 Further Assurances. Each of the parties hereto shall execute and deliver any and all additional instruments, documents and other assurances, and shall do any and all acts and things reasonably necessary in connection with the performance of their respective obligations hereunder, to carry out the intent of the parties hereto. 5.6 Waiver. No delay or omission on the part of any party hereto in exercising any right under this Agreement shall operate as a waiver of such right or any other right, and no waiver of any right conferred by this Agreement shall be binding unless signed by or on behalf of each such party. A waiver on one occasion shall not be construed as a bar to or a waiver of any party's right to enforce any rights hereunder on any future occasion. 5.7 Successors and Assigns. This Agreement shall apply to, and inure to the benefit of, and be binding upon and enforceable against the parties hereto and their respective successors and permitted assigns. 5.8 Attorneys' Fees. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. AGREED TO AND ACCEPTED by the parties hereto as of the day and year first above written. MAG-HEAD ENGINEERING COMPANY, INC. By:_____________________________ Paul Michael, President By:_____________________________ Willy Schrepfer, Secretary __________________________________ PAUL MICHAEL ("Shareholder") __________________________________ WILLY SCHREPFER ("Shareholder") AHEAD TECHNOLOGY ACQUISITION CORPORATION By:_____________________________ ____________________________, Title:______________________ Schedule 1 Geographic Territory All cities, counties and jurisdictions within the United States and worldwide within which or to Seller has conducted its business or made sales on or prior to the date hereof, including, without limitation, the City of Golden Valley, in the Sate of Minnesota. Schedule 7.4 Discounts/Concessions None. Schedule 9.2.1 Warranty Bill of Sale This Warranty Bill of Sale is given with respect to and in accordance with the Asset Purchase Agreement, dated as of February __, 1996 (the "Purchase Agreement"), between Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"), among others. Capitalized terms not otherwise defined in this Warranty Bill of Sale shall have the meanings given to them in the Purchase Agreement. 1. For good and valuable consideration, the receipt and adequacy of which is acknowledged, Seller hereby sells, transfers and assigns to Purchaser (and to Purchaser's successors and assigns forever) all of Seller's rights, title and interest in and to the Assets, including, without limitation, all Fixed Assets listed in Schedule 1.1.1 of the Purchase Agreement and all inventory, work-in-progress and stock-in-trade of Seller. 2. Seller represents and warrants to Purchaser that (i) Seller has good and marketable title to all of the Assets, and (ii) the assets are not subject to any mortgage, pledge, lien, conditional sale agreement, security agreement, encumbrance or charge of any kind or nature. IN WITNESS WHEREOF, Seller and Purchaser have executed this Warranty Bill of Sale, effective as of February __, 1996. MAG-HEAD ENGINEERING COMPANY, INC. By:_____________________________ Paul Michael, President By:_____________________________ Willy Schrepfer, Secretary [Acknowledgement] AHEAD TECHNOLOGY ACQUISITION CORPORATION By:______________________________ _________________________, Title:________________________ [Acknowledgement] Schedule 9.2.2 Assignment of Intangibles This Assignment is given with respect to and in accordance with the Asset Purchase Agreement, dated as of February __, 1996 (the "Purchase Agreement"), between Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"), among others. Capitalized terms not otherwise defined in this Assignment shall have the respective meanings given to them in the Purchaser Agreement. Seller, for good and valuable consideration, the receipt and adequacy of which is acknowledged, hereby sells, assigns and transfers to Purchaser all of its right, title and interest in and to the goodwill and other intangibles of Seller listed in Schedules 1.1.3, 1.1.4 and 1.1.5 of the Purchase Agreement and sold pursuant thereto, including, without limitation, the Proprietary Rights. IN WITNESS WHEREOF, Seller and Purchaser have executed this Assignment of Intangibles as of February __, 1996. MAG-HEAD ENGINEERING COMPANY, INC. By:_____________________________ Paul Michael, President By:_____________________________ Willy Schrepfer, Secretary [Acknowledgement] AHEAD TECHNOLOGY ACQUISITION CORPORATION By:______________________________ _____________________________, Title:________________________ [Acknowledgement] SCHEDULE 9.2.3 ASSIGNMENT AND ASSUMPTION OF CONTRACTS This Assignment and Assumption of Contracts is given with respect to and in accordance with the Asset Purchase Agreement, dated as of February __, 1996 (the "Purchase Agreement"), between Mag-Head Engineering Company, Inc., a Minnesota corporation ("Assignor"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Assignee"), among others. Capitalized terms not otherwise defined in this Assignment and Assumption of Contracts shall have the respective meanings given to them in the Purchase Agreement. 