-----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, RFeH9JOEh5u5KODFZjhJPAN1/PNNCQJUnTAJ91NdJmvPaWg7YHqAwVzNHdiy57El yD2f7wu6kuklP9LOSNdwfQ== 0001053949-01-500188.txt : 20010629 0001053949-01-500188.hdr.sgml : 20010629 ACCESSION NUMBER: 0001053949-01-500188 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08533 FILM NUMBER: 1669972 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9738981500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-K 1 e900511_r5.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 Commission File Number 1-8533 ------------ DRS Technologies, Inc. ------------ Delaware 13-2632319 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Sylvan Way, Parsippany, New Jersey 07054 (973) 898-1500 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered ------------------- ------------------- Common Stock, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The market value of shares of common stock held by non-affiliates, based on the closing prices for such stock on the American Stock Exchange on June 8, 2001, was approximately $260,508,000. The number of shares of common stock outstanding as of June 22, 2001 was 12,116,670. DOCUMENTS INCORPORATED BY REFERENCE 1. Definitive Proxy Statement, dated June 27, 2001, for the Annual Meeting of Stockholders, incorporated in Part III of this Form 10-K. DRS Technologies, Inc. Form 10-K For the Fiscal Year Ended March 31, 2001 Table of Contents PART I Page Item 1. Business.......................................................... 3 Item 2. Properties........................................................ 17 Item 3. Legal Proceedings................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders............... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 20 Item 6. Selected Financial Data........................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 35 Item 8. Financial Statements and Supplementary Data....................... 37 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............................................. 65 PART III Item 10. Directors and Executive Officers of the Registrant................ 66 Item 11. Executive Compensation............................................ 66 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 66 Item 13. Certain Relationships and Related Transactions.................... 66 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 67 Signatures ................................................................ 68 Exhibit Index................................................................ 69 PART I The following discussion and analysis contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that risks and uncertainties are inherent to forward-looking statements. Accordingly, the Company's actual results could differ materially from those suggested by such forward-looking statements. Risks include, without limitation: the effect of the Company's acquisition strategy on future operating results; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to the Company's products and services; the effects of government regulation or shifts in government policy, as they may relate to the Company's products and services; competition; and other matters referred to in this report. Item 1. Business General DRS Technologies, Inc. ("DRS", the "Company", "we", "us", "our") is a leading supplier of defense electronics products and systems. We provide high-technology products and services to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military forces and consumer markets. Incorporated in 1968, DRS has served the defense industry for over thirty years. We are a leading provider of thermal imaging devices, combat display workstations, electronic sensor systems, mission recorders and deployable flight incident recorders. Our products are deployed on Navy surface ships, submarines and surveillance aircraft, U.S. Army battle tanks and other vehicles, as well as in other military and non-military applications. We have increased our annual revenues and operating income at a compound annual growth rate of approximately 33% and 34%, respectively, over the last five years. In addition, from fiscal 2000 to fiscal 2001, operating income increased over 43% and net earnings increased over 177%. For the year ended March 31, 2001, we generated sales of $427.6 million and operating income of $37.5 million. Company Organization We design and manufacture electronic systems for several of the U.S. military's well-funded programs and high-profile platforms. We operate in three principal business segments on the basis of products and services offered. Each operating unit is comprised of separate and distinct businesses: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG) and the Flight Safety and Communications Group (FSCG). All other operations are grouped in "Other." Financial information on our reportable business segments is presented in Note 15 to our Consolidated Financial Statements, which are included in this Form 10-K (see Item 8 - Financial Statements and Supplementary Data). Additional financial data and commentary on the results of operations for the reportable segments are included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which is also included in this Form 10-K (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations). These data and comments should be referred to in conjunction with the summary description of our business segments which follows. Electronic Systems Group ESG is a leading provider of naval computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance radar and tracking systems, acoustic signal processing and display equipment, and combat control systems for U.S. and international military organizations. ESG performs field service and depot level repairs for its products, as well as other manufacturers' systems, and also provides systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. ESG products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in the U.S. Army's ongoing battlefield digitization programs. ESG markets directly to 3 various U.S. Government agencies, primarily in the intelligence community, and has teamed with leading corporations, such as Lockheed Martin and General Dynamics. ESG's major products and services include: o AN/UYQ-70. AN/UYQ-70 Advanced Display Systems are advanced, open-architecture display systems designed for widespread application through software and hardware modification for deployment on Navy platforms such as Aegis and other surface ships, submarines and airborne platforms. These systems are self-contained, microprocessor-based units complete with interface software and offer advanced computing and graphic capabilities. These units replace previous generation units that are dependent upon a shipboard computer for approximately 25% of the cost of the legacy systems. These systems were developed for the U.S. Navy under a subcontract with Lockheed Martin Tactical Defense Systems. Revenues from the AN/UYQ-70 program accounted for approximately 22% of total consolidated revenues for the year ended March 31, 2001. o Rugged Computer Products. The Explorer (often referred to as the CCU, Compact Computer Unit) provides the full capabilities for the Common Hardware/Software (CH/S-2) program in a portable, self-contained unit with its own power source and an integrated flat panel display. The unit uses exchangeable media (hard disks and tape units) and provides compatibility of information and system security. The unit shares its design with the Explorer 2 and is being complemented with an upgraded version with a larger display and greater capabilities. The Genesis 300, a variant of the Genesis SR (short rack), features an integrated 12-inch screen and keyboard. Since its launch in 1997, the Genesis SR, which supports applications such as mission planning, tactical communications, combat support and logistics support, has been sold into military programs in Europe and Southeast Asia. o AN/SPS-67. AN/SPS-67 Radar Systems are being deployed on the U.S. Navy's new DDG-51 Aegis class ships, Spanish Navy's F-100 class ships and other international naval forces. They provide ocean surveillance and navigation data, including detection and tracking of low flying aircraft and surface targets. An integral part of the ships' command and control combat system, the AN/SPS-67 has a potential market application on other surface ships in the Navy's fleet, as well as on aircraft carriers and amphibious operation assault ship platforms. o AN/SQR-17A(V)3. The AN/SQR-17A(V)3 Mobile In-shore Undersea Warfare (MIUW) system is a multi-sensor processing system that is deployed in land-based vans, utilizing sonobuoys and sensor string array passive detectors for harbor defense, coastal defense and amphibious operations surveillance, as well as for the enhancement of drug interdiction efforts. These systems currently are being procured for use in 22 field installations. We provide the underwater subsystem, including sensor string arrays for MIUW. o Technical Support Services. Technical Support Services perform field service and depot level repairs for ESG products, as well as other manufacturers' systems, and also provide systems and software engineering support to the U.S. Navy for the testing of shipboard combat systems. The facilities are located in close proximity to U.S. Naval bases in Norfolk, Virginia and San Diego, California. Services, including equipment and field change installation, configuration audit, repair, testing and maintenance, are performed for the U.S. Navy and, to a lesser extent, commercial customers. DRS Technical Services also has performed work for foreign navies, including those of Australia, Egypt, Greece, the Republic of China and Turkey. o Electronic Manufacturing and Systems Integration Services. ESG operates an ISO 9001 certified electronic manufacturing and integration facility in Johnstown, PA. This facility produces ESG products and provides contract manufacturing services for many aerospace and military prime contractors and programs. 4 The products, their applications and platforms or end users of our Electronic Systems Group are summarized in the table below:
Product Description Platforms/Customers - --------------------------- ---------------------------------------------- -------------------------------------- Tactical/Sensor Combat AN/UYQ-70 Advanced Display Systems family of o U.S. Navy Aegis cruisers/destroyers Display Systems products comprised of COTS-based systems o Aircraft carriers integrating the latest information o NSSN, Trident and other attack processing and display technology for submarines combat, command and control, and o E-2C Hawkeye surveillance aircraft mission-essential applications. Open-system o LHA Amphibious assault operations architecture, ease of technology insertion, platforms adaptability across platforms, and seamless o U.S. Navy/Marine Corps Cooperative integration capabilities provide ease of Engagement (CEC) Capability platforms upgrading and costs savings throughout life