-----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, PPUtDt9Ez9vcoJHw5JxiFdqTFoQ8BPzkXxzsZc7YKJDsdgGPFiMglqAt+b3kQlsM 5bXVd2m09VPIWYNfJtFBCQ== 0000950172-96-000218.txt : 19960513 0000950172-96-000218.hdr.sgml : 19960513 ACCESSION NUMBER: 0000950172-96-000218 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19960510 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64641 FILM NUMBER: 96559559 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-1/A 1 Registration No. 33-64641 As filed with the Securities and Exchange Commission on May 10, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 POST-EFFECTIVE 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 Outside Front Cover Page of Prospectus......... Page 2. Inside Front and Outside Back Cover Pages Inside Front Cover of Prospectus.................................. Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio Prospectus Summary; of Earnings to Fixed Charges.................... Risk Factors; The Company; Selected Consolidated Finan- cial 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 [FLAG] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the post-effective amendment to the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MAY 10, 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 Common Stock (as defined herein) of the Company which are issuable from time to time upon conversion of the Debentures. The Debentures or 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"). The Company will not receive any proceeds from this offering. On March 26, 1996, the stockholders of the Company approved the reclassification (the "Reclassification") of each share of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and each share of the Company's Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), into one share of the Company's new single class of common stock, par value $.01 per share (the "Common Stock"). The Reclassification became effective on April 1, 1996. 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 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 Debentures and the shares of Common Stock which are issuable upon conversion of the Debentures are listed 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 Common Stock is listed on the AMEX under the symbol "DRS." On April 25, 1996, the last reported sale price of the Common Stock on the AMEX was $7-5/16 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 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 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 Common Stock offered by the Selling Security Holders hereby will be the purchase price of such Debentures or 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 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 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, the exchange on which the 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 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 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: o 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; o increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and o 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 Lockheed-Martin Tactical Defense Systems (formerly, 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 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)(2)..... $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34 OTHER OPERATIONS DATA: EBITDA(3)............... $ 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(4)(5)....... 2.9x 2.3x 1.8x -- -- 2.8x 2.7x Ratio of Earnings to Fixed Charges, as adjusted(4)(6)... 1.8x 2.2x December 31, 1995 __________________________________ Actual As Adjusted(7) 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) Does not give effect to the Reclassification. On April 1, 1996, the Reclassification became effective pursuant to which each share of the Class A Common Stock and each share of the Class B Common Stock was reclassified into one share of the Common Stock. See "Description of Capital Stock." (3) 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. (4) 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. (5) 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. (6) 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." (7) 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 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 sub- ordinated 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 suffi- cient 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 (ex- cluding current install- ments) 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 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 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 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 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 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 Common Stock in the public market could adversely affect the prevailing market price of the Debentures and the 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 Common Stock, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. As of April 25, 1996, there was an aggregate of 5,467,632 shares of Common Stock outstanding (excluding 498,434 shares held in treasury). Of such shares, 1,062,248 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 332,800 shares of Common Stock at $15 per share. 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 Debentures and the shares of Common Stock which are issuable upon conversion of the Debentures are listed 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 Common Stock of the Company is listed on the AMEX. The market for the Common Stock has historically been characterized by limited trading volume and a limited number of holders. There can be no assurance that a more active trading market for the 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: o 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; o increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and o 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 Lockheed-Martin Tactical Defense Systems (formerly, 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 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 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." The Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in preliminary discussions regarding several potential acquisitions. However, there can be no assurance that definitive agreements will be reached or that any acquisition will be consummated. 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 8 1/2% 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(3) ................ 37,000 37,000 Class B Common Stock, $.01 par value, 20,000,000 shares authorized; 2,216,353 shares issued(3) ................. 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(3) ............................................. (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. (3) Does not give effect to the Reclassification. On April 1, 1996, the Reclassification became effective pursuant to which each share of the Class A Common Stock and each share of the Class B Common Stock was reclassified into one share of the Common Stock. See "Description of Capital Stock." MARKET PRICES OF CAPITAL STOCK Prior to the Reclassification, the Company's Class A Common Stock and Class B Common Stock traded on the AMEX (Symbols: DRSA and DRSB, respectively). On April 1, 1996, upon the effectiveness of the Reclassification, trading of the newly classified Common Stock commenced. The following table sets forth for each period indicated the high and low closing sales prices of the Company's Class A Common Stock , Class B Common Stock and Common Stock, as reported by the American Stock Exchange Monthly Market Statistics:
Class A Common Stock Class B Common Stock Common Stock* High Low 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........................ 8-11/16 7-7/16 8-3/4 7-3/8 - - Year Ended March 31, 1997: First Quarter (through April 25, 1996).............. - - - - 7-15/16 7-5/16
- ---------------- * As of April 25, 1996, the Common Stock was held by 2,113 stockholders (of which 346 were registered holders and 1,767 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 Common Stock. The Company's 1998 Debentures limit the Company's ability to pay dividends or make other distributions on its Common Stock. See Note 6 of Notes to Consolidated Financial Statements for information concerning restrictions on the declaration or payment of dividends. 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)(2)....... $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34 OTHER OPERATIONS DATA: EBITDA(3).................... $ 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(4)(5)............. 2.9x 2.3x 1.8x - - 2.8x 2.7x Ratio of Earnings to Fixed Charges, as adjusted(4)(6). 1.8x 2.2x March 31, December 31, l995 1995 1994 1993 1992 1991 Actual As Adjusted(7) ------------ ------------ ------------- ------------ ------------- -------- ------------- 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) Does not give effect to the Reclassification. On April 1, 1996, the Reclassification became effective pursuant to which each share of the Class A Common Stock and each share of the Class B Common Stock was reclassified into one share of the Common Stock. See "Description of Capital Stock." (3) 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. (4) 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. (5) 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. (6) 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." (7) 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. In March 1996, the Company entered into an employment, non-competition and termination agreement with Mr. Leonard Newman. Pursuant to such agreement, Mr. Newman resigned as Chairman Emeritus of the Company. See "-- Financial Condition and Liquidity - Certain Agreements." 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 DECEMBER 31, 1995 VS. FISCAL FISCAL NINE MONTHS 1995 1994 ENDED Nine Months VS. VS. DECEMBER 31, Year Ended March 31, Ended December 31, 1994 1993 1994 ------------------------------------- ---------------------- -------- -------- -------------- 1995 1994 1993 1995 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 ---------- -------- --------- --------- --------- 3.7% 2.8% 2.3% 3.8% 3.6% Net Earnings................... ========== ======= ======== ========= ========= 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. The Company continues to seek acquisition opportunities consistent with its business strategy and is engaged in preliminary discussions regarding several potential acquisitions . However, there can be no assurance that definitive agreements will be reached or that any acquisition will be consummated. On February 5, 1996, the Company received a written commitment from Mellon Bank, N.A. ("Mellon Bank") for a $15 million unsecured revolving line of credit. The line of credit will be used for working capital, stand-by letters of credit, and to refinance certain existing debt obligations of the Company at more favorable interest rates. Interest on borrowings under the line of credit will be accrued at the prime rate or London Interbank Offered Rate plus 175 basis points. The Company has agreed to maintain certain financial covenants, including the maintenance of: (i) a certain minimum quarterly ratio of liquid assets to current liabilities, (ii) a certain minimum interest coverage ratio, calculated on a rolling four quarter basis and (iii) a certain maximum quarterly ratio of total liabilities to tangible net worth. This commitment is subject to the execution of a related loan agreement by and between the Company and Mellon Bank. The Company expects this agreement to be completed in May 1996. 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 31, 1995. As of February 25, 1996, backlog totalled approximately $148 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 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 $625,000 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. On March 28, 1996, the Company entered into an employment, non-competition and termination agreement (the "Newman Agreement") with Leonard Newman. Pursuant to the Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0 million. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five year period and has also agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with the Company. In March 1996, Mr. Leonard Newman and certain members of his immediate family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an investment adviser to several accounts. In connection with such sale, the Company entered into a registration rights agreement with such buyer to assist in facilitating such sale. The Company has agreed to file and cause to become effective a registration statement with the SEC upon demand, at its expense, relating to such shares for future sale by such buyer. 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: o 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; o increasing revenue opportunities through the design and adaptation of products for use by all branches of the military; and o 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 Lockheed-Martin Tactical Defense Systems (formerly, 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 Lockheed-Martin Tactical Defense Systems (formerly, 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: o AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical workstation to be qualified by the U.S. Navy and was designed to comply with the stringent requirements of the Aegis (DDG-51) shipbuilding program. Replacing the sensor displays in the SQQ-89 ASW Combat Suite, it employs dual processors enabling simultaneous I/O and graphics processing. This new approach allows for required high bandwidth processing while maintaining response times for operator/machine interfaces. The system architecture can be adapted to meet various interface, cooling, memory, storage and processing requirements. See "Risk Factors -- Limited Term of Contracts." o 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. o 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: o AN/UYQ-70: The AN/UYQ-70 is an advanced, open architecture display system designed for widespread application through software modification, and is to be deployed on Aegis and other surface ships, submarines and airborne platforms. This system was developed for the U.S. Navy under subcontract with the Government Systems Group of Loral (Unisys) Corporation (presently, Lockheed-Martin Tactical Defense Systems). The AN/UYQ-70 is a self-contained, microprocessor-based unit complete with mainframe interface software offering advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a ship- board 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. o 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: o 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. o 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. o 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 moved into a new joint facility . 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: o 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. o 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: o 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. o 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. o 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. o 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. o 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. o 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 February 25, 1996, backlog totalled approximately $148 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 perfor mance 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 February 25, 1996, the Company employed 795 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 have recently been consolidated and relocated to 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 approximately 54,000 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, Chief 46 Executive Officer and Director Nancy R. Pitek.......... Controller, Treasurer and Secretary 39 Paul G. Casner, Jr...... Vice President; President of DRS Electronic 58 Systems Group Stuart F. Platt......... Vice President and Director; President 62 of DRS Media Technology Group Richard Ross............ Vice President; President of DRS 41 Electro-Optical Systems Group Leonard Newman.......... Director 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 also serves as President of DRS Media Technology Group. He 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. Mr. Ross also serves as President of the DRS Electro-Optical Systems Group. 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. From August 1995 until March 1996, Mr. Newman held the position of 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 --------------------------------------- ----------------- All Other Name and Principal Position Fiscal Year Salary ($) Bonus ($) Stock Options(#) Compensation($) - --------------------------------------- ----------- ----------- ---------- ----------------- --------------- Leonard Newman..................... 1995 321,910 0 0 57,000(a)(b)(c)(d) Chairman of the Board 1994 331,140 100,000 0 52,538(a)(b)(c)(d) & Secretary 1993 332,294 20,000 0 43,974(a)(b)(c)(d) Mark S. Newman..................... 1995 281,344 120,000 150,000(f)(j) 19,440(b)(c)(d) President & Chief 1994 230,767 52,993 0 86,728(b)(c)(d)(e) Executive Officer 1993 226,083 15,000 0 13,910(b)(c)(d) Paul G. Casner, Jr................. 1995 198,000 40,000 0 32,201(b)(d)(h) Vice President & President-- DRS Electronic 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)(j) 3,664(c)(d) President-- DRS Media Technology Group 1993 187,889 0 0 2,426(c)(d) Richard Ross............................... 1995 198,618 36,000 0 9,070(b)(c)(d) Vice President & 1994 155,596 27,237 5,000(g)(j) 7,010(b)(c)(d) President-- DRS Electro-Optical Systems Group 1993 159,166 10,000 0 5,851(b)(c)(d)
- ------------------- (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 Common Stock and incentive stock options to purchase 100,000 shares of 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 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 $50,000 or 10% of the total annual salary and bonus reported for the Named Officers in those period. There were no other amounts of compensation required to be reported as "Other Annual Compensation", by Item 402 of Regulation S-K, earned by the Named Officers. (j) In connection with the Reclassification, each option issued or issuable pursuant to the 1991 Stock Option Plan will be exercisable for an equal number of shares of the Company's Common Stock. Stock Options. The following table contains information concerning the grant of stock options under the Company's 1991 Stock Option Plan to the Named Officer during the Company's fiscal year ended March 31, 1995. The following table does not give effect to the Reclassification.
OPTION GRANTS IN LAST FISCAL YEAR POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM ------------------------------------------------------------- -------------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS GRANTED OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION NAME GRANTED (#) FISCAL 1995 ($/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 (Footnotes on next page)
- -------------- (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. The following table does not give effect to the Reclassification.