1. Assignor, for good and valuable consideration, the receipt and adequacy of which is acknowledged, hereby assigns and transfers to Assignee all of Assignor's right, title and interest in and to all of the contracts and commitments listed on Exhibit "A" attached hereto (the "Assigned Contracts"). 2. Assignee hereby assumes and agrees to perform all of the obligations of Assignor under the Assigned Contracts from and after the Closing Date. 3. Assignee is not assuming any liability or obligation of Assignor relating to or arising from Assignor's performance of or failure to perform any obligation under any Assigned Contracts prior to the Closing Date. 4. This Assignment and Assumption of Contracts will not affect Assignee's right to assert any defense under any Assigned Contract, at law, in equity or otherwise against the validity or enforceability of any liability or obligation under any Assigned Contract. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment and Assumption of Contracts as of February __, 1996. MAG-HEAD ENGINEERING COMPANY, INC. By:_______________________________ Paul Michael, President By:_______________________________ Willy Schrepfer, Secretary AHEAD TECHNOLOGY ACQUISITION CORPORATION By:___________________________________ _________________________, Title:____________________________ Exhibit "A" 1. Lease, dated September 12, 1990 (as amended by a certain (i) Rider, dated September 12, 1990, (ii) Amendment to Lease, dated November 19, 1990, and (iii) Agreement to Extend Lease, dated January 14, 1994), between Lutheran Brotherhood, a Minnesota corporation, and Mag-Head Engineering, Inc. (now known as Mag-Head Engineering Company, Inc.), a Minnesota corporation, by which the premises therein commonly described as 684-686 Mendelssohn Avenue North, Golden Valley, Minnesota are demised for a term commending on September 12, 1990 and ending on January 31, 1997. 2. All Accounts Receivable Trade (including, without limitation, those identified in Schedule 1.1.3 to the Purchase Agreement) of Seller. 3. All GPT - A/R (including, without limitation, those identified in Schedule 1.1.3 to the Purchase Agreement) of Seller. 4. Copier lease with "Imaging Systems," provided to Purchaser by Seller. 5. All customer sales/purchase orders (including, without limitation, those identified in Schedule 1.1.3 to the Purchase Agreement) of Seller. SCHEDULE 9.2.5 AFFIDAVIT OF SELLER See Attached. TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS To inform Ahead Technology Acquisition Corporation, a Delaware corporation ("Transferee"), that withholding of tax under Section 1445 of the Internal Revenue Code of 1986, as amended ("Code"), will not be required upon the consummation of transactions under that certain Asset Purchase Agreement, dated as of February __, 1996, by and between Transferee and Mag-Head Engineering Company, Inc., a Minnesota corporation ("Transferor"), Transferor hereby certifies to the following on behalf of the Transferor: 1. The Transferor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Code and the Income Tax Regulations promulgated thereunder); 2. The Transferor's U.S. employer identification number is ________________; and 3. The Transferor's office residence address is 686 Mendelssohn Avenue, Golden Valley, Minnesota 55427. The Transferor understands that this Certification may be disclosed to the Internal Revenue Service by the Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. The Transferor understands that the Transferee is relying on this Certification in determining whether withholding is required upon said transfer. Under penalty of perjury I declare that I have examined this Certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of the Transferor. Dated: February __, 1996 MAG-HEAD ENGINEERING COMPANY, INC. By:____________________________ Paul Michael, President By:____________________________ Willy Schrepfer, Secretary SCHEDULE 9.2.7.(a) SELLER'S OFFICER'S CERTIFICATE SELLER CERTIFICATE Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of February __, 1996, by and between Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"), among others. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. Seller hereby certifies that: 1. The undersigned, Willy Schrepfer, executing this Certificate on behalf of Seller, is the duly elected and acting officer of Seller holding the office of Secretary of Seller. 2. Attached hereto as Exhibit A is a copy of the Articles of Incorporation of Seller. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Seller in effect as of the date hereof. 4. Attached hereto is a true and correct copy of (i) resolutions of the Board of Directors of Seller adopted by unanimous written consent of the Board on February __, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Seller's sale of the Assets to Purchaser have been duly approved and adopted by such Board of Directors; and (ii) resolutions of the shareholders of Seller adopted by unanimous written consent of such shareholders on February __, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Seller's sale of the Assets to Purchaser have been duly approved and adopted by such shareholders. 5. There is currently no proceeding for the dissolution or liquidation of Seller or threatening its existence. 6. The representations and warranties of each of Seller and Shareholder set forth in the Asset Purchase Agreement and the Assignment, and each other agreement, document, instrument, exhibit and schedule thereto and delivered in connection therewith, are true and accurate as of the date hereof, which date shall be deemed to be the Closing Date for the purposes of the Asset Purchase Agreement, and all of each of Seller's and Shareholder's obligations set forth in Paragraphs 5, 6 and 7 of the Asset Purchase Agreement have been completed, satisfied and complied with. 7. The Asset Purchase Agreement and each other agreement, document, instrument, exhibit and schedule thereto and delivered in connection therewith, to which any of the undersigned is a party, is in full force and effect with respect to such party, and enforceable against each party, in accordance with its terms. 8. Seller's conditions to Closing set forth in Section 8 of the Asset Purchaser Agreement are either satisfied or deemed waived. Executed at _____________, ________, on this _____ day of February, 1996. MAG-HEAD ENGINEERING COMPANY, INC. By:________________________________ Willy Schrepfer, Secretary EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS SCHEDULE 9.2.7(B) PURCHASER'S OFFICER'S CERTIFICATE PURCHASER CERTIFICATE Reference is made to that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of February __, 1996, by and between Mag-Head Engineering Company, Inc., a Minnesota corporation ("Seller"), and Ahead Technology Acquisition Corporation, a Delaware corporation ("Purchaser"), among others. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Asset Purchase Agreement. Purchaser hereby certifies that: 1. The undersigned, Steve Conlisk, executing this Certificate on behalf of Purchaser, is the duly elected and acting officer of Treasurer of Purchaser. 2. Attached hereto as Exhibit A is a copy of the Articles of Incorporation of Purchaser. 3. Attached hereto as Exhibit B is a true and correct copy of the Bylaws of Purchaser in effect as of the date hereof. 4. Attached hereto is a true and correct copy of (i) the resolutions duly adopted by the Board of Directors of Purchaser by unanimous written consent on January __, 1996, which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect, and pursuant to which the Asset Purchase Agreement and Purchaser's purchase of the Assets from Seller have been duly approved and adopted by such Board of Directors. 5. There is no proceeding for the dissolution or liquidation of Purchaser or threatening its existence. 6. The representations and warranties of Purchaser set forth in the Asset Purchase Agreement and the Assignment, and each other agreement, document, instrument, exhibit and schedule thereto and delivered in connection therewith, are true and accurate as of the date hereof, which date shall be deemed to be the Closing Date for the purposes of the Asset Purchase Agreement, and all of each of Purchaser's obligations set forth in Paragraph 8 of the Asset Purchase Agreement have been completed, satisfied and complied with. 7. The Asset Purchase Agreement and each other agreement, document, instrument, exhibit and schedule thereto and delivered in connection therewith, to which the Purchaser is a party, is in full force and effect, with respect to such party, and enforceable against each such party, in accordance with its terms. 8. Purchaser's conditions to Closing set forth in Section 6 of the Asset Purchaser Agreement are satisfied or deemed waived. Executed at Santa Clara, California, on this _____ day of February, 1996. AHEAD TECHNOLOGY ACQUISITION CORPORATION By:____________________________________ ___________________________________, Title:_____________________________ EXHIBIT A ARTICLES OF INCORPORATION EXHIBIT B BYLAWS SCHEDULE 9.2.9 FORM OF SELLER'S COUNSEL OPINION See attached. EX-23.1 16 ACCOUNTANTS' CONSENT AND REPORT 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 February 22, 1996 -----END PRIVACY-ENHANCED MESSAGE-----