cycle. Represents the next generation in the evolution of force readiness and information sharing in network-centric environment. - --------------------------- ---------------------------------------------- -------------------------------------- Rugged Computer Systems COTS-based computers, servers and other o U.S. Army and Peripherals peripheral equipment in battlefield-ready o U.S. Navy hardware that meets reliability and o Range of international military durability standards of harsh environments. ground mobile, airborne, surface, Explorer(TM)used in the U.S. Army's CH/S-2 subsurface platforms program supplied throughout Army for o Government intelligence, Tempest communications, tactical information applications processing, and coordination. Genesis(TM)for mission planning, combat support, tactical communications, logistics. Tempest systems provide secure communications and data processing for variety of intelligence agency applications. - --------------------------- ---------------------------------------------- -------------------------------------- Radar Systems AN/SPS-67(V)3 Radar System provides o U.S. Navy Aegis cruisers/destroyers automatic target detection, clutter lock o Spanish F-100, Royal Norwegian digital moving target indications, Coast Guard, other international track-while-scan capability and surface ships, aircraft carriers, command/weapon interface for surface and low international surface ships, flying object detection. amphibious operations platforms - --------------------------- ---------------------------------------------- -------------------------------------- Littoral Surveillance State-of-the-art string array sonar sensors o U.S. Navy MIUW shore surveillance Systems and multi-sensor processing systems for vans mobile in-shore warfare, amphibious operations o Harbor and coastal defense and harbor defense. AN/SQR-17A(V)3 Sonar Signal o Amphibious operation surveillance Processing Systems installed in electronically o Drug interdiction efforts equipped vans for Mobile In-Shore Underwater Warfare Systems Upgrade (MIUW-SU) program. - --------------------------- ---------------------------------------------- -------------------------------------- Technical Support Services East and West coast naval support, including o U.S. and international naval bases Integrated Logistics Support (ILS), o Worldwide field support technical manuals, repair, system installation, drawing packages, training, maintenance planning, configuration management, on line and phone support, R&D capabilities. - --------------------------- ---------------------------------------------- --------------------------------------
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Product Description Platforms/Customers - --------------------------- ---------------------------------------------- -------------------------------------- Electronic Manufacturing, Value-added electronic manufacture of our o General Dynamics CH/S-2 rugged Integration and Testing products. Advanced, state-of-the-art ISO computer systems for U.S. Army Services 9001 and AS-9000 Quality System Standards o United Defense M2A3 Bradley certified manufacturing, test, system Fighting Vehicles for U.S. Army integration facilities for military and o U.S. Navy AN/UYQ-70 Display commercial customers. Specializes in Systems for Lockheed Martin production of UYQ-70 workstations, CH/S-2 o Northrop Grumman E-8C Joint STARS rugged computers, cable and wire harness aircraft for U.S. Air Force assembly for tanks and aircraft, printed o Condor surveillance system circuit cards, full system integration and test services. - --------------------------- ---------------------------------------------- --------------------------------------
Electro-Optical Systems Group EOSG produces systems and subsystems for thermal imaging and targeting products used in some of the U.S. Army's most important battlefield platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting Vehicle and the HMMWV scout vehicle. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures regardless of the ambient light level. EOSG is also a designer and manufacturer of eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its technology base by expanding into related non-defense markets and manufactures electro-optical modules for a commercial device used in corrective laser eye surgery. EOSG's major products and contracts include: o Horizontal Technology Integration Second Generation Forward Looking Infrared (FLIR), thermal imaging systems (HTI SGF Thermal Imaging Systems). HTI SGF Thermal Imaging Systems are installed on the U.S. Army's Abrams Battle Tanks, Bradley Infantry Fighting Vehicles and HMMWV scouts. Revenues from the HTI SGF Thermal Imaging Systems program accounted for approximately 11% of total consolidated revenues for the year ended March 31, 2001. o Improved Bradley Acquisition System (IBAS). IBAS provides the thermal imaging and fire control system installed on Bradley Infantry Fighting Vehicles. o Long Range Advanced Scout Surveillance System (LRAS3). LRAS3 is the thermal imaging sighting systems on the HMMWV scouts. o Standard Advanced Dewar Assembly II Detector (SADA II). SADA II is the specified detector dewar cooler module procured by the U.S. Army for its Horizontal Technology Integration (HTI) program for use in the Second Generation night vision equipment upgrades on the MIA2 Abrams Battle Tank and the Bradley Infantry Fighting Vehicle. The HTI upgrade greatly increases the range performance of these systems for our soldiers. o Infrared Scanning Focal Plane Arrays (scanning FPAs), staring FPAs and linear coolers. Scanning FPAs, staring FPAs and linear coolers are used to provide cooled detector assemblies for military thermal imaging devices. An FPA is a two-dimensional assembly of electro-optical detecting pixels used to generate thermal imaging capability. FPAs are also used in heat-seeking missile guidance systems and missile warning systems, applications for which no pictorial image is required. 