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 STOCK COMMON STOCK COMMON STOCK COMMON STOCK ------------------- ----------------- ---------------- ------------ SHARES ACQUIRED ON VALUE EXER- UNEXER- EXER- UNEXER- EXER- UNEXER- EXER- UNEXER- NAME EXERCISE (#) REALIZED ($) CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE - ------------------ ------------ ------------ ------- -------- -------- -------- ------- -------- ------- ------- 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
[FN] - ------------------- (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. Upon entering into the Newman Agreement in March 1996, this Deferred Compensation Agreement was superseded. 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, was 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 were 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 was 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 were 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 was to 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. Under the Newman Agreement, the Company will continue to be 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 an 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. On March 28, 1996, the Company entered into the Newman Agreement with Leonard Newman. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five year period and has also agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with the Company. In consideration for the above, Mr. Newman received a lump sum payment of approximately $2.0 million. 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 (the "Committee") on May 26, 1994, served as the Chairman of the Board and Secretary of the Company during fiscal 1995 and until his resignation from such offices in August 1995. During the period in which he served on the Committee, Mr. Newman did not participate in compensation decisions relating to himself or Mark S. Newman. SECURITY OWNERSHIP The following table gives effect to the Reclassification and shows, as of April 25, 1996, the number of shares of 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 beneficially owned (within the meaning of Rule 13d-3 of the Exchange Act). COMMON STOCK (a) ------------------------------- PERCENT NAME OF BENEFICIAL OWNER SHARES OF CLASS Mark S. Newman........................ 194,149(b)(c)(d) 3.5 Theodore Cohn......................... 5,900 0.1 Donald C. Fraser....................... - - Mark N. Kaplan......................... 1,000 -(e) Stuart F. Platt....................... 3,000(c) 0.1 Jack Rachleff.......................... 1,000 -(e) Paul G. Casner, Jr..................... 31,000(c) 0.6 Nancy R. Pitek......................... 14,307(b)(c) 0.3 Richard Ross........................... 3,000(c) 0.1 Leonard Newman......................... 2,700 -(e) All directors and executive officers as a group (10 persons)....................... 388,356(b)(c)(d) 6.9% - ------------------ (a) As of April 25, 1996, the Company had outstanding 5,467,632 shares of Common Stock (excluding 498,434 shares of Common Stock held in treasury). Unless otherwise noted, each director and executive officer had sole voting power and investment power over the shares of Common Stock indicated opposite such director's and executive officer's name. (b) Includes 13,107 shares of 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. (c) Includes shares of Common Stock which might be purchased upon exercise of options which were exercisable on April 25, 1996 or within 60 days thereafter, as follows: Mr. P. Casner, Jr., 30,000 shares; Mr. Newman, 90,000 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, 181,200 shares. (d) Includes 3,200 shares of Common Stock held by Mr. M. Newman as custodian for his daughter over which Mr. M. Newman has sole voting and investment power. (e) Less than 0.1%. The following table gives effect to the Reclassification and sets forth certain information, as of April 25, 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. ------------------------------------------------------- COMMON STOCK ------------------------------------------------------- AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME AND ADDRESS OWNERSHIP OF CLASS OF BENEFICIAL OWNER ---------------------- ----------------- First Pacific Advisors, Inc. 10301 West Pico Blvd. Los Angeles, CA 90064....... 1,774,452(a) 28.7% Palisade Capital Management L.L.C. One Bridge Plaza Suite 695 Fort Lee, New Jersey 07024 . ...................... 885,924(b) 16.2 Michael N. Taglich Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated 100 Wall Street New York, NY 10005 . .......... 529,850(c) 9.7 David E. Gross 27 Cameron Road Saddle River, NJ 07458 ......... 335,701(d) 6.1 - ------------------ (a) Includes 508,475 shares of Common Stock from the assumed conversion of $4,500,000 principal amount of the Debentures , 208,877 shares of Common Stock from the assumed conversion of $3,133,000 principal amount of the Company's 1998 Debentures and 1,057,100 shares of Common Stock beneficially owned by First Pacific Advisors, Inc. ("First Pacific") through control of FPA Capital Fund, Inc. ("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 First Pacific has shared voting power with respect to 300,000 shares and shared dispositive power with respect to 1,774,452 shares, 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 321,527 shares and New Income has sole voting power and shared dispositive power with respect to 339,328 shares. (b) Represents shares of Common Stock held by Palisade Capital Management L.L.C., acting as investment adviser to (i) Crysler Corp. Emp. #1 Pension Plan Dtd. 4-1-89, (ii) IBM Corp. Retirement Plan Trust Dtd. 12-18-45, (iii) G.E. Pension Trust, and (iv) Nynex Master Pension Trust Dtd. 1-1-84. (c) Consists of 312,450 shares of Common Stock held by Lancer Partners, Inc. ("Lancer Partners"), 11,500 shares of Common Stock held by Antrade, N.V. ("Antrade"), 15,200 shares of Common Stock held by Album N.V. ("Album"), 11,600 shares of Common Stock held by Ralco Investments Group ("Ralco"), 156,850 shares of Common Stock held by Lancer Offshore, Inc. ("Lancer Offshore") and 22,250 shares of Common Stock held by Michael Lauer. The Company has been advised that Michael Lauer has sole voting power and sole dispositive power with respect to 22,250 shares. 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 507,600 shares. (d) Includes 282,381 shares of Common Stock held by Mr. Gross for which he has sole voting and dispositive power. Also included are 26,000 shares of Common Stock held by Mr. Gross' wife personally and 27,320 shares of Common Stock held by her as custodian for her two children. Mr. Gross has neither voting power nor investment power over the shares of Common Stock held by his wife, either personally or as custodian for her children, and disclaims any beneficial interest in such 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, and as supplemented as of April 1, 1996, 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 April 25, 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 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 Common Stock will not be issued upon conversion. A person otherwise entitled to a fractional share of Common Stock upon conversion shall receive cash equal to the equivalent fraction of the Current Market Price of a share of 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 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 Common Stock, for the purpose of effecting conversions of Debentures, the full number of shares of 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; and with respect to the Company, means the Common Stock, par value $.01 per share, or any successor class of common equity into which such common stock may thereafter be converted. "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 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 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 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 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 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 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 On February 7, 1996, the Board of Directors of the Company approved and recommended for submission to the stockholders of the Company by a 6 to 1 vote, with Leonard Newman voting against such submission, the consideration and approval of an Amended and Restated Certificate of Incorporation (the "Restated Certificate"), which amended and restated the Company's certificate of incorporation (i) to effect a reclassification of each share of Class A Common Stock and each share of Class B Common Stock into one share of Common Stock, (ii) to provide that action by the stockholders may be taken only at a duly called annual or special meeting, and not by written consent and (iii) to provide that the stockholders of the Company would have the right to make, adopt, alter, amend, change or repeal the By- Laws of the Company only upon the affirmative vote of not less than 66 2/3% of the outstanding capital stock of the Company entitled to vote thereon. On March 26, 1996, the stockholders approved the Restated Certificate. The Restated Certificate was filed with the Secretary of State of the State of Delaware and became effective April 1, 1996. The authorized capital stock of the Company currently consists of 2,000,000 shares of Preferred Stock and 20,000,000 shares of Common Stock. As of April 25, 1996, there were 5,467,632 shares of Common Stock issued and outstanding (exclusive of 498,434 shares held in treasury). No shares of Preferred Stock have been issued. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Restated Certificate authorizes 2,000,000 shares of Preferred Stock each having a par value of $10 per share. Subject to applicable law, the Board may issue, in its sole discretion, shares of Preferred Stock without further stockholder action by resolution at the time of issuance. The Preferred Stock may be issued in one or more series and may vary as to the designation and number of shares in such series, the voting power of the holders thereof, the dividend rate, the redemptive terms and prices, the voluntary and involuntary liquidation preferences, the conversion rights and the sinking fund requirements, if any, of such series. The Board, however, may not create any series of Preferred Stock with more than one vote per share. COMMON STOCK Voting Rights. As a result of the Reclassification, all holders of Common Stock have the same preferences, rights, powers and qualifications, including one vote for each share of Common Stock held. The Board was previously divided into two classes; Class A Directors and Class B Directors. The Class A Directors were divided into three classes serving staggered terms, the Class A-I Directors, the Class A-II Directors and the Class A-III Directors. As a result of the Reclassification, the Board is no longer divided into Class A Directors and Class B Directors. The directors who, as of the effective date of the Reclassification, were designated as Class A-I Directors, Class A-II Directors and Class A-III Directors are now designated as Class I Directors, Class II Directors and Class III Directors, respectively, and will continue to serve out their respective terms. Each of the former Class B Directors was appointed to serve as either a Class I Director, Class II Director or Class III Director. Each class of directors will consist of as nearly an equal number of directors as possible. At each annual meeting beginning with the 1996 Annual Meeting, one class of directors will be elected to succeed those whose terms expire by all record holders of the Common Stock as of the date of determination, with each new director to serve a three-year term. In General. Holders of Common Stock have no redemption or preemptive rights and are not liable for further calls or assessments. Holders of Common Stock will be entitled, after satisfaction of the Company's liabilities and payment of the liquidation preferences, if any, of any outstanding shares of Pre ferred Stock, to share the remaining assets of the Company, if any, equally in proportion to the number of shares held. Subject to the rights of holders of Preferred Stock, if any, and subject to other provisions of the Restated Certificate, holders of Common Stock are entitled to receive such dividends and other distributions in cash, property or shares of stock of the Company as may be declared from time to time by the Board in its discretion from any assets of the Company legally available therefor. 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 Common Stock and the Debentures. 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 Common Stock offered hereby from time to time on terms to be determined at the times of such sales. The Debentures and shares of 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 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 Common Stock for whom they may act as agent. To the extent required, the aggregate principal amount of Debentures and number of shares of 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 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 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 Common Stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Debentures and the shares of 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 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 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 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 Debentures and the shares of Common Stock which are issuable upon conversion of the Debentures are listed 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 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 of Deben- Principal Percent tures Amount of of Benef- Debentures Outstand- icially Being ing Name Owned Registerd 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. . . . . . 500,000 500,000 2.0 Convertible Holdings, Inc. . . . 1,000,000 1,000,000 4.0 First Pacific Advisers, Inc.1 . . 4,500,000 4,500,000 18.0 Forest Fulcrum Ltd. . . . . . . . 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.2 . . . . . . 3,000,000 3,000,000 12.0 Laterman Strategies 90's L.P. . . 300,000 300,000 1.2 Laterman & Co. . . . . . . . . . 200,000 200,000 * 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 . . . . . . . . . . . .$24,500,000 $24,500,000 98% ______________________ * Less than 1%. 1 First Pacific Advisers, Inc. may be deemed to be the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than ten percent of the Common Stock of the Company. Such information has been derived from statements on Schedule 13D and 13G filed with the SEC by First Pacific Advisers, Inc. 2 IDS Bond Fund, Inc. is an investment company registered under the Investment Company Act of 1940, as amended, and is a fund in the IDS Mutual Fund Group ("IDS Funds"). American Express Financial Corporation (formerly known as IDS Financial Corporation) ("AEFC"), an investment adviser registered under the Investment Advisers Act of 1940, as amended, provides investment advisory services to each of the IDS Funds and to certain other registered investment companies. AEFC is a wholly owned subsidiary of American Express Company. The information set forth in the table with respect to IDS Bond Fund, Inc. and the information set forth in this footnote was provided by AEFC. Because the Selling Security Holders may sell all or some of the Debentures which they hold and shares of 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 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 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 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 1994 1995 ------------ ------------ ------------ (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 Amortization................. 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 Installments (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, 9 and 13): 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, respectively..................... 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' Equity................... $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 (Note 13): 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 (Note 13): 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 Common Stock (unaudited) -------------------------------- Class A Class B Unamortized Net ----------- ---------- Additional Restricted Stock- Paid In Retained Treasury Stock holders' 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 Options, Net..... -- -- -- -- (39,000) -- -- 22,000 (17,000) --------- -------- ---------- ------- ----------- ----------- ---------- -------- ----------- Balances at March 31, 1993................. 3,674,963 37,000 2,094,528 21,000 12,945,000 6,700,000 (1,579,000) (9,000) 18,115,000 Net Earnings............. -- -- -- -- -- 1,615,000 -- -- 1,615,000 Stock Options Exercised................ -- -- 11,000 -- 2,000 -- -- -- 2,000 Compensation Re- lating to Stock Options, Net............. -- -- -- -- 23,000 -- -- 4,000 27,000 --------- ------- --------- -------- ------- ---------- --------- --------- ---------- Balances at March 31, 1994................. 3,674,963 37,000 2,105,528 21,000 12,970,000 8,315,000 (1,579,000) (5,000) 19,759,000 Net Earnings ............ -- -- -- -- -- 2,604,000 -- -- 2,604,000 Stock Options Exercised................ 25,000 -- 57,725 1,000 188,000 -- -- -- 189,000 Compensation Relating to Stock Options, Net ....... -- -- -- -- 388,000 -- -- (282,000) 106,000 Purchase of Trea- sury 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 Re- lating to Stock Options Net (unaudited)... -- -- -- -- -- -- -- 60,000 60,000 --------- ------- ---------- -------- -------- --------- -------- --------- --------- 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 Liabil- ities, 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 Activities: .................................. 2,486,000 10,170,000 5,759,000 (3,494,000) 14,000 --------- ---------- --------- ----------- --------- 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 Ac- quired 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 activities....... (3,794,000) (3,473,000) (920,000) (5,472,000) (2,292,000) ----------- ----------- --------- ------------ ------------ 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 Convertible Debentures ................................ -- -- -- 23,360,000 -- 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 Activities...... (2,960,000) (2,197,000) (2,142,000) 20,838,000 (2,895,000) ------------ ----------- ----------- ----------- ----------- 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 consol- idation. The Consolidated Financial Statements include information as of December 31, 1995 and for the nine months ended December 31, 1995 and 1994, which is unau- dited. In the opinion of Management, the accompanying unaudited consolidated financial statements of the Compa- ny contain all adjustments (consisting of only normal and recurring adjustments) necessary for the fair presenta- tion of the Company's consolidated financial position as of 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 necessar- ily indicative of the results to be expected for the full year. B. CASH AND CASH EQUIVALENTS The Company considers all highly liquid invest- ments purchased with a maturity of three months or less to be cash equivalents. C. REVENUE RECOGNITION Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as ship- ments are made. The estimated profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues on contracts with significant engi- neering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total con- tract costs at completion (cost-to-cost) with consider- ation given for risk of performance and estimated profit. Revenues related to incentive-type contracts also are determined on a percentage-of-completion basis measured by the cost-to-cost method. Revenues from cost- reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Revenues recognized under the cost-to-cost percentage-of-completion basis during fiscal 1995, 1994 and 1993 approximated 16%, 26% and 37% of total revenues, respectively, with remaining revenues recognized as delivery of finished units is made, or as costs are incurred under cost-reimbursement contracts. Included in revenues for fiscal 1995, 1994 and 1993 are $18,771,000, $27,496,000 and $19,155,000 respectively, of customer- sponsored research and development. Revisions in profit estimates are reflected in the year in which the facts, which require the revisions, become known, and any estimated losses and other future costs are accrued in full. Approximately 84%, 94% and 83% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government (principally the U.S. Navy). In addition, approximately 7%, 3% and 17% of the Company's revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly from sales to foreign governments. Sales to commercial customers comprised 9% and 3% of revenues in fiscal 1995 and 1994, respectively. D. INVENTORIES Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expens- es, which include research and development costs, where such costs are recoverable under customer contracts. In accordance with industry practice, invento- ries include amounts relating to contracts having produc- tion cycles longer than one year, and a portion thereof will not be realized within one year. E. DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been provid- ed on the straight-line method. The ranges of estimated useful lives are: office furnishings, motor vehicles and equipment, 3-10 years; building and building improve- ments, 15-40 years; and leasehold improvements, over the shorter of the estimated useful lives or the life of the lease. Maintenance and repairs are charged to opera- tions as incurred; renewals and betterments are capital- ized. The cost of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in operations. F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED Intangibles resulting from acquisitions repre- sent the excess of cost of the investments over the fair- market values of the underlying net assets at the dates of investment. All intangibles are being amortized on the straight-line method, over five to thirty years. The carrying value of intangible assets periodically is reviewed by the Company, and impairments are recognized when the expected undiscounted future operating cash flows derived from such intangible assets are less than their carrying value. G. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recog- nized in income in the period that includes the enactment date. SFAS 109 supersedes Statement of Financial Ac- counting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"). Effective April 1, 1993, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 was not material to the Company's consolidated results of operations or financial position. Prior-year financial statements have not been restated to apply the provisions of SFAS 109. Until March 31, 1993, the Company used the asset and liability method of accounting for income taxes, as set forth in SFAS 96. Under SFAS 96, deferred income taxes are recog- nized by applying statutory tax rates to the difference between the financial statement carrying amounts and tax bases of assets and liabilities. The statutory tax rates applied are those applicable to the years in which the differences are expected to reverse. Deferred tax ex- pense represents the change in the liability for deferred taxes from year to year. H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). The Company adopted SFAS 106 during the first quarter of fiscal 1994, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. I. POSTEMPLOYMENT BENEFITS In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). The Company adopted SFAS 112 during the first quarter of fiscal 1995, and its adoption did not have a material impact on the Company's consolidated results of operations or financial position. J. EARNINGS PER SHARE (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 out- standing 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 mate- rial. 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 effect 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 Con- vertible 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 Ac- crued Profit on Progress Completed, Not Billed . . . 7,264,000 5,374,000 ------------ ------------ 13,149,000 11,120,000 ------------ ------------ Other U.S. Defense Contracts: Amounts Billed . . . . . 1,418,000 2,981,000 Recoverable Costs and Ac- crued Profit on Progress Completed, Not Billed . . . 639,000 537,000 ----------- ----------- 2,057,000 3,518,000 ----------- ----------- Other Amounts Billed . . 2,226,000 900,000 ----------- ----------- Total . . . . . . . . . . $ 17,432,000 $ 15,538,000 ------------ ------------ Generally, no accounts receivable arise from retainage provisions in contracts. The Company receives progress payments on certain contracts from the U.S. Government of between 80-100% of allowable costs in- curred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final accep- tance of the product. In addition, the Company may bill based upon units delivered. NOTE 3. INVENTORIES Inventories are summarized as follows: March 31, 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 Improvements....... 2,384,000 2,289,000 Office Furnishings and Equipment......... 3,621,000 3,754,000 Laboratory and Production Equipment..... 15,639,000 14,457,000 Motor Vehicles.......................... 235,000 389,000 Computer Equipment...................... 7,246,000 7,323,000 Leasehold Improvements.................. 3,186,000 2,620,000 ------------ ------------ Total................................... $33,661,000 $32,182,000 ------------ ------------ Depreciation and amortization of plant and equipment amounted to $1,833,000, $2,061,000 and $2,748,000 in fiscal 1995, 1994 and 1993, respectively. NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The component elements of accounts payable and accrued expenses are as follows: March 31, --------------------------- 1995 1994 ------------ ------------ Payrolls, Including Payroll Taxes.. $ 648,000 $ 1,753,000 Holiday and Vacation Pay............ 1,102,000 849,000 Income Taxes Payable................ 1,821,000 1,917,000 Losses and Future Costs Accrued on Uncompleted Contracts.. 4,555,000 3,214,000 Other............................... 3,897,000 4,101,000 ----------- ----------- 12,023,000 11,834,000 Accounts Payable.................... 7,966,000 4,307,000 ------------ ------------ Total............................... $19,989,000 $16,141,000 ------------ ------------ NOTE 6. LONG-TERM DEBT A summary of long-term debt is as follows: ============================================================================ March 31, 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 8 1/2% 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 Number of Shares of Shares of Option Class A Option Price Class B Price per Common Stock per 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 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 operating results of OMI, the acquiring 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 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. The Company filed a Registration Statement on Form S-1 (No. 33-64641) with the Securities and Exchange Commission (the "Commission"), pursuant to the terms of the Registration Rights Agreement. In connection with these transactions, the Company expects to incur approximately $625,000 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. On February 7, 1996, the Board of Directors of the Company approved and recommended for submission to the stockholders of the Company by a majority vote the consideration and approval of an Amended and Restated Certificate of Incorporation (the "Restated Certificate"), which amended and restated the Company's certificate (i) to effect a reclassification (the"Reclassification") of each share of Class A Common Stock and each share of Class B Common Stock into one share of common stock, par value $.01 per share (the "Common Stock"), of the Company, (ii) to provide that action by the stockholders may be taken only at a duly called annual or special meeting, and not by written consent and (iii) to provide that the stockholders of the Company would have the right to make, adopt, alter, amend, change or repeal the By-Laws of the Company only upon the affirmative vote of not less than 662/3% of the outstanding capital stock of the Company entitled to vote thereon. On March 26, 1996, the stockholders approved the Restated Certificate. The Restated Certificate was filed with the Secretary of State of the State of Delaware and became effective April 1, 1996. As a result of the Reclassification, the Senior Subordinated Convertible Debentures and the 1998 Debentures are convertible into shares of Common Stock and each option issued or issuable pursuant to the Company's stock option plans (See Note 9) are exercisable for an equal number of shares of the Common Stock. On March 28, 1996, the Company entered into an Employment, Non-Competition and Termination Agreement (the "Newman Agreement") with Leonard Newman. Pursuant to the Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0 million. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide consulting services, as required from time to time, to the Company for a five year period and has also agreed not to compete with the Company during this same period. This agreement supersedes a previous deferred compensation agreement with Mr. Newman. In March 1996, Mr. Leonard Newman and certain members of his immediate family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an investment adviser to several accounts. In connection with such sale, the Company entered into a registration rights agreement with such buyer to assist in facilitating such sale. The Company has agreed to file and cause to become effective a registration statement with the Securities and Exchange Commission upon demand, at its expense, relating to such shares for future sale by such buyer. 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 CONVERTIBLE IT RELATES OR AN OFFER TO ANY DEBENTURES DUE 2003 PERSON IN ANY JURISDICTION 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 Market Prices of Capital Stock . . . . . . . . . 15 Dividend Policy . . . . . 15 Selected Consolidated Financial Data . . . . 16 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 18 Business . . . . . . . . 27 Management . . . . . . . 39 Security Ownership . . . 46 Certain Relationships and Related Transactions . . 48 Description of the Debentures . . . . . . . 49 Description of 1998 Debentures . . . . . . . 70 Description of Capital Stock . . . . . . . . . 71 Plan of Distribution . . 73 Selling Security Holders 75 Legal Matters . . . . . . 77 Experts . . . . . . . . . 77 Index to Financial , 1996 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 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 . . . . 120,000.00 Legal fees and expenses . . . . . . . 350,000.00 Trustee's fees . . . . . . . . . . . . 12,500.00 Transfer agent and registrar fees and expenses . . . . . . . . . . . . 2,500.00 Miscellaneous . . . . . . . . . . . . 106,379.31 Total . . . . . . . . . . . . . . $625,000.00 _____________________________________ 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 Amended and Restated 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 - Amended and Restated Certificate of Incorporation of the Company, as filed April 1, 1996 3.5 - By-laws of the Company, as amended to November 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 - Certificate of Amendment of the Certificate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 - Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] **3.8 - Amended and Restated By-Laws of the Company, as of April 1, 1996 *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 bond holders [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.2] 4.6 - Reimbursement Agreement, dated December 1, 1991, among Photronics Corp., the Company and Morgan Guaranty Trust Company of New York [Form 10-K, fiscal year ended March 31, 1992, File No. 1-8533, Exhibit 4.3] **4.7 - Registration Rights Agreement, dated as of March 27, 1996, by and between the Company and Palisade Capital Management L.L.C., acting as investment adviser to the accounts named therein **4.8 - First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee *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. **10.94 - Employment, Non-Competition and Termination Agreement, dated March 28, 1996, between the Company and Leonard Newman 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 POST-EFFECTIVE 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, MAY 10, 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 POST-EFFECTIVE 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,Chief Executive May 10, 1996 ____________________ Officer, Chairman of the Mark S. Newman Board and Director (Principal Executive Officer) /s/Nancy R. Pitek Controller, Treasurer May 10, 1996 _____________________ and Secretary Nancy R. Pitek (Principal Financial Officer and Principal Accounting Officer) * Vice President, President of May 10, 1996 _____________________ Precision Echo and Director Stuart F. Platt * _____________________ Director May 10, 1996 Leonard Newman * Director May 10, 1996 _____________________ Theodore Cohn * Director May 10, 1996 ______________________ Donald C. Fraser * Director May 10, 1996 ______________________ Mark N. Kaplan * Director May 10, 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 (1) (2) (1) (2) Period 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 - Amended and Restated Certificate of Incorporation of the Company, as filed April 1, 1996 . . . . . . . 3.5 - By-laws of the Company, as amended to November 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 - Certificate of Amendment of the Certificate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 - Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] **3.8 - Amended and Restated By-Laws of the Company, as of April 1, 1996 . . . *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 Con vertible 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] **4.7 - Registration Rights Agreement, dated as of March 27, 1996, by and between the Company and Palisade Capital Management L.L.C., acting as investment adviser to the ac counts named therein . . . . . . . **4.8 - First Supplemental Indenture, dated as of April 1, 1996, to Indenture, dated as of September 22, 1995, between the Company and The Trust Company of New Jersey, as Trustee *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, be tween 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 Pur chase 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. . . . . . . . **10.94 - Employment, Non-Competition and Termination Agreement, dated March 28, 1996, between the Company and Leonard Newman . . . . . . . . . . 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-3 2 EXHIBIT 3.4 Exhibit 3.4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. We, the President and Secretary of Diagnostic/Retrieval Systems, Inc., a corporation existing under the laws of the State of Delaware, do hereby certify as follows: The original Certificate of Incorporation of Diagnostic/Retrieval Systems, Inc. (the "Corporation") was filed with the Secretary of State of the State of Delaware on November 8, 1968. This Amended and Restated Certificate of Incorporation restates, integrates and further amends the provisions of the Restated Certificate of Incorporation of the Corporation. This Amended and Restated Certificate of Incorporation has been duly adopted, all in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. Upon the filing (the "Effective Time") of this Amended and Restated Certificate of Incorporation pursuant to the Delaware General Corporation Law, each share of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and each share of the Company's Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), shall be reclassified as and changed into one validly issued, fully paid and non-assessable share of Common Stock authorized by subparagraph (a) of Article FOURTH, without any action by the holder thereof. Each certificate that theretofore represented a share or shares of Class A Common Stock or Class B Common Stock shall thereafter represent that number of shares of Common Stock into which the share or shares of Class A Common Stock or Class B Common Stock represented by such Certificate shall have been reclassified. FIRST: The name of the corporation (hereinafter called the "corporation") is Diagnostic/Retrieval Systems, Inc. SECOND: The address, including street, number, city and county of the registered office of the corporation in the State of Delaware is Wilmington, County of New Castle (19805); and the name of the registered agent of the corporation in the State of Delaware at such address is The Prentice-Hall Corporation System, Inc. THIRD: The nature of the business and of the purposes to be conducted and promoted by the corporation, which shall be in addition to the authority of the corporation to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, is as follows: To carry on a general mercantile, industrial, investing, and trading business in all its branches; to devise, invent, manufacture, fabricate, assemble, install, service, maintain, alter, buy, sell, import, export, license as licensor or licensee, lease as lessor or lessee, distribute, job, enter into, negotiate, execute, acquire, and assign contracts in respect of, as principal, and as sales, business, special, or general agent, representative, broker, factor, merchant, distributor, jobber, advisor, and in any other lawful capacity, goods, wares, merchandise, commodities, and unimproved, improved, finished, processed, and other real, personal, and mixed pro- party of any and all kinds, together with the components, resultants, and by-products thereof. To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated. To engage generally in the real estate business as principal, agent, broker, and in any lawful capacity, and generally to take, lease, purchase, or otherwise acquire, and to own, use, hold, sell, convey, exchange, mortgage, work, clear, improve, develop, divide, and otherwise handle, manage, operate, deal in, and dispose of, real estate, real property, lands, multiple-dwelling structures, houses, buildings and other works and any interest or right therein; to take, lease, purchase or otherwise acquire, and to own, use, hold, sell, convey, exchange, hire, pledge, mortgage, and otherwise handle, and deal in and dispose of, as principal, agent, broker, and in any lawful capacity, such personal property, chattels, chattels real, rights, easements, privileges, chooses in action, notes, bonds, mortgages, and securities as may lawfully be acquired, held, or disposed of, and to acquire, purchase, sell, assign, transfer, dispose of, and generally deal in and with, as principal, agent, broker, and in any lawful capacity, mortgages and other interests in real, personal, and mixed properties; to carry on a general construction, contracting, building, and realty management business as principal, agent, representative, contractor, sub-contractor, and in any other lawful capacity. To apply for, register, obtain, purchase, lease, take licenses in respect of, or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to account, grant licenses, franchises and immunities in respect of, manufacture under and to introduce, sell, assign, mortgage, pledge or otherwise dispose of, and, in any manner, deal with and contract with reference to: (a) inventions, devices, formulae, processes and any improvements and modifications thereof; (b) letters patent, patent rights, patented processes, copyrights, designs, and similar rights, trade-marks, trade names, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States of America, the District of Columbia, any state or subdivision thereof, and any commonwealth, territory, possession, dependency, colony, agency or instrumentality of the United States of America and of any foreign country, and all rights connected therewith or appertaining thereunto; (c) franchises, licenses, grants and concessions. To guarantee, purchase, take, receive, subscribe for, and otherwise acquire, own, hold, use, and otherwise employ, sell, lease, exchange, transfer, and otherwise dispose of, mortgage, lend, pledge, and otherwise deal in and with, securities (which term, for the purpose of this Article THIRD, includes, without limitation of the generality thereof, any shares of stock, bonds, debentures, notes, mortgages, other obligations, and any certificates, receipts or other instruments representing rights to receive, purchase or subscribe for the same, or representing any other rights or interests therein or in any property or assets) of any persons, domestic and foreign firms, associations, and corporations, and by any government or agency or instrumentality thereof; to make payment therefor in any lawful manner; and, while owner of any such securities, to exercise any and all rights, powers and privileges in respect thereof, including the right to vote. To make, enter into, perform and carry out contracts of every kind and description with any person, firm, association, corporation or government or agency or instrumentality thereof. To acquire by purchase, exchange or otherwise, all, or any part of, or any interest in, the properties, assets, business and good will of any one or more persons, firms, associations or corporations heretofore or hereafter engaged in any business for which a corporation may now or hereafter be organized under the laws of the State of Delaware; to pay for the same in cash, property or its own or other securities; to hold, operate, reorganize, liquidate, sell or in any manner dispose of the whole or any part thereof; and in connection therewith, to assume or guarantee performance of any liabilities, obligations or contracts of such persons, firms, associations or corporations, and to conduct the whole or any part of any business thus acquired. To lend money in furtherance of its corporate purposes and to invest and reinvest its funds from time to time to such extent, to such persons, firms, associations, corporations, governments or agencies or instrumentalities thereof, and on such terms and on such security, if any, as the Board of Directors of the corporation may determine. To make contracts of guaranty and suretyship of all kinds and endorse or guarantee the payment of principal, interest or dividends upon, and to guarantee the performance of sinking fund or other obligations of, any securities, and to guarantee in any way permitted by law the performance of any of the contracts or other undertakings in which the corporation may otherwise be or become interested, of any person, firm, association, corporation, government or agency or instrumentality thereof, or of any other combination, organization or entity whatsoever. To borrow money without limit as to amount and at such rates of interest as it may determine; from time to time to issue and sell its own securities, including its shares of stock, notes, bonds, debentures, and other obligations, in such amounts, on such terms and conditions, for such purposes and for such prices, now or hereafter permitted by the laws of the State of Delaware and by this certificate of incorporation, as the Board of Directors of the corporation may determine; and to secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income. To be a promoter or manager of other corporations of any type or kind; and to participate with others in any corporation, partnership, limited partnership, joint venture, or other association of any kind, or in any transaction, undertaking or arrangement which the corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others. To draw, make, accept, endorse, discount, execute, and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments and evidences of indebtedness whether secured by mortgage or otherwise, as well as to secure the same by mortgage or otherwise, so far as may be permitted by the laws of the State of Delaware. To purchase, receive, take, reacquire or otherwise acquire, own and hold, sell, lend, exchange, reissue, transfer or otherwise dispose of, pledge, use, cancel, and otherwise deal in and with its own shares and its other securities from time to time to such an extent and in such manner and upon such terms as the Board of Directors of the corporation shall determine; provided that the corporation shall now use its funds or property for the purchase of its own shares of capital stock when its capital is impaired or when such use would cause any impairment of its capital, except to the extent permitted by law. To organize, as an incorporator, or cause to be organized under the laws of the State of Delaware, or of any other state of the United States of America, or of the District of Columbia, or of any commonwealth, territory, dependency, colony, possession, agency or instrumentality of the United States of America, or of any foreign country, a corporation or corporations for the purpose of conducting and promoting any business or purpose for which corporations may be organized, and to dissolve, wind up, liquidate, merge or consolidate any such corporation or corporations or to cause the same to be dissolved, wound up, liquidated, merged or consolidated. To conduct its business, promote its purposes, and carry on its operations in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all States of the United States of America, in the District of Columbia, and in any or all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments. To promote and exercise all or any part of the foregoing purposes and powers in any and all parts of the world, and to conduct its business in all or any of its branches as principal, agent, broker, factor, contractor, and in any other lawful capacity, either alone or through or in conjunction with any corporations, associations, partnerships, firms, trustees, syndicates, individuals, organizations, and other entities in any part of the world, and, in conducting its business and promoting any of its purposes, to maintain offices, branches and agencies in any part of the world, to make and perform any contracts and to do any acts and things, and to carry on any business, and to exercise any powers and privileges suitable, convenient, or proper for the conduct, promotion, and attainment of any of the business and purposes herein specified or which at any time may be incidental thereto or may appear conducive to, or expedient for, the accomplishment of any of such business and purposes and which might be engaged in or carried on by a corporation incorporated or organized under the General Corporation Law of the State of Delaware, and to have and exercise all of the powers conferred by the laws of the State of Delaware upon corporations incorporated or organized under the General Corporation Law of the State of Delaware. The foregoing provisions of this Article THIRD shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers shall not be held to limit or restrict in any manner the purposes and powers of the corporation, and the purposes and powers herein specified shall, except when otherwise provided in this Article THIRD, be in no way limited or restricted by reference to, or inference from, the terms of any provision of this or any other Article of this certificate of incorporation; provided, that the corporation shall not conduct any business, promote any purpose, or exercise any power or privilege within or without the State of Delaware which, under the laws thereof, the corporation may not lawfully conduct, promote, or exercise. FOURTH: (a) The aggregate number of shares of capital stock which the corporation is authorized to issue is 22,000,000 consisting of 20,000,000 shares of Common Stock each having a par value of $0.01 per share and 2,000,000 shares of Preferred Stock each having a par value of $10.00 per share. (b) No holder of shares of stock of the corporation of any class now or hereafter authorized shall be entitled as of right to purchase or subscribe for any part of any unissued shares of stock of the corporation of any class now or hereafter authorized or any additional shares of stock to be issued by reason of any increase of the authorized capital stock of the corporation of any class, or any bonds, certificates of indebtedness, debentures or other securities convertible into stock of the corporation of any class now or hereafter authorized, but any such unissued stock or such additional authorized issue of new stock, or such securities convertible into stock, may be issued and disposed of, pursuant to resolutions of the Board of Directors, to such persons, firms, corporations or associations, and upon such terms, as may be deemed advisable by the Board of Directors in the exercise of its discretion. (c) The Board of Directors hereby is vested with the authority to provide for the issuance of the Preferred Stock, at any time and from time to time, in one or more series, each of such series to have such powers, designations, preferences and relative, participating or optional or other special rights and such qualifications, limitations or restrictions thereon as expressly provided in the resolution or resolutions duly adopted by the Board of Directors providing for the issuance of shares of such series. The authority which hereby is vested in the Board of Directors shall include, but not be limited to, the authority to provide for the following matters relating to each series of the Preferred Stock: (1) the number of shares to constitute such series and the designations thereof; (2) the voting power, if any, of holders of shares of such series and, if voting power is limited, the circumstances under which such holders may be entitled to vote; provided, however, that the Board of Directors shall not create any series of Preferred Stock with more than one vote per share; (3) the rate of dividends, if any, and the extent of further participation in dividend distributions, if any, and whether dividends shall be cumulative or non- cumulative; (4) whether or not such series shall be redeemable, and, if so, the terms and conditions upon which shares of such series shall be redeemable; (5) the extent, if any, to which such series shall have the benefit of any sinking fund provision for the redemption or purchase of shares; (6) the rights, if any, of such series, in the event of the dissolution of the corporation, or upon any distribution of the assets of the corporation; and (7) whether or not the shares of such series shall be convertible, and, if so, the terms and conditions upon which shares of such series shall be convertible. FIFTH: The corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the corporation, including the election of the Chairman of the Board of Directors, if any, the President, the Treasurer, the Secretary, and other principal officers of the corporation, shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. Directors are and shall continue to be divided into three subclasses. As of the date hereof, the subclasses Class A-I, Class A-II and Class A-III shall be designated Class I, Class II and Class III, respectively. The number of directors in each subclass shall continue to be determined by the Board of Directors and shall consist of as nearly equal a number of directors as possible. The term of Class I directors initially shall expire at the annual meeting of stockholders held in 1996; the term of Class II directors initially shall expire at the next ensuing annual meeting of stockholders; and the term of Class III directors initially shall expire at the second ensuing annual meeting of stockholders. In the case of each class, the directors shall serve until their respective successors are duly elected and qualified. At each annual meeting of stockholders, directors of the respective class whose term expires shall be elected, and the directors chosen to succeed those whose terms shall have expired shall be elected to hold office for a term to expire at the third ensuing annual meeting of stockholders after their election, and until their respective successors are elected and qualified. Any vacancy in the office of a director may be filled by the vote of the majority of the remaining directors, regardless of any quorum requirements set forth in the By-Laws of the corporation. Any director elected to fill a vacancy in the office of director shall serve until the next annual meeting of stockholders at which directors of the class for which such director shall have been chosen are to be elected, and until his or her successor is elected and qualified. Newly created directorships may be filled by the Board of Directors. 3. In furtherance and not in limitation of the powers conferred by statute, the power to adopt, alter, or repeal the By-Laws of the Corporation shall be vested in the Board of Directors as well as the stockholders; stockholders may not make, adopt, alter, amend, change or repeal the By-Laws of the Corporation except upon the affirmative vote of not less than sixty-six and two- thirds percent (66 2/3%) of the outstanding stock of the Corporation entitled to vote thereon. 4. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders, except as required by law; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. 5. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation to the contrary, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be taken by written consent without such a meeting. 6. No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for 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) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this subsection 6 to Article SEVENTH shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. EIGHTH: (a) No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at, or participates in, the meeting of the Board of Directors or a committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. NINTH: (a) The corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he 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 his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create an assumption that the person did not act in good faith and in a manner which he 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 reasonable cause to believe that his conduct was unlawful. (b) The corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that, the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of any undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article. (f) The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. TENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws and by this certificate of incorporation. All rights at any time conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article TENTH. IN WITNESS WHEREOF, we have duly executed this certificate on behalf of the corporation this 29th day of March, 1996. /s/ Mark S. Newman Mark S. Newman Chairman of the Board, President and Chief Executive Officer EX-3 3 EXHIBIT 3.8 - BY-LAWS Exhibit 3.8 AMENDED AND RESTATED BY-LAWS OF DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (a Delaware corporation) (hereinafter called the "Corporation") ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation shall be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. Annual meetings and special meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as shall be fixed from time to time by the Board of Directors. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the Corporation in the State of Delaware. Section 2. Annual Meetings. The annual meeting shall be held on the date and at the time fixed, from time to time, by the Board of Directors, provided, each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. Annual meetings may be called by the Board of Directors or by any officer instructed by the Board of Directors to call the meeting. Section 3. Special Meetings. Special meetings shall be held on the dates and at the time fixed by the Board of Directors. Special meetings may be called by the Board of Directors or by any officer instructed by the Board of Directors to call the meeting. Section 4. Notice or Waiver of Notice. Written notice of all meetings shall be given, stating the place, date and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the Corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting in all instances shall state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Section 5. Conduct of Meeting. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the Corporation, or in his or her absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the chairman of the meeting shall appoint a secretary of the meeting. Section 6. Proxy Representation. Every stockholder may authorize another person or persons to act for such stockholder by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting. Every proxy must be signed by the stockholder or by such stockholder's attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. Section 7. Nature of Business. No business may be transacted at an annual meeting of Stockholders, other than business that is either: (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 7 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 7. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of the stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever occurs first. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (b) the name and record address of such stockholder; (c) the class or series and number of shares of capital stock which are owned beneficially or of record by such stockholder; (d) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business; and (e) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with this Section 7; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 7 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. Section 8. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 8 and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 8. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 8. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 9. Inspectors and Judges. The directors, in advance of any meeting, shall appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. The directors may designate one or more persons as alternate inspectors or judges to replace any inspector or judge who fails to act. If no inspector or judge or alternate inspector or judge is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors or judges to act at the meeting. Each inspector, or judge, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector or judge at such meeting with strict impartiality and according to the best of his or her ability. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him, her or them and execute a certificate of any fact found by him, her or them. Section 10. Quorum. The holders of a majority of the outstanding shares of common stock of the Corporation issued, outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of stockholders for the transaction of any business. However, the foregoing shall not be deemed to permit a vote upon any transaction as to which the certificate of incorporation or these By- Laws require approval by a vote of the holders of more than a majority of the outstanding shares of common stock of the Corporation, or by more than a majority of the outstanding votes to which the holders of the outstanding shares of common stock of the Corporation are entitled, unless the holders of such portion of the outstanding shares of common stock of the Corporation, or the holders of shares entitled to such portion of votes, as the case may be, are present, whether in person or by proxy. The stockholders present may adjourn the meeting to some future time, without notice other than announcement at the meeting, despite the absence of a quorum. Section 11. Voting. Each share of common stock shall entitle the holder thereof to one vote with respect to any matters presented at any meeting of stockholders. In the election of each class of directors, a plurality of the votes cast with respect to each respective class shall elect. Any other action shall be authorized by a majority of the votes cast except where the Delaware General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power and except as otherwise provided in these By-Laws or the certificate of incorporation. In the election of directors, voting need not be by ballot. Voting by ballot shall not be required for any other corporate action except as otherwise provided by the Delaware General Corporation Law. Section 12. Stockholder List. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 13. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 11 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. ARTICLE III DIRECTORS Section 1. Duties and Powers. The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. The use of the phrase "whole Board" herein refers to the total number of directors which the corporation would have if there were no vacancies. Section 2. Number and Qualifications of Directors. The number of directors which shall constitute the whole Board shall be such number, not less than five nor more than nine, as shall be determined from time to time by a resolution adopted by the directors then in office or by the remaining director if there be only one. Until such time as action shall be taken by the Board to determine a different number, the number of directors which shall constitute the whole Board shall be five. Directors need not be stockholders of the Corporation, citizens of the United States, or residents of the State of Delaware. Section 3. Meetings. Meetings of the Board of Directors of the Corporation shall be held at such place within or without the State of Delaware as shall be fixed by the Board of Directors. Meetings of the Board of Directors shall be held at such time as the Board of Directors shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. No call shall be required for regular meetings of the Board of Directors for which the time and place have been fixed. Special meetings of the Board of Directors may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, or the President, or of a majority of the directors in office. Section 4. Notice or Waiver of Notice. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. The notice of any meeting need not specify the purpose of the meeting. Any requirements of furnishing a notice shall be waived by any director who signs a written waiver of such notice before or after the time stated therein. Section 5. Quorum. Except as may be otherwise specifically provided by law, the certificate of incorporation or these By-Laws, a majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as otherwise provided in the certificate of incorporation or these By-Laws, and except as otherwise provided by the Delaware General Corporation Law, the act of the Board shall be the act by vote of a majority of the directors present at a meeting, a quorum being present. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the Delaware General Corporation Law, the certificate of incorporation or these By-Laws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board. Section 6. Action in Writing. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided by the certificate of incorporation or these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting. Section 8. Chairman of the Meeting. The President if present and acting, shall preside at all meetings. Otherwise, any other officer chosen by the Board, shall preside. Section 9. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 10. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV OFFICERS Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors, a Vice-Chairman thereof and one or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers, and may elect or appoint such other officers and agents as are desired. Any number of offices may be held by the same person, unless otherwise prohibited by law, the certificate of incorporation or these By-Laws. Section 2. Election. Unless otherwise provided in the resolution of election or appointment, each officer shall hold office until the meeting of the Board of Directors following the next annual meeting of stockholders and until such officer's successor has been elected and qualified, or until their earlier resignation or removal. Any officer may resign at any time upon written notice. The Board of Directors may remove any officer for cause or without cause. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 3. Chairman of the Board of Directors. Except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the power, as from time to time may be authorized by the Board of Directors or by the President, to sign all contracts, certificates and other instruments of the Corporation. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President as may be authorized by the Board of Directors or President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him or her by the President, these By-Laws or by the Board of Directors. Section 4. President. The President shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. The President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him or her by these By-Laws or by the Board of Directors. Section 5. Vice-Presidents. At the request of the President or in his or her absence or in the event of the President's inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice- President or the Vice-Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice- President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice- President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 6. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all of the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 7. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Treasurer and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under this control belonging to the Corporation. Section 8. Assistant Secretaries. Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretary's disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 9. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer's disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in the case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. Section 10. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. Section 11. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. ARTICLE V STOCK Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation (i) by the Chairman or Vice-Chairman of the Board of Directors if any, or by the President or a Vice-President and (ii) by the Treasurer or any Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. Section 2. Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if the signator were such officer, transfer agent or registrar at the date of issue. Section 3. Notations on Certificates. Whenever the Corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the Corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the Delaware General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. Section 4. Lost Certificates. The Corporation may issue a new certificate of stock in place of any certificate theretofore issued by it alleged to have been lost, stolen or destroyed, and the Board of Directors may require the owner of any lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. Section 5. Fractional Share Interests. The Corporation may, but shall not be required to, issue fractions of a share. In lieu thereof it shall either arrange for the disposition of fractional interests by those entitled thereto, pay in cash the fair value of fractions of a share, as determined by the Board of Directors, to those entitled thereto or issue scrip or fractional warrants in registered or bearer form over the manual or facsimile signature of an officer of the Corporation or of its agent, exchangeable as therein provided for full shares, but such scrip or fractional warrants shall not entitle the holder to any rights of a stockholder except as therein provided. Such scrip or fractional warrants may be issued subject to the condition that the same shall become void if not exchanged for certificates representing full shares of stock before a specified date, or subject to the condition that the shares of stock for which such scrip or fractional warrants are exchangeable may be sold by the Corporation and the proceeds thereof distributed to the holders of such scrip or fractional warrants, or subject to any other conditions which the Board of Directors may determine. Section 6. Transfers. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the Corporation shall be made only on the stock ledger of the Corporation by the registered holder thereof, or by such registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. Section 7. Record Date. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not be more than sixty days or less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and the record date for determining stockholders when prior action by the Board of Directors is necessary shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided in this paragraph, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 8. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 9. Meaning of Certain Terms. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the Corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon whom the Delaware General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or decrease in the authorized number of shares of stock of any class or series which otherwise is denied voting rights under the provisions of the certificate of incorporation. ARTICLE VI NOTICES Section 1. Notices. Whenever written notice is required by law, the certificate of incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable. Section 2. Waivers of Notice. Whenever any notice is required by law, the certificate of incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed, and shall be subject to change, by the Board of Directors. Section 4. Corporate Seal. The corporate seal shall be in such form as the Board of Directors shall prescribe. EX-4 4 EXHIBIT 4.7 Exhibit 4.7 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of March 27, 1996, by and between Palisade Capital Management L.L.C. ("Palisade"), acting as investment adviser to (i) Chrysler Corp. Emp. #1 Pension Plan Dtd. 4-1-89, (ii) IBM Corp. Retirement Plan Trust Dtd. 12-18-45, (iii) G.E. Pension Trust, and (iv) Nynex Master Pension Trust Dtd. 1-1-84 (each, an "Account" and collectively, the "Accounts") and Diagnostic/Retrieval Systems, Inc. (the "Company"). WHEREAS, in connection with entering into this Agreement, Palisade privately purchased 649,200 shares of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock") and 236,724 shares of the Company's Class B Common Stock, par value $.01 per share (the "Class B Common Stock") pursuant to a letter agreement (the "Letter Agreement"), dated March 27, 1996, between Palisade and Leonard Newman; WHEREAS, on March 26, 1996, the stockholders of the Company approved the reclassification of each share of Class A Common Stock and each share of Class B Common Stock into one share of Common Stock, par value $.01 per share (the "Common Stock") and effective on April 1, 1996 the 649,200 shares of Class A Common Stock and the 236,724 shares of Class B Common Stock privately purchased pursuant to the Letter Agreement by Palisade, as investment adviser to the Accounts, will be reclassified and exchanged for 885,924 shares of the Company's new Common Stock; WHEREAS, the Company believes it is in the best interests of the Company and its stockholders that Palisade, as investment adviser to the Accounts, purchase the shares of Common Stock and Palisade would not consummate the purchase, as investment adviser to the Accounts, without appropriate registration rights in order to be in a position to own shares which could be freely traded; WHEREAS, the Company believes it is in the best interests of the stockholders of the Company to have additional stock registered under the Securities Act and sold into the public market to establish a more liquid and active trading market for the stock; WHEREAS, the Board of Directors of the Company has authorized the officers of the Company to execute and deliver this Agreement in the name and on behalf of the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties to this Agreement hereby agree as follows: 1. Definitions - As used in this Agreement, the following terms shall have the following meanings: "Holder" means Palisade as investment adviser to the Accounts, and each Account, each in its capacity as a registered holder of Registrable Securities. For purposes of this Agreement, the Company may deem and treat the registered holder of a Registrable Security as the Holder and absolute owner thereof, and the Company shall not be affected by any notice to the contrary. "Person" means a corporation, partnership, business, an association, organization, a governmental or political subdivision thereof or a governmental agency. "Registrable Securities" means the 885,924 shares of Common Stock purchased by Palisade, as investment adviser to the Accounts, pursuant to the Letter Agreement dated March 27, 1996. For purposes of this Agreement, a Registrable Security ceases to be a Registrable Security when (x) it has been effectively registered under the Securities Act and sold or distributed to the public in accordance with an effective registration statement covering it, or (y) it is sold or distributed to the public pursuant to Rule 144 (or any successor or similar provision) under the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended from time to time. 2. Demand Registration. (a) Subject to the limitations hereof, if at any time one or more Holders of Registrable Securities holding in the aggregate at least 51% of the total number of Registrable Securities then outstanding shall request the Company in writing to register under the Securities Act all or a part of the Registrable Securities held by such Holder or Holders (a "Demand Registration"), the Company shall use, subject to the terms of this Agreement, all reasonable efforts to cause to be filed and declared effective as soon as reasonably practicable a registration statement, on such appropriate form as the Company in its discretion shall determine, to effect the registration under the Securities Act of (i) the Registrable Securities which the Company has been so requested to register by such Holder or Holders for disposition in accordance with the intended method of disposition stated in the written request by such Holder or Holders and (ii) all Common Stock or other securities of the Company which the Company may elect to register on behalf of itself or others in connection with the offering of the Registrable Securities pursuant to this Section 2. The Company agrees to use its best efforts to keep any such registration statement continuously effective and usable for resale of Registrable Securities for the applicable period specified in Section 3(a)(ii), subject to subparagraph (c) of this Section 2. The Company shall be obligated to effect one (1) registration statement pursuant to this Section 2(a). A registration requested pursuant to this Section 2(a) shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, provided that a registration which does not become effective after the Company has filed a registra- tion statement with respect thereto solely by reason of the refusal to proceed of the Holder (other than a refusal to proceed based upon the advice of counsel relating to a matter with respect to the Company) shall be deemed to have been effected by the Company at the request of such Holder unless the Holder shall have elected to pay all expenses (pursuant to Section 3(e) hereof) in connection with such registration, (ii) if, after it has become effective, such registration becomes subject to any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason, or (iii) the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied, other than by reason of some act or omission by such Holder. Each registration statement filed pursuant to this Section 2(a) is hereinafter referred to as a "Demand Registration Statement." (b) The Company agrees (i) not to effect any public or private sale, distribution or purchase of any of its securities which are the same as or similar to the Registrable Securities, including a sale pursuant to Regulation D under the Securities Act, during the 15-day period prior to, and during the 45-day period beginning on, the closing date of each underwritten offering under any Demand Registration Statement (with the exception of Common Stock or other securities of the Company sold in connection with the Demand Registration Statement pursuant to Section 2(e) hereof), and (ii) to use reasonable best efforts to cause each holder of its securities purchased from the Company, at any time on or after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution of any such securities during such period, including a sale pursuant to Rule 144 under the Securities Act. (c) The Company may postpone for a reasonable period of time the filing or the effectiveness of any Demand Registration Statement and the Company shall not be required to maintain the effectiveness of or amend or supplement any Demand Registration Statement if the Board of Directors of the Company in good faith determines that (A) such registration might have a material adverse effect on any plan or proposal by the Company with respect to any financing, acquisition, merger, recapitalization, reorganization or other material transaction (a "Transactional Delay Period"), or (B) the Company is in possession of material non-public information that, if publicly disclosed, could result in a material disruption of a corporate development or transaction then pending or in progress or in other material adverse consequences to the Company (an "Informational Delay Period"). The Company will give prompt written notice to each Holder of each Transactional Delay Period and Informational Delay Period. Such notice shall state to the extent, if any, as is practicable, an estimate duration of such Transactional Delay Period or Informational Delay Period. Each Holder, as holder of Registrable Securities, agrees that (i) upon receipt of such notice of an Informational Delay Period or Transactional Delay Period it will forthwith discontinue disposition of any Registrable Securities pursuant to the Demand Registration Statement and (ii) it will not deliver any prospectus forming a part of the Demand Registration Statement in connection with any sale of Registrable Securities until the expiration of such Informational Delay Period or Transactional Delay Period, as the case may be. The Company shall have the right to file a post-effective amendment to any Demand Registration Statement to change the form of registration statement from a long form to a short form in accordance with the rules and regulations of the Securities Act. (d) If at any time any Holder of Registrable Securities to be covered by a Demand Registration Statement desires to sell Registrable Securities in an underwritten offering, the Company shall have the right to select any nationally recognized investment banking firm(s) to administer the offering, and the Company shall enter into underwriting agreements with the underwriter(s) of such offering, which agreements shall contain such representations and warranties by the Company, and such other terms and conditions as are at the time customarily contained in underwriting agreements for similar offerings. Such underwriting agreement shall contain indemnities consistent with Section 3(f) hereof. (e) The Company may also elect to register Common Stock or other securities of the Company on behalf of itself or others in connection with the offering of Registrable Securities pursuant to this Section 2. (f) If a requested registration pursuant to this Section 2 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each Holder of Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Securities) exceeds the number which can be sold in such offering, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, (i) first, Registrable Securities requested to be included in such registration by the Holder or Holders of Registrable Securities, pro rata among such Holders requesting such registration on the basis of the number of such securities requested to be included by such Holders and (ii) second, securities the Company proposes to sell and other securities of the Company included in such registration by the holders thereof. 3. Registration Procedures. (a) Whenever the Company is required to use all reasonable efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to the terms and conditions of Section 2 (such Registrable Securities being hereinafter referred to as "Subject Shares"), the Company will use all reasonable efforts to effect the registration and sale of the Subject Shares in accordance with the intended method of disposition thereof. Without limiting the generality of the foregoing, the Company will as expeditiously as practicable: (i) prepare and file with the SEC a registration statement with respect to the Subject Shares to effect the registration thereof, and thereafter use all reasonable efforts to cause such registration statement to become effective; provided, however, that the Company may discontinue any registration of its securities which are not Registrable Securities at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Subject Shares and other securities covered by such registration statement until the earlier of (a) such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement or (b) the expiration of three years after such registration becomes effective; (iii) furnish each Holder covered by such registration statement, without charge, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits if requested by a Holder in writing), such number of copies of the prospectus included in such registration statement (including such preliminary prospectus), such documents incorporated by reference in such registration statement or prospectus, and such other documents, as such Holders may reasonably request; (iv) use all reasonable efforts to register or qualify the Subject Shares covered by such registration statement under the securities or blue sky laws of such jurisdictions as any seller thereof and the managing underwriter(s) of the Securities being sold by such seller shall reasonably recommend, and do any and all other acts and things which may be reasonably necessary or advisable to enable the Holders to consummate the disposition in such jurisdictions of the Subject Shares covered by such registration statement, except that the Company shall not for any such purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, (B) subject itself to taxation in any jurisdiction wherein it is not so subject, or (C) consent to general service of process in any such jurisdiction or otherwise take any action that would subject it to the general jurisdiction of the courts of any jurisdiction in which it is not so subject; (v) otherwise use its best efforts to comply with all applicable rules and regula- tions of the SEC; (vi) furnish, at the Company's expense, unlegended certificates representing ownership of the securities being sold in such denominations as shall be requested and instruct the transfer agent to release any stop transfer orders with respect to the Subject Shares being sold; (vii) notify each Holder at any time when a prospectus relating to the Subject Shares is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of a prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading, and the Company will, as promptly as practicable thereafter, prepare and file with the SEC and furnish a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of Subject Shares such prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (viii) if requested by the underwriters for any underwritten offering by the Holders of Registrable Securities pursuant to a registration requested under Section 2, the Company will enter into with such underwriters for such offering, an underwriting agreement in customary form in the case of an underwritten offering in form and substance satisfactory to the Company, each such Holder and the underwriters; make such representations and warranties to the sellers and underwriters as in form and substance and scope are customarily made by issuers to underwriters in underwritten offerings and take such other actions as the Holders or the managing underwriter or agent, if any, reasonably require in order to expedite or facilitate the disposition of such Subject Shares and the Holders of the Registrable Secu- rities will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof, provided that nothing herein contained shall diminish the foregoing obligations of the Company; (ix) make available for inspection by the Holder, any underwriter or agent participating in any disposition pursuant to such registration statement, and any attorney, account or other similar professional advisor retained by any such Holders or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement. The Holders agree that Records and other information which the Company determines, in good faith, to be confidential and of which determination the Inspectors are so notified shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement, (ii) the release of such Records is ordered pursuant to a subpoena, court order or regulatory or agency request or (iii) the information in such Records has been generally disseminated to the public. Each Holder agrees that it will, upon learning that disclosure of such Record is sought in a court of competent jurisdiction or by a governmental agency, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; (x) obtain for delivery to the Company, the underwriter or agent which satisfy the conditions for receipt of a "comfort" letter, with copies to the Holders, a "comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Holders or the managing underwriter reasonably request; (xi) obtain for delivery to the Holders and the underwriter or agent an opinion or opinions from counsel for the Company in customary form and reasonably satisfactory to the Holders and their counsel; (xii) make available to its security holders earnings statements, which need not be audited, satisfying the provisions of Section 11(a) of the Securities Act no later than 90 days after the end of the 12-month period beginning with the first month of the Company's first quarter commencing after the effective date of registration statement, which earnings statements