6 o Day/Night Vision Binoculars. EOSG is currently under contract to develop and manufacture these units for U.S. and foreign militaries. The Nightstar(R) night vision binocular is a hand-held viewing binocular that incorporates an image intensifier tube, laser range finder and digital compass in a compact lightweight system suited for infantry units, special forces and night operations involving forward observers and reconnaissance patrols. Nightstar(R) displays range and azimuth data in the soldier's eyepiece, allowing identification of targets and providing essential fire support data for nighttime engagement. These units have a range of 20 to 2,000 meters. o Tube-launched Optically-tracked Wire-guided (TOW) Optical Sight. EOSG is currently the only U.S. qualified producer of two of the three critical assemblies in the TOW anti-tank missile launcher. The complex electro-optical system produced by EOSG is the main component of this premier ground antitank weapons system for the U.S. Army and Marine Corps. o Multiple Platform Boresighting Equipment (MPBE). MPBE currently is used on the U.S. Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship radar as well as aircraft of international military forces. Boresighting equipment is used to align and harmonize the navigation, targeting and weapons systems on rotary- and fixed-wing aircraft. This technology is proprietary to us. o LADARVision. LADARVision combines a laser radar eye tracker with a narrow-beam shaping technology for the correction of near-sightedness, far-sightedness and astigmatism. LADARVision is the first FDA -approved laser system to incorporate an eye tracker during surgery. The products, their applications and platforms or end users of our Electro-Optical Systems Group are summarized in the table below:
Product Description Platforms/Customers - --------------------------- ----------------------------------------------- -------------------------------------- Sighting and Day/Night Second Generation Forward Looking Infrared o U.S. Army M1 Abrams Battle Tanks Vision Systems (Gen II FLIR) thermal imaging, sighting and o U.S. Army M2 Bradley Fighting weapons systems providing common night vision Vehicles technology across land/air platforms. o M1025 and M1114 Long Range Scouts Improved Bradley Acquisition System (IBAS), o AH-64 Apache Longbow helicopter Long Range Scout Surveillance System (LRAS3), o RAH-66A Comanche helicopter Nightstar(R) binoculars. Higher detail at o Ground personnel forces greater ranges, regardless of dust, smoke, fog, low light level and other battlefield obscurants. - --------------------------- ----------------------------------------------- -------------------------------------- Missile Guidance and Advanced Infrared Focal Plane Arrays (IRFPA), o U.S. Army Javelin Anti-Tank Infrared Components/ Standard Advanced Dewar Assemblies (SADA I, Commander's Launch Unit (CLU) Assemblies, Precision II, III), cooler assemblies for target o Sighting systems for U.S. Army Optics tracking, imaging used in our sighting and o AH-64 Apache Longbow helicopter night vision systems. Mirror assemblies that o RAH-66A Comanche helicopter focus infrared energy onto missile guidance o U.S. Army Stinger and other device. Diamond-turned components, optics missiles prisms/lenses for fire control devices. o Satellite systems used in theater missile defense - --------------------------- ----------------------------------------------- -------------------------------------- Eye-Safe Laser Range Incorporated in Nightstar(R) Day/Night o U.S. Army Attack helicopter and Finders Binocular Systems. Transmit target range, and ground vehicle combat training azimuth and elevation data directly to combat o Binoculars for ground troops and computers, which pass coordinates on to fire special operations units and special operations units control units. Accurate within five meters at maximum range. Protect eyes against blindness caused by laser beams. - --------------------------- ----------------------------------------------- --------------------------------------
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Product Description Platforms/Customers - --------------------------- ----------------------------------------------- -------------------------------------- Weapons Fire Control Sighting and targeting systems, eye-safe U.S. Army Abrams Main Battle Tanks, Systems laser range finders with Global Positioning Bradley Acquisition Systems, TOW Systems (GPS). Acquisition Systems, missile launch systems - --------------------------- ----------------------------------------------- -------------------------------------- Multiple-Platform Portable ground-support device that aligns o U.S. Army AH-64 Apache helicopters Boresight Equipment aircraft's navigation, targeting and weapon o U.S. Marine Corps AH-1F Cobra systems with the pilot's sighting gear to helicopters ensure synchronization and target accuracy o U.S. National Guard Cobras when weapons are released. Generic for o International Apache and Cobra multiple platforms. Provide significant