shall cover said 12-month period; (xiii) make every reasonable effort to prevent the issuance of any stop order suspending the effectiveness of the registration statement or of any order preventing or suspending the effectiveness of such registration statement at the earliest possible moment; (xiv) cause the Subject Shares to be registered with or approved by such other governmental agencies or authorities within the United States as may be necessary to enable the sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such securities; (xv) cooperate with the Holders and the managing underwriter or underwriters if any, or any other interested party (including any interested broker-dealer) in making any filings or submission required to be made, and the furnishing of all appropriate information in connection therewith, with the National Association of Securities Dealers, Inc. ("NASD"); (xvi) cause its subsidiaries to take action necessary to effect the registration of the Subject Shares contemplated hereby, including filing any required financial information; (xvii) effect the listing of the Subject Shares on the American Stock Exchange or such other national securities exchange on which shares of the Common Stock shall then be listed; and (xviii) take all other steps necessary to effect the registration of the Subject Shares contemplated hereby. (b) The Holders shall provide (in writing and signed by the Holders and stated to be specifically for use in the related registration statement, preliminary prospectus, prospectus or other document incident thereto) all such information and materials and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and any applicable state securities laws and to obtain any desired acceleration of the effective date of any registration statement prepared and filed by the Company pursuant to this Agreement. (c) The Holders shall, if requested by the Company or the managing underwriter(s) in connection with any proposed registration and distribution pursuant to this Agreement, (i) agree to sell the Subject Shares on the basis provided in any underwriting arrangements entered into in connection therewith, (ii) become a party to any such underwriting agreements and (iii) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents customary in similar offerings. (d) Upon receipt of any notice from the Company that the Company has become aware that the prospectus (including any preliminary prospectus) included in any registration statement filed pursuant to Section 2(a), as then in effect, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Holders shall forthwith discontinue disposition of Subject Shares pursuant to the registration statement covering the same until the Holders' receipt of copies of a supplemented or amended prospectus and, if so directed by the Company, deliver to the Company (at the Company's expense) all copies other than permanent file copies then in such Holder's possession, of the prospectus covering the Subject Shares that was in effect prior to such amendment or supplement. (e) The Company shall pay the out-of-pocket expenses incurred in connection with any Demand Registration Statement pursuant to Section 2(a) of this Agreement prior to the time at which one such registration shall have been effected, including, without limitation, all SEC and blue sky registration and filing fees (including NASD fees), printing expenses, transfer agents and registrars' fees, fees and disbursements of the Company's counsel and accountants and fees and disbursements of experts used by the Company in connection with such registration statement, provided that the Holders shall pay all underwriting discounts, commissions and expenses attributable to securities sold for the account of the Holders pursuant to such registration statement and the fees and disbursements of the Holders' counsel and accountants and fees and disbursements of experts used by the Holders in connection with such registration statement, provided, further, that the Company shall pay all underwriting discounts, commissions and expenses attributable to Common Stock or other securities of the Company sold pursuant to Section 2(e) in connection with such Demand Registration Statement. (f) In connection with any sale of Subject Shares that are registered pursuant to this Agreement, the Company will, and hereby does agree to, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 2 hereof, the Holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Holder or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such Holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Holder or underwriter specifically stating that it is for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Securities Act to the Person asserting the existence of an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. (g) (i) In the case of any registration statement filed pursuant to Section 2 hereof, the sellers of such Registrable Securities covered by such registration statement in consideration for being included in such registration will, jointly and severally, indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (f) above of this Section 3) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (h) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions (f) or (g) of this Section 3, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions (f) or (g) of this Section 3, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (i) If the indemnification provided for in the preceding subdivisions of this Section 3 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Holder or underwriter, as the case may be, on the other from the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Holder or underwriter, as the case may be, on the other in connection with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the Holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, provided that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained in the first sentence of subdivision (f) of this Section 3, and in no event shall the obligation of any indemnifying party to contribute under this subdivision (i) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under subdivisions (f) or (g) of this Section 3 had been available under the circumstances. Notwithstanding the provisions of this subdivision (i), no Holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such Holder, the net proceeds received by such Holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such Holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (j) Prior to any transfer of any restricted Common Stock which are not registered under an effective registration statement under the Securities Act, the Holder thereof will give written notice to the Company of such Holder's intention to effect such transfer and to comply in all other respects with this subdivision (j). Each such notice (i) shall describe the manner and circumstances of the proposed transfer in sufficient detail to enable counsel to render the opinions referred to below, and (ii) shall designate counsel for the Holder giving such notice (who may be house counsel for such Holder). The Holder giving such notice will submit a copy thereof to the counsel designated in such notice and the Company will promptly submit a copy thereof to its counsel. The following provisions shall then apply: (x) If (A) in the opinion of such counsel for the Holder the proposed transfer may be effected without registration of such restricted Common Stock under the Securities Act, and (B) counsel for the Company shall not have rendered an opinion within 30 days after receipt by the Company of such written notice that such registration is required, such Holder shall thereupon be entitled to transfer such restricted Common Stock in accordance with the terms of the notice delivered by such Holder to the Company and the Securities Act. Each certificate, if any, issued upon or in connection with such transfer shall bear the appropriate restrictive legend, unless in the opinion of each such counsel such legend is no longer required to insure compliance with the Securities Act. (y) If in the opinion of either or both of such counsel the proposed transfer may not legally be effected without registration of such restricted Common Stock under the Securities Act (such opinion or opinions to state the basis of the legal conclusions reached therein), the Company will promptly so notify the Holder thereof and thereafter such Holder shall not be entitled to transfer such restricted Common Stock until receipt of a further notice from the Company under clause (x) above or until registration of such restricted Common Stock under the Securities Act has become effective. Notwithstanding the foregoing provisions of this subdivision (j), the purchaser of the restricted Common Stock shall be permitted to transfer any restricted Common Stock to a limited number of institutional investors, provided that (A) each such investor represents in writing that it is acquiring such restricted Common Stock for investment and not with a view to the distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within the control of such transferee), (B) each such investor agrees in writing to be bound by all the restrictions on transfer of such restricted Common Stock contained in this subdivision (j) and (C) the purchaser of the restricted Common Stock delivers to the Company an opinion of counsel satisfactory to the Company, stating that such transfer may be effected without registration under the Securities Act. 4. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the third business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual service, fully prepaid, addressed to such address, or upon actual receipt of such mailing whichever shall first occur. The addresses for such communications shall be: If to the Company: Diagnostic/Retrieval Systems, Inc. 5 Sylvan Way Parsippany, New Jersey 07054 with a copy to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 Attention: Mark N. Kaplan, Esq. If to Palisade: One Bridge Plaza Suite 695 Fort Lee, New Jersey 07024 Attention: Mark Hoffman If to any other Holder: to such name at such address as such Holder shall have indicated in a written notice delivered to the other parties of this Agreement. Any party hereto may from time to time change its address for notices under this Section 4 by giving at least 10 days' notice of such changes to the other parties hereto. 5. Waivers. No waiver by any party of any default with respect to any provision, condition or requirement hereof shall be deemed to be a continuing waiver in the future thereof or a waiver of any other provision, condition or requirement hereof; nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 6. Headings. The headings herein are for convenience only, do not constitute a part of this Agree- ment and shall not be deemed to limit or affect any of the provisions hereof. 7. No Third Party Beneficiaries. This Agree- ment is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 8. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of laws. 9. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 10. Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11. Execution. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become affective when counterparts have been signed by each party and delivered to the other party, it being understood that the parties need not sign the same counterpart. IN WITNESS WHEREOF, the parties hereto have duly executed. This Agreement as of the date first written above. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By /s/ Nancy R. Pitek Name: Nancy R. Pitek Title: Controller, Treasurer and Secretary PALISADE CAPITAL MANAGEMENT L.L.C. By /s/ Mark S. Hoffman Name: Mark S. Hoffman Title: Senior Vice President EX-4 5 EXHIBIT 4.8 EXHIBIT 4.8 FIRST SUPPLEMENTAL INDENTURE, dated as of April 1, 1996 between Diagnostic/Retrieval Systems, Inc., a Delaware corporation (the "Company"), and The Trust Company of New Jersey, as trustee (the "Trustee"). WHEREAS, the Company heretofore executed and delivered to the Trustee an Indenture dated as of Septem- ber 22, 1995 (the "Original Indenture" and, as it may be amended or supplemented from time to time by one or more indentures supplemental thereto entered into pursuant to the applicable provisions thereof, the "Indenture"), providing for the issuance of the Company's 9% Senior Subordinated Convertible Debentures due 2003(the "Deben- tures"); WHEREAS, on March 26, 1996, the stockholders of the Company approved, effective as of April 1, 1996, the reclassification of each share of Class A Common Stock, par value $.01 per share, and each share of Class B Common Stock, par value $.01 per share, into one share of a new single class of common stock, par value $.01 per share; and WHEREAS, Section 10.5 of the Original Indenture provides that in the event of any reclassification of Class A Common Stock, the Company shall enter into a supplemental indenture providing that each Debenture shall be convertible into the kind and amount of securi- ties receivable upon such reclassification by a holder of Class A Common Stock issuable upon conversion of such Debentures immediately prior to such reclassification. NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDEN- TURE WITNESSETH, that, for and in consideration of the promises, it is mutually covenanted and agreed, for the equal and proportionate benefit of all holders of Deben- tures, as follows: ARTICLE ONE Amendment to Original Indenture SECTION 1.1. (a) The definition of the defined term "Class A Common Stock" that appears in Article 1., Section 1.1 of the Indenture is hereby deleted. (b) The definition of the defined term "Common Stock" that appears in Article 1., Section 1.1 of the Indenture is hereby amended in its entirety to read: "Common Stock" as applied to the Capital Stock of any corporation, means the common equity (however designated) of such Person, and with respect to the Company, means the Common Stock, par value $.01 per share, or any successor class of common equity into which such common stock may hereafter be converted. (c) Any and all references in the Indenture to "Class A Common Stock" shall be read as referring to "Common Stock". ARTICLE TWO Miscellaneous SECTION 2.1 Instruments to be Read Together. This First Supplemental Indenture is an indenture supple- mental to and in implementation of the Original Inden- ture, and the Original Indenture and this First Supple- mental Indenture shall henceforth be read together. SECTION 2.2 Confirmation. The Original Indenture as amended and supplemented by this First Supplemental Indenture is in all respects confirmed and preserved. SECTION 2.3 Terms Defined. Capitalized terms used in this First Supplemental Indenture and not otherwise defined herein shall have the respective mean- ings set forth in the Original Indenture. SECTION 2.4 Headings. The headings of the Articles and Sections of this First Supplemental Inden- ture have been inserted for convenience of reference only, and are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. SECTION 2.5 Governing Law. The laws of the State of New York shall govern this First Supplemental Indenture, without regard to the conflicts of laws provi- sions thereof. SECTION 2.6 Counterparts. This First Sup- plemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall to- gether constitute but one and the same instrument. SECTION 2.7 Effectiveness. The provisions of this First Supplemental Indenture will take effect immediately upon its execution and delivery by the Trust- ee in accordance with the provisions of Section 9.01 and 9.06 of the Indenture. SECTION 2.8 Acceptance by Trustee. The Trustee accepts the amendments to the Indenture effected by the First Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the date first written above. Attest: DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By: By: /s/ Mark S. Newman Name: Name: Mark S. Newman Title: Title: Chief Executive Officer and President THE TRUST COMPANY OF NEW JERSEY By: /s/ John D. Cherry Name: John D. Cherry Title: Vice President Trust Officer EX-10 6 EXHIBIT 10.88 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 7 EXHIBIT 10.89 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 8 EXHIBIT 10.93 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-10 9 EXHIBIT 10.94 Exhibit 10.94 EMPLOYMENT, NON-COMPETITION AND TERMINATION AGREEMENT EMPLOYMENT, NON-COMPETITION AND TERMINATION AGREEMENT (the "Agreement"), dated March 28, 1996, between Diagnostic/Retrieval Systems, Inc., a Delaware corporation having its principal place of business at 5 Sylvan Way, Parsippany, New Jersey (the "Corporation"), and Leonard Newman ("Employee"). W I T N E S S E T H WHEREAS, the Corporation and Employee desire to modify their existing employment relationship and resolve all issues existing between them; and WHEREAS, the Corporation and Employee desire to enter into a new contractual arrangement, superseding any prior agreement between the parties, whereby, inter alia, the Corporation will utilize Employee on a consulting basis upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises contained herein and intending to be legally bound hereby, the Corporation and Employee agree as follows: 1. EFFECTIVE DATE Employee shall continue as an employee of the Corporation until March 31, 1996 with all of his current rights and benefits and shall perform such duties consistent with those of a senior executive of the Corporation as may be assigned to him from time to time by the Corporation's Chief Executive Officer. This Agreement shall become effective on the date hereof (the "Effective Date"). 2. TERM OF AGREEMENT This Agreement shall commence on the Effective Date and terminate on the fifth anniversary of March 31, 1996. 3. INDEMNIFICATION Employee shall continue to be indemnified by the Corporation for his past and future actions taken (or omitted to be taken) as an officer, director or employee of the Corporation, and shall be indemnified by the Corporation for his future actions taken (or omitted to be taken) as a Consultant (as such term is defined in paragraph 5(a) hereof), consistent with the Corporation's Bylaws and Certificate of Incorporation. 4. RELEASE (a) Release by Employee. Employee hereby releases (the "Release") and forever discharges the Corporation, its past and present directors, managers, officers, shareholders, employees, agents, attorneys, servants, affiliates, successors and assigns (collectively, the "Releasees") from any and all claims, charges, complaints, liens, demands, causes of action, obligations, damages and liabilities, known or unknown, that he had, now has, or may claim hereafter to have against the Releasees by reason of any matter, cause or things whatsoever arising on or before the Effective Date, whether or not previously asserted before any state or federal court, agency or governmental entity. This Release includes, without limitation, any rights or claims relating in any way to Employee's employment relationship with the Corporation under any statute, including the federal Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act, as amended, The New Jersey Law Against Discrimination, as amended or any other federal, state or local laws. Notwithstanding the above, this Release does not include or effect Employee's right to indemnification as an officer, director, employee or Consultant or his rights pursuant to this Agreement. Employee further acknowledges that the Corporation has satisfied fully any and all obligations whatsoever owed to Employee arising out of his employment relationship with the Corporation, or the modification thereof, prior to the Effective Date and that no further sums are owed to him by the Corporation, except as provided in this Agreement. This Release shall not survive the wrongful termination of this Agreement by the Corporation. (b) No Action. Except as set forth in paragraph 4(a), Employee shall not commence or join in any claim, charge or action against Releasees, or any of them, arising out of or relating in any way to Employee's employment with the Corporation during the period prior to the Effective Date, including, but not limited to, the modification of his duties and responsibilities as an employee, or to any other matter or event occurring prior to the Effective Date. Employee represents that he has not brought or joined in any such claim, charge or action against any of the Releasees. (c) Consultation with Attorney; Voluntary Agreement. Employee acknowledges that the Corporation has advised him to consult with any attorney of his choosing prior to signing this Agreement. Employee further acknowledges and understands that he has the right and has been given the opportunity to review this Agreement and, specifically, paragraph 4 hereof (regarding the Release by Employee), with any attorney of Employee's choice. Employee further represents that he understands that the Corporation is under no obligation to offer the consulting relationship provided for in paragraph 5 hereof, and that Employee is under no obliga- tion to consent to the release, and that he has entered into this Agreement freely and voluntarily. Employee shall have twenty-one (21) days to consider this Agreement and once he has signed this Agreement, Employee shall have seven (7) additional days from the date of its execution to revoke his consent to the Release. Any such revocation shall be made in writing pursuant to paragraph 17 hereof. If no such revocation occurs, the release and this Agreement shall become effective eight (8) days from the date first set forth above. If Employee revokes his Release within such period, this Agreement shall be null and void and shall not become effective. (d) Release by Corporation. The Corporation hereby releases and forever discharges Employee from any and all claims, charges, complaints, liens, demands, causes of action, obligations, damages and liabilities, known or unknown, that it had, now has, or may claim hereafter to have against Employee, by reason of any matter, cause or thing whatsoever arising on or before the Effective Date, whether or not previously asserted before any state or federal court, agency or governmental entity; provided, however, that this release of the Employee by the Corporation shall not apply to any claim arising as a result of any unlawful conduct by the Em- ployee. This release includes, without limitation, any rights or claims relating in any way to Employee's employment relationship with the Corporation under any statute, rule, regulation or the common law. Notwith- standing the above, this release does not include or effect the Corporation's rights under this Agreement. This release shall not survive the wrongful termination of this Agreement by Employee. 5. ENGAGEMENT OF EMPLOYEE ON CONSULTING BASIS (a) General. The Corporation hereby engages Employee as Co-Founder and Senior Adviser and as a consultant ("Consultant") to perform such duties as are assigned to him by the Corporation's Chief Executive Officer pursuant to paragraph 5(b). Employee accepts such engagement and shall perform such duties on behalf of the Corporation in accordance with the terms of this Agreement. Employee's obligations under this paragraph 5 shall commence on April 1, 1996 and shall continue until March 31, 2001 unless terminated earlier pursuant to paragraph 5(h) or paragraph 5(k) (the "Consulting Period"). During the Consulting Period, Employee shall con- tinue to be an employee of the Corporation. At the end of Consulting Period, Employee's employment with the Corporation shall terminate. (b) Duties. The services rendered to the Corporation by Employee during the Consulting Period pursuant to this Agreement shall consist of consulting with the Corporation as the Corporation's Chief Executive Officer may reasonably request from time to time and such duties shall be consistent with those of a senior executive of the Corporation. Such consulting shall be with respect to the operation of the Corporation's business and such other matters as may be agreed upon between the Corporation and Employee and may include, without limitation, attendance at meetings, briefings, seminars, conferences, depositions, trials, tax audits or other proceedings. If Employee requires access to secretarial services in connection with the performance of his duties pursuant to this paragraph 5(b) during the Consulting Period, the Corporation shall provide the Employee with reasonable access to secretarial services as the Employee may reasonably require from time-to-time and such access may be terminated by the Corporation if it is determined in the sole discretion of the Corporation's Chief Executive Officer that the use of such secretarial services by Employee is neither reasonable nor in connection with the performance of Employee's duties pursuant to this paragraph 5(b). (c) Reasonable Efforts. Employee shall devote his reasonable efforts, talents and skills to the duties which the Corporation may reasonably request of him during the Consulting Period. (d) Limitations. The duties which the Corporation may assign to Employee during the Consulting Period pursuant to this Agreement shall not require an average of more than twenty (20) hours of service by Employee per week throughout the term of the Consulting Period and shall not exceed more than 40 hours in any given week. (e) Compensation. For Employee's services to the Corporation under paragraph 5(a), the Corporation shall pay Employee, consistent with the Corporation's regular payroll practices, the amount of $6,000.00, less all applicable withholding taxes, for each calendar year of the Consulting Period. Any such payment covering less than a full-calendar year shall be pro-rated. If the Corporation wants to utilize Employee's services for more than the number of hours of service specified in paragraph 5(d), the Corporation and Employee shall meet and negotiate in good faith to reach an agreement regarding the appropriate compensation for additional work. If no agreement is reached, Employee shall not be required to perform any additional services. (f) Benefits. During the Consulting Period, Employee shall receive the health care (including flex benefits), disability, life insurance and 401(k) plan benefits set forth in the plans listed on Exhibit A. Employee's participation in any benefit plan shall be subject to the terms and conditions set forth in the relevant plan documents, any amendments thereto adopted from time to time and any agreements relating thereto. In addition, the Corporation shall pay to Employee on an annual basis during the Consulting Period an amount equal to the scheduled premium for the Banner Life Insurance Policy No. 010618131 with the specified face value of such policy as $250,000. The Corporation has been advised by the insurance broker for its health care, disability and life insurance benefit plans that an employee with the title of Co-Founder is eligible to participate in the health care, disability and life insurance benefit plans set forth in this paragraph 5(f). The Corporation shall take all actions which are commercially reasonable to continue Employee's eligibility under such plans. To the extent permitted under the Corporation's relevant health care, life and disability policies, upon termination of the Consulting Period, Employee may assume said policies upon terms mutually agreed to between the Corporation and Employee. During the Consulting Period, the Employee may submit a request to the Corporation's Chief Executive Officer that the Corporation pay for certain memberships or subscriptions which the Corporation had previously paid for prior to the Effective Date relating to Employee's duties under this Agreement and the Corporation may pay for such memberships or subscriptions which are approved by the Corporation's Chief Executive Officer in his sole discretion. On the Effective Date, the Corporation shall sell to Employee for $1,000 the Corporation's vehicle he is currently using. Notwithstanding the foregoing, the Corporation shall have no further obligation to provide Employee with an automobile or to reimburse Employee for any expenses incurred after the Effective Date relating to any automobile. Also on the Effective Date, the Corporation shall transfer ownership to Employee of its computer and associated equipment that Employee has at his home as of the date of this Agreement and of the furniture currently in the Employee's office, and the Corporation shall bear the cost of moving the furniture to the address for Employee set forth in paragraph 17 of this Agreement. (g) Termination for Cause. The Corporation may terminate Employee's consulting services under this Agreement at any time for "Cause" after compliance with the provisions of paragraph 5(h). The term "Cause" shall be defined solely as follows: i) Employee's failure or refusal to perform materially the duties set forth in paragraph 5(b), except if such non-performance is due to Employee's inability, due to medical reasons, to so perform; ii) Employee's conviction of a felony, or conviction of any other violation of any law that results in material injury to the Corporation (either monetarily or to its reputation); or iii) Any material breach (not covered by clauses (i) and (ii) above) of any material provisions of this Agreement. (h) Decision as to Breach and Opportunity to Cure. Any decision by the Corporation as to whether "Cause" exists shall be made by a majority of the entire Board after Employee and his counsel have had an opportu- nity to appear before the Board. If thereafter the Corporation desires to terminate Employee's consulting services for Cause, it shall first provide Employee with written notice of termination specifying the basis for terminating his consulting services, and shall allow Employee no less than thirty (30) days to remedy, cure or rectify the situation giving rise to the alleged Cause. (i) Compensation if Terminated for Cause. If Employee's consulting services under this Agreement are terminated for Cause, the Corporation's sole obligation under paragraph 5 shall be to pay Employee any unpaid but accrued compensation owed to him pursuant to paragraph 5(e) through the date of termination and provide Employee with benefits pursuant to paragraph 5(f) through the date of termination. (j) Termination by Employee. Employee may elect to terminate the Consulting Period at any time after the second anniversary of the Effective Date by providing the Corporation with written notice of such election. If Employee's consulting services under this Agreement are terminated pursuant to this paragraph 5(j), the Corporation's sole obligation under this paragraph 5 shall be to pay Employee any unpaid but accrued compensation owed pursuant to paragraph 5(e) through the date of termination and provide Employee with benefits pursuant to paragraph 5(f) through the date of termination. (k) Termination by Employee's Death. If Employee dies during the Consulting Period, his estate shall be entitled to receive any amounts that would have become payable pursuant to paragraph 5(e) had Employee survived, provided that the schedule for making such payments shall not be accelerated unless the Corporation and Employee's estate both agree to a "present value" lumpsum payment. (l) Disability. During any period of disability, Employee shall continue to receive his compensation pursuant to paragraph 5(e) and all benefits pursuant to paragraph 5(f), less any amounts paid to Employee pursuant to the Corporation's disability plan. Employee may resume his consulting services pursuant to this paragraph 5 at any time during the Consulting Period if Employee is no longer disabled and is able to resume his duties hereunder, provided that in no event shall the Consulting Period be extended beyond March 31, 2001. 6. COVENANT NOT TO COMPETE (a) Non-Competition. For the five-year period commencing on March 31, 1996 (the "Non-Compete Period"), Employee shall not, directly or indirectly, own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with any business that offers products or services comparable to those offered by the Corporation on the Effective Date or during the Non- Compete Period, as described in the Corporation's annual reports on Form 10-K (a "Competitive Business"). The restrictions contained in this paragraph 6(a) shall not be construed to prohibit Employee from being employed by or from providing services to any entity or enterprise which directly competes with the Corporation, provided that Employee does not work in or otherwise provide advice or assistance to an area of any such entity or enterprise that competes with the Corporation and Employee complies with paragraph 6(b). Nothing in this paragraph 6 shall be deemed to prevent Employee from owning securities of any publicly owned corporation that is a Competitive Business, provided the total amount of securities owned by Employee in such publicly owned corporation does not exceed one percent (1%) of the outstanding securities of such class. (b) Non-interference. During the Non-Compete Period, Employee shall not, directly or indirectly, take any of the following actions: (i) persuade or attempt to persuade any client of the Corporation to cease doing business with the Corporation, or to reduce the amount of business it does with the Corporation; (ii) persuade or attempt to persuade any potential client to which the Corporation has made a presentation, or with which the Corporation has been negotiating, not to hire the Corporation or to hire a competitor; (iii) persuade or attempt to persuade any employee of the Corporation to leave the Corporation's employ or to become employed by any person, firm, corporation, partnership, association or entity other than the Corporation; or (iv) persuade or attempt to persuade or assist any person, firm, corporation, partnership, association or entity in any attempt to procure a sale of all or substantially all of the Corporation's stock or assets. (c) Covenants are Reasonable and Necessary. Employee acknowledges and agrees that due to the uniqueness of his skills and abilities and the uniqueness of the confidential information he possesses, the covenants set forth herein are reasonable and necessary for the protection of the Corporation's goodwill and business. Employee further agrees that enforcement of the covenants herein will not deprive him of his ability to earn a livelihood. (d) Payments to Employee. In consideration of Employee's covenants set forth in this paragraph 6, the Corporation shall pay Employee an amount of $50,000.00 which amount is included in the sum set forth in paragraph 7(a). (e) Breach of Covenant Not to Compete. If Employee breaches his obligations under subparagraphs 6(a) or 6(b) above, the Corporation shall provide the Employee with a notice specifying the basis for its belief that such a breach has occurred, and shall allow the Employee no less than five (5) business days to remedy, cure or rectify the breach. Thereafter, if Employee has failed to remedy, cure or rectify the breach, the Corporation may pursue any legal or equitable remedies it deems appropriate. (f) Opportunity to Consult. The Corporation agrees that at Employee's request the parties shall consult regarding whether any activity proposed by Employee violates this paragraph 6. If the parties are unable to reach an agreement regarding whether Employee's proposed activity would violate this paragraph 6, the dispute may be resolved pursuant to paragraph 12. (g) Limitation. Notwithstanding anything to the contrary in paragraphs 6(a), 6(b)(i) and 6(b)(ii), if after the Effective Date, Employee, directly or indirectly, owns, manages, operates, controls, is employed by or participates in the ownership, management, operation or control of a business that as of the Effective Date was not a Competitive Business, Employee's activity will not violate paragraphs 6(a), 6(b)(i) and 6(b)(ii), provided that (i) Employee did not obtain information about such business as a result of the performance of his duties for the Corporation, including, without limitation, his duties performed during the Consulting Period and (ii) the Corporation does not intend to utilize such informa- tion in maintaining its existing business or soliciting new business. 7. ADDITIONAL PAYMENTS AND BENEFITS (a) On the Effective Date, the Corporation shall pay the Employee $2,023,186.66, less all applicable withholding taxes. (b) Payment of Bonus. On the Effective Date, the Corporation shall pay Employee the sum of $75,000.00. This sum represents the bonus earned by Employee for the Corporation's fiscal year ended March 31, 1995. On the Effective Date, all payments under this Section 7 and Section 13 of this Agreement shall be paid by the Corporation to Employee by wire transfer to an account designated by Employee. In the event that Employee revokes his consent pursuant to paragraph 4(c) of this Agreement, Employee shall, on the immediately succeeding business day, transfer to the Corporation by wire all amounts received by Employee pursuant to this Agreement including interest on such amounts. Such interest shall be computed at a rate of 1% over the prime commercial rate of interest as announced from time to time by Morgan Guaranty Trust Company of New York. (c) Termination of Employment and Release. At the end of the Consulting Period, Employee's employment with the Corporation shall terminate. At that time, Employee and the Corporation will execute mutual releases substantially in the form set forth in Exhibit B. The form of the release set forth in Exhibit B may be modified by the Corporation or Employee to comply with all legal requirements then necessary to ensure reasonably a valid release of all claims. This paragraph does not require a release of claims that may arise under this Agreement. (d) Corporation Property. Except as set forth in paragraphs 5(b) and 5(f), Employee shall, at the end of the Consulting Period, return to the Corporation all other property which came into his possession during his employment with the Corporation, including, without limitation, reports, files, memoranda, records and software, credit cards, cardkey passes, door and file keys, computer access codes or disks and instructional manuals, parking passes, and other physical or personal property that he received or prepared or helped prepare in connection with his employment with the Corporation and its affiliates. To the extent that he retains any copies, duplicates, reproductions, or excerpts thereof, Employee will provide the Corporation with a list of the information that has been retained and agrees to comply with paragraph 8 (regarding confidentiality) in relation to such property or information. (e) Medicare Supplementary Insurance. The Corporation shall assist with the funding of Employee's purchase of Medicare Supplementary Insurance, when, as and if available at the time of Employee's qualification for Medicare subject to the terms and conditions set forth below. The Corporation shall make payments, commencing upon termination of Employee's employment with the Corporation, to Employee or his surviving spouse, Ruth Newman, as the case may be, in an amount not to exceed $2,000 per annum for each of Employee and his present spouse, Ruth Newman, (if she is eligible to obtain such coverage) to assist Employee with the cost of purchasing and maintaining Medicare Supplementary Insurance. Coverage may include Employee and Ruth Newman, if she was covered under the Corporation's health care insurance program. Payment will be made upon presentation of evidence of coverage under such Medicare Supplementary Insurance. Payments shall continue for the life of each covered person. Responsibility to obtain such coverage shall rest solely with Employee with no guarantee by the Corporation of availability or suitability of any coverage. If Employee is unable to secure such coverage, the Corporation shall have no obligation to make any payments under this paragraph 7(e). 8. CONFIDENTIALITY AND INVENTIONS (a) Employee shall not, either directly or indirectly, disclose or make available to any person, firm, corporation, partnership, association or other entity, other than with the written consent of the Corporation and in the proper performance of duties contemplated by this Agreement, any knowledge or information of any type whatsoever of a confidential nature which he acquired during his employment by the Corporation or may acquire in his performance of duties pursuant to this Agreement that relate to the business of the Corporation or any of its affiliates, or any customers, clients or prospective clients thereof, including, without limitation, all types of trade secrets, any facts concerning the systems, methods, procedures, formula or plans developed by or for or used by the Corporation, but not including information that is lawfully within the public domain or is already lawfully in the possession of a third party. The obligations and the rights of the parties under this paragraph 8 shall survive any termination of this Agreement. (b) Any systems, programs, inventions and discoveries made, developed or perfected by Employee, in whole or in part, or conceived by Employee, alone or with others, at any time during his employment with the Corporation prior to the Effective Date, or during the Consulting Period in connection with his performance of services for the Corporation, shall be the exclusive property of the Corporation, whether patented or not, and Employee shall, without charge to the Corporation, assign to the Corporation all of his rights, title and interest in such systems, programs, inventions and discoveries, and execute, acknowledge and deliver any instruments requested by the Corporation to confirm the complete ownership by the Corporation of such systems, programs, inventions and discoveries. Employee hereby appoints the Corporation as his attorney-in-fact to execute all appropriate and relevant documents to accomplish such result in the event he is unwilling or unable to do so. Employee shall, at the request and expense of the Corporation, assist the Corporation in obtaining patents for such systems, programs, inventions and discoveries in all countries throughout the world. Employee shall not at any time, except as properly required in the conduct of the business of the Corporation, publish, disclose or authorize anyone to publish or disclose any such invention or discovery to any person, firm or corporation other than the Corporation or its authorized employees or agents. 9. RESIGNATION AND DESIGNATION Employee hereby acknowledges that he was not elected as Chairman of the Board of Directors, Secretary or to any other office of the Corporation following the annual meeting of the Board held in August 1995, and that he was designated Chairman Emeritus of the Board. Employee hereby resigns as Chairman Emeritus of the Board as of the Effective Date. 10. ANNOUNCEMENTS Employee and the Corporation agree to issue a press release in a form to be mutually agreed upon regarding Employee's change in status at the Corporation. All announcements and/or statements by either party regarding the change of Employee's status shall be consistent with said press release. Employee further agrees not to make any public or private statements which disparage the Corporation, its affiliates or their respective businesses, officers and directors. The Corporation agrees to use its best efforts to not permit its officers and directors from making any public or private statements which disparage the Employee. 