cost helicopters reduction by reducing platform down time. o U.S. Air Force F-16 strike fighter and for AC-130U gun ship radar system - --------------------------- ----------------------------------------------- -------------------------------------- Electro-Optical System Value-added electronic manufacture of our o Sighting and targeting systems Manufacturing, products. Advanced, state-of-the-art ISO o Focal plane arrays Integration and Testing 9000 Quality System Standard certified o Cryogenics and cooler assemblies Services manufacturing, test, system integration o Laser products facilities for military and commercial o Diamond-tuned components customers. Specializes in advanced infrared o Optical coatings and lenses/mirrors and electro-optical systems production. for military applications o LADARVision(R)modules for laser eye surgery device - --------------------------- ----------------------------------------------- -------------------------------------- High-Speed Digital Airborne Separation Video System, a fully o U.S. Navy F/A-18 Hornet strike Imaging Systems integrated digital imaging system recording aircraft weapons separation on test flights. Captures multiple images of projectiles and records hypervelocity impacts. Provides cost/time efficiencies gained with digital processing. - --------------------------- ----------------------------------------------- --------------------------------------
Flight Safety and Communications Group FSCG is a leading manufacturer of deployable flight emergency or "black box" recording equipment. These complete emergency avionics systems combine the functionality of a crash locator beacon with a flight incident recorder for search, recovery and crash analysis. FSCG uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture and recording products, as well as high-capacity data storage devices for harsh aerospace and defense environments. FSCG also manufactures shipboard communications and infrared laser warning and range finder displays for Canadian and other foreign navies. FSCG is also a leading manufacturer of ultra high-speed digital imaging systems. FSCG's major products and services include: o Emergency Avionics System 3000 (EAS3000): The EAS3000 is an integrated in-flight data recorder, cockpit voice recorder and emergency locator beacon system constructed in a modular, deployable and crash-survivable package, designed to withstand intensive destructive forces. Mounted on the outside of a helicopter, the EAS3000 provides rapid location of an accident site, allowing early rescue of survivors and recovery of vital flight and cockpit voice data. FSCG provides the EAS3000 for use on British EH-101 helicopters and its variants, as well as on the Italian MMI, Canadian Cormorant, Tokyo Metropolitan Police and other military and search and rescue helicopters. FSCG also developed a version of the EAS3000, known as EAS3000F, for use on fixed-wing aircraft. 8 o Deployable Flight Incident Recorders: Designed to withstand the intense destructive forces associated with an aircraft crash, deployable flight incident recorders are mounted beneath the airframe skin. Deployment commands provided by the switch activation trigger release the unit and activate the recorder. These systems also contain crash locator beacons. They have been installed successfully on fighter aircraft, such as the German Tornado and the U.S. Navy F/A-18 Hornet, and are used to record both flight and voice data. o Aircraft Crash Locator Beacons: Consisting of a composite airfoil which encloses a radio transmitter and power source, crash locator beacons are designed to deploy and activate either before or upon impact. Used primarily on fixed-wing military aircraft, these crash position locators enable the rapid location of downed aircraft and timely rescue of survivors. o Integrated Shipboard Communications Systems: Using the latest available technology and COTS-based designs, FSCG produces integrated digital shipboard communications systems which provide single-button access to tactical interior, exterior and secured channels for joint operations. These Shipboard Integrated Communications (SHINCOM) systems improve communication efficiency by eliminating the need for multiple single-purpose communications systems, thus providing a comprehensive system solution. FSCG's SHINCOM systems are capable of handling shipboard interior communications; communications with other aircraft, surface and undersea vessels; and UHF/VHF and broadband communications via satellite with shore stations and cooperating units. These systems are used aboard the Canadian Iroquois class ships and the U.S.S. George Washington aircraft carrier. FSCG also provides data link components and systems, modems, digital telephone and radar surveillance systems. o Electronic Manufacturing and Systems Integration Services: FSCG operates an ISO 9001 certified and space qualified electronic manufacturing facility in Carlton Place, Canada. This facility produces FSCG products and provides contract manufacturing services for aerospace and military prime contractors and programs. FSCG's manufacturing expertise and capabilities include: o surface mount and through-hole multi-layer computer circuit assemblies (CCAs); o harness fabrication; o power supply assembly and testing; o motherboard assembly and testing; and o systems integration services. o WRR-818: This ruggedized airborne video recorder captures various sensor and video data on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10A aircraft. The U.S. Army also has selected it for use in its Kiowa Warrior attack helicopters. A similar recorder, the WRR-812, has been adapted for use in the Canadian Army's Light Armored Reconnaissance Vehicles. o DCMR-24 and 100: These are digital cassette mission recorders that use high-capacity digital tape formats (DTF) under license by Sony Corporation. Incorporating DTF technology, FSCG produces the Acoustic Data Recorder for U.S. Navy P-3C patrol aircraft. o Framing Cameras: Framing cameras have the ability to take a sequence of pictures at the same location at very high speeds. These cameras are designed to produce images at equivalent speeds of several million pictures per second, although in practice 4-8 frames are taken. Framing cameras are used primarily for research in the areas of electrical breakdown/discharge, ballistics, detonics and combustion. o Electronic Ballistic Range Cameras: These cameras use digital imaging to capture a single picture of a projectile in flight. Slower than framing cameras but with better resolution, these cameras are used in the development and proof testing of ballistics. 9 The products, their applications and platforms or end users of our Flight Safety and Communications Group are summarized in the table below:
Product Description Platforms/Customers - --------------------------- ----------------------------------------------- -------------------------------------- EAS 3000 Emergency Deployable systems for helicopters o U.K. Royal Air Force & Navy EH-101 Avionics Systems/Crash incorporating data recorder, cockpit voice Merlin and variants Locator Beacons recorder and crash locator beacon, designed o Cormorant search/rescue helicopters to improve flight safety, survivability, o Italian MMI helicopter future improvements. Aerodynamic design o Tokyo police helicopters deploys unit from exterior of helicopter prior to crash. Floats indefinitely on water. Crash-hardened package allows survival of unit in land crash. - --------------------------- ----------------------------------------------- -------------------------------------- Deployable Flight Deployable systems for fixed-wing aircraft o U.S. Navy and international F/A-18 Incident Recorders incorporating data recorder, cockpit voice Hornet strike aircraft Systems (DFIRS) recorder and crash locator beacon, designed o German Air Force/Navy Tornado to improve flight safety, survivability, o Air Force One aircraft future improvements. Aerodynamic design o Canadian CP-140 Aurora patrol aircraft deploys unit from exterior of aircraft prior o Other international strike fighters to crash. Floats indefinitely on water. Crash-hardened package allows survival of unit in land crash. - --------------------------- ----------------------------------------------- -------------------------------------- Integrated Ship Tactical and secure interior ship o U.S. George Washington aircraft Communications Systems communication systems. Advanced carrier communications capabilities providing single o Canadian Iroquois class ships button access that support complex C4I o Venezuelan Mariscal Sucre and operations. other international surface fleets - --------------------------- ----------------------------------------------- -------------------------------------- Electronic Manufacturing Value-added electronic manufacture of our o Boeing and Integration Services products. Advanced, state-of-the-art ISO o Smiths Industries 9000 Quality System Standard certified o International Space Station manufacturing, test, system integration o Canadian and other international facilities for military and commercial military and space systems customers. Specializes in tactical, reconnaissance, training and spaced-based products. - --------------------------- ----------------------------------------------- -------------------------------------- Cockpit Video Recording WRR-818, -812 recorders with over 2 hours o U.S. Navy F/A-18 Hornet strike aircraft Systems recording time for voice, video data, flight o U.S. Air Force A-10 Thunderbolt data. o U.S. Army OH-58D Kiowa Warrior attack aircraft o Canadian Light Armored Reconnaissance Vehicles - --------------------------- ----------------------------------------------- -------------------------------------- Mission Recording Systems AN/USH-42 recorders capture mission critical o U.S. Navy P-3C Orion and S-3 Viking data for target verification, training and patrol aircraft archiving for aircraft missions across air, o U.S. Navy and international Navies' land and sea. Acoustic Data Recorders upgrading SH-60F helicopters existing recorders on P-3C aircraft. AN/AQH-11 Helicopter Mission Recording Systems. DCMR-24 and -100 high-capacity digital cassette recorders/data storage devices using DTF(TM) under license by Sony Corporation. - --------------------------- ----------------------------------------------- --------------------------------------
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Product Description Platforms/Customers - --------------------------- ----------------------------------------------- -------------------------------------- Ultra High-Speed Digital In flight controls avoid ailures/re-testing. o International ballistic test ranges Imaging Systems Imacon(TM), Frame and Streak and other ultra o Engine combustion studies and other high-speed cameras provide industrial customers scientific and university research with this capability for a variety of laboratory applications applications. - --------------------------- ----------------------------------------