11. IRREPARABLE INJURY; INJUNCTIVE RELIEF Employee hereby acknowledges that, by virtue of his intimate knowledge of the business and affairs of the Corporation, its policies, methods, plans, trade secrets, systems and personnel policies, and his prior position as a key executive of the Corporation, the Corporation would be injured irreparably and damaged by his breach of any of the provisions of paragraph 6, 7(d) and 8, and the Corporation shall be entitled, in addition to any other rights and remedies, to seek injunctive or other equitable relief, without the posting of any bond or security, enjoining or restraining him from any such violations or threatened violation. 12. DISPUTES Any controversy or claim arising out of or relating to this Agreement, or any breach thereof (including whether, with respect to paragraph 5(h), termination for Cause has been established), shall be settled by submitting the matter to one arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The award may be entered into any court of competent jurisdiction. Each party shall pay its own attorney's fees and expenses in connection with the arbitration and the parties shall share equally the costs of the arbitrator. Notwithstanding the foregoing, nothing in this paragraph 12 shall limit the Corporation's right to seek an injunction or other equitable relief in any court of competent jurisdiction for breach of any provisions of paragraphs 6, 7(d) and 8. 13. ATTORNEY'S FEES FOR NEGOTIATION On the Effective Date, the Corporation shall pay to the Employee his attorney's fees incurred by him in the preparation, revision and negotiation of this Agreement in an amount not to exceed $20,000.00. 14. GOVERNING LAW This Agreement and all rights, duties and remedies hereunder shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflicts of law rules of any jurisdiction. 15. ENTIRE AGREEMENT This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties including, without limitation, the letter agreement between Employee and the Corporation dated as of June 30, 1990. Notwithstanding the foregoing, the Split-Dollar Insurance Agreement between the Corporation and Employee, dated as of July 1, 1994 and attached hereto as Exhibit C, shall remain in full force and effect. 16. EFFECT OF INVALIDITY The parties intend that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any one or more of the provisions contained in this Agreement is held to be excessively broad as to duration, scope, activity or subject, such provisions will be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 17. NOTICES All notices, claims, certificates, requests, demands and other communications hereunder will be given in writing and will be deemed to have been duly given if delivered personally or sent by hand-delivery, telecopy or registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other addresses as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof): If to the Corporation, to: Diagnostic/Retrieval Systems, Inc. 5 Sylvan Way Parsippany, New Jersey 07436 Attention: Chief Executive Officer If to Employee, to: Mr. Leonard Newman 8 Toboggan Ridge Road Saddle River, New Jersey 07458 If a notice is sent to any of the above, copies shall be sent to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue York, New York l0022 Attention: Mark N. Kaplan, Esq. and Pepper, Hamilton & Scheetz 450 Lexington Avenue, Suite 1600 New York, New York 10017-3904 Attention: John B. Glendon, Esq. Any notice given by hand-delivery or by mail shall be effective when received. Any notice given by telecopy shall be effective when the appropriate telecopy answer back or confirmation is received. 18. MODIFICATIONS AND WAIVERS No provisions of this Agreement may be modified or discharged unless such modification or discharge is authorized and agreed to in a writing signed by the Corporation and Employee. No waiver by either party of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other provision or condition at the time of any such breach or at any prior or subsequent time. 19. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement and their respective successors or permitted assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. 20. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 21. HEADINGS All descriptive headings in this Agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement. 22. DRAFTING This Agreement reflects the joint drafting efforts of all parties to this Agreement and any ambiguities in this Agreement shall not be construed against any party hereto. IN WITNESS WHEREOF, the Corporation and Employee have executed this Agreement, on and as of the date and year first above written. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. By:/s/ Mark S. Newman Name: Mark S. Newman Title: Chairman of the Board, President and Chief Executive Officer /s/ Leonard Newman Leonard Newman INSURANCE POLICY# TYPE ORIGINAL FACE CARRIER (BENEFICIARY) AMOUNT New York Life 35305833 Life (Split)* $300,000 New York Life 35305834 Life (Split)* $200,000 New York Life 40800926 Life (Split)* $750,000 New York Life 41910920 Life (Split)* $500,000 Banner Life 10618131 Life (Fam.) $250,000 Northwest GL, X, Z- Life (Fam.) o Benefit = 2x National Life 18395 (Group) annual salary to maximum of $275,000 o 65% of benefit to age 75 o 45% of benefit at age 75 and beyond INSURANCE POLICY# TYPE MONTHLY DISABILITY CARRIER BENEFIT New York Life H2364237 Disability $1,000** Union Mutual N727219 Disability $2,500** Paul Revere G-28258 Disability o 66.67% of basic (Group) monthly earnings to maximum of $10,000/mo. o Benefit period for over 69 is twelve months Northwest GRA0022089 National Life 18396-2 Flex-Healthcare *** 401K DRS Retirement/Savings Plan Any group policy listed above will be available to the extent the Corporation continues to provide such policy or group benefits to substantially all its employees - -------- * Subject to Split Dollar Agreement dated July 1, 1994. ** Ends at age 72. *** Flex benefits will be provided to the same extent as all other corporate executives. Exhibit B Release Pursuant to paragraph 7(c) of the Employment, Non-Competition and Termination Agreement dated March 28, 1996, between Diagnostic/Retrieval Systems, Inc. (the "Corporation") and Leonard Newman (the "Employee") (hereinafter referred to as the "Agreement"), Employee shall release and forever discharge the Corporation, its past and present directors, managers, officers, shareholders, employees, agents, attorneys, servants and affiliates, successors and assigns (collectively "Releasees") from any and all claims, charges, complaints, liens, demands, causes of action, obligations, damages, and liabilities, known or unknown, that he had, now has, or may hereafter claim to have against the Releasees by reason of any matter, cause of things whatsoever arising on or before March 31, 2001, whether or not previously asserted before any state or federal court or before any state or federal agency or governmental entity (the "Release"). The Release includes, without limitation, any rights or claims relating in any way to Employee's employment relationship with the Corporation and the termination of his employment under any statute, including the federal Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act, as amended, The New Jersey Law Against Discrimination, as amended, or any other federal, state or local law. Employee further agrees and acknowledges that the Corporation has fully satisfied any and all obligations whatsoever owed to Employee arising out of his employment relationship with the Corporation, or the termination thereof, and that no further sums are owed to him by the Corporation. The Release shall survive the termination of the Agreement. Employee shall not in any way commence or join in any claim, charge or action against Releasees, or any of them, arising out of or relating in any way to Employee's employment with the Corporation for the period prior to March 31, 2001, including, but not limited to, the termination of his employment with the Corporation, or to any other matter or event occurring prior to March 31, 2001. Employee represents that he has not brought or joined in any such claim, charge or action against any of the Releasees. Employee represents that the Corporation has advised him to consult with an attorney of his choosing prior to signing this Release. Employee further represents that he understands and agrees that he has the right and has been given the opportunity to review this Release with an attorney of Employee's choice. Employee is under no obligation to consent to the Release, and he has executed this Release freely and voluntarily. Employee shall have twenty-one (21) days to consider this Release and once he has executed this Release, Employee shall have seven (7) additional days from the date of execution to revoke his consent to this Release. Any such revocation shall be made in writing pursuant to paragraph 17 of the Agreement. If no such revocation occurs, the Release shall become effective eight (8) days from the date set forth below. Dated: March 31, 2001 --------------------------- Leonard Newman Exhibit C SPLIT-DOLLAR INSURANCE AGREEMENT BETWEEN DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND LEONARD NEWMAN This Agreement entered into as of the first day of July, 1994, by and between DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. (the "Employer") and LEONARD NEWMAN, an employee of the Employer (the "Employee"); WHEREAS, the Employee has been employed by the Employer since 3/1/69 and has discharged his duties in a capable and efficient manner to the benefit of the Employer; and WHEREAS, the Employer wishes to retain the services of the Employee through the inducement of a split-dollar arrangement designed to provide insurance protection for the benefit of the Employee; and WHEREAS, the Employee agrees to participate in such plan as hereinafter provided, as such; NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. PURCHASE OF INSURANCE. This Agreement is made in --------------------- connection with certain life insurance policies pur- chased by the Employer from New York Life Insurance Company (the "Insurer") on the life of the Employee (each, a "Policy" and, collectively, the "Policies") with an aggregate face amount of $1,750,000. The Employer is the sole owner of the Policies. A de- scription of such Policies is attached hereto as Schedule A. The Employer shall not exercise any of its ownership rights in the Policies, except the right to make Policy loans, without the written consent of the Employee. The Employer shall not permit the indebtedness on each Policy to exceed the Employer's interest in such Policy. The interest of the Employer at any time shall be the sum of premiums paid from the Employer's funds less any indebtedness on such Policy previously incurred. The Employer shall give the Employee written notice if the Employer makes application for a Policy loan. If at any time the indebtedness on the Policy would result in termination of the Policy, the Employee shall have the right to take any steps required by the Policy to prevent such termination. 2. EVIDENCE OF INSURABILITY. The Employee has answered questions concerning his insurability and has sub- mitted such evidence of insurability as was required by Insurer. 3. PREMIUMS. The Employer shall forward directly to the respective insurer each premium due in accor- dance with the mode of premium payment as provided in the Policy on or before the due date with such payments continuing for the Employee's life. The premiums will be paid by the Employer on an annual mode. The Employer shall have the right to pay annual premiums on the Policies by taking loans against its interests in the respective Policies. 4. DIVIDENDS. All dividends credited to a Policy in --------- each year during which it remains in force, if any, shall remain with the respective Insurer and shall be applied to purchase additional insurance on the life of the Employee. The Employee shall not have the right to borrow against or surrender dividend accumulations or additions without the consent of the Employer. 5. BENEFICIARY DESIGNATION. The Employer shall be ----------------------- designated as creditor beneficiary as its interest may appear. For the balance, if any, of the amounts payable under the terms of a POLICY, the Employer shall request the Insurer to designate such benefi- ciary and manner of payment as may be directed in writing by the Employee from time to time and the change shall become effective as provided by the terms of the policy. 6. TERMINATION OF AGREEMENT. Either party hereto, with or without the consent of the other, may terminate this Agreement by giving the other party sixty days' written notice of such termination. In the event of the termination of the Employee's employment with the Employer, this Agreement shall terminate. Upon the termination of this Agreement prior to the death of the Employee, the Employee shall pay to the Employer an amount equal to the aggregate premiums advanced by the Employer with respect to such Policy or Policies, reduced, in each case, by all outstanding indebtedness, if any, incurred by the Employer and relating to such Policy or Policies, including interest thereon. The receipt of such amounts by the Employer shall discharge completely all obligations owing from the Employee to the Employer under this Agreement with respect to the Policy or Policies related thereto. Upon the receipt of such amounts by the Employee, the Employer shall execute such documents as may be required by the Insurer to transfer ownership of the policy to the Employer. 7. DEATH OF THE INSURED. Upon the death of the Employ- -------------------- ee prior to either surrender of all of the Polices or termination of this Agreement, the beneficiary designated by the Employee shall pay to the Employer an amount equal to the aggregate premiums advanced by the Employer with respect to such Policy then owned by the Employee, reduced by all outstanding indebtedness, if any, incurred by the Employer and relating to such Policies, including interest there- on. Such payment shall discharge completely all obligations owing from the Employee to the Employer under this Agreement. All proceeds payable with respect to the Policies which are in excess of said amount shall be paid to the beneficiary designated by the Employee. 8. AGREEMENT BINDING. This agreement shall be binding upon the parties hereto, their heirs, legal repre- sentatives or successors. 9. AMENDMENTS. Amendments may be made to this Agree- ment only by a written agreement signed by each of the parties and attached hereto. Additional poli- cies of insurance on the life of the Employee may be purchased under this Agreement by amendment to Article 1 hereof. 10. STATE LAW. This Agreement may be subject to and governed by the laws of the State of New Jersey. 11. INSURANCE COMPANY NOT A PARTY TO AGREEMENT. Not- ------------------------------------------ withstanding the provisions of this Agreement, the Insurer is hereby authorized to act in accordance with the terms of any Policy issued by it as if this Agreement did not exist and payment or other performance of its contract obligations by the Insurer in accordance with the terms of any such Policy shall completely discharge the insurer from all claims, suits and demands of all persons whatsoever. 12. FIDUCIARY PROVISIONS. The Employer is hereby desig- -------------------- nated as the "Named Fiduciary" for the "split-dol- lar" arrangement established by this Agreement and shall have the authority to control and manage the operation and administration of such arrangement; provided, however, that the Insurer shall be the fiduciary of the split-dollar arrangement as to a Policy issued by it solely with regard to the review and final decision on a claim for benefits under that Policy, as provided in Article 14 of this Agreement. 13. ALLOCATION OF FIDUCIARY RESPONSIBILITIES. The ---------------------------------------- Named Fiduciary may allocate its responsibilities for the operation and administration of the split-dollar arrangement, including the designation of persons to carry out fiduciary responsibilities under any such plan. The Named Fiduciary shall effect such alloca- tion of its responsibilities by delivering to the Employee a written instrument signed by the Named Fiduciary that specified the nature and extent of the responsibilities allocated, including the person or persons designated to carry them out, and signed as well by the designee or designees in acceptance of those responsibilities. 14. CLAIMS PROCEDURE. The following claims procedure shall apply to the split-dollar arrangement. (A) Filing of Benefit Claims. 1. When the Employee, beneficiary, or his duly authorized representative (hereinafter referred to as the "Claimant") have a claim which may be covered under the provisions of the insurance policy described in the attached Schedule A, he or she should contact the Insurer. 2. Claim forms and claim information can be obtained from the Insurer. 3. The claim must be in writing on the Insurer's Claim Form and delivered, along with a certified copy of the death certificate, to the above named fiduciary either in person or by mail, postage paid. The above named fiduciary will forward the claim form to the authorized representative of the Insurer. (B) Initial Disposition of Benefit Claims. 1. Within ninety (90) days after receipt of a claim, the Insurer shall send to the Claimant, by mail, postage prepaid, a notice granting or denying, in whole or in part, a claim for benefits. 2. If a claim for benefits is denied, the Insurer shall provide to the Claimant written notice setting forth in a manner calculated to be understood by the Claimant. a. The specific reason or reasons for denial; b. Specific reference to pertinent policy provisions on which the denial is based; c. A description of any additional mate- rial or information necessary for the Claimant to perfect the claims and an ex- planation of why such material or informa- tion in necessary; and d. Approximate information as to the steps to be taken if the Claimant wishes to submit his or her claim for review. 3. If the claim is payable, a benefit check will be issued to the Claimant. 4. The ninety (90) day period may be extended if special circumstances require an extension of time to process the claim for benefits. 5. Written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period by the Insurer. 6. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Insurer expects to render the final decision. 7. In no event shall such extension exceed a period of 90 days from the end of the initial 90-day period. 8. If a notice of denial is not received within 90 days of the claim being filed, the claim shall be deemed denied and the Claimant shall be permitted to proceed to the review stage. (C) Review Procedure. 1. Within sixty (60) days of: a. The receipt by the Claimant of written notification denying, in whole or in part, his or her claim, or b. A deemed denial resulting from the Insurer's failure to provide the Claimant with written notice of denial within 90 days of the claim being filed, the Claimant upon written application to the Insurer, delivered in person or by certified mail, postage prepaid, may request an opportunity to appeal a denied claim to the Insurer or a person designated by the Insurer. 2. The Claimant may: a. Request a review upon written applica- tion to the Insurer. b. Review pertinent documents; and c. Submit issues and comments in writing. 3. The decision on review shall be made within sixty (60) days of the Insurers receipt of a request for review. 4. The Sixty (60) day period may be extended if special circumstances require an extension of time to process the review. 5. If an extension is required: a. Written notice of the extension shall be furnished to the Claimant prior to the commencement of the extension, and b. A decision shall be rendered as soon as possible but no later than 120 days after the Insurer received the request for review. 6. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, as well as specific references to the policy provision on which the decision is based. 7. If the decision on review is not rendered within 60 days or within 120 days if an extension is granted, then the claim shall be deemed denied on review. (D) Other Remedies. After exhaustion of the claims procedures, nothing shall prevent any person from pursuing any other legal or equitable remedy otherwise available. 15. POLICY LOANS. The Employer shall have the right to borrow that portion of its interest in a Policy equal in amount to the aggregate premiums on such Policy advanced by the Employer on behalf of the Employee. Interest on such Policy loan shall be the responsibility of the Employer as such interest becomes due. IN WITNESS WHEREOF, the parties hereto have set their hands and seals, or by its duly authorized officer, as of the day and year above written, to this Agreement. DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. BY: /s/ Mark S. Newman Name: Mark S. Newman President & CEO /s/ Leonard Newman Acknowledgements SCHEDULE A It is agreed, pursuant to the foregoing Split Dollar Insurance Agreement that the following described Policies of life insurance shall be subject to the provisions of said Agreement. Policy # Carrier Face Amount 35305833 New York Life $300,000 35305834 New York Life $200,000 40800926 New York Life $750,000 41910920 New York Life $500,000 EX-23 10 EXHIBIT 23.1 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 con- solidated 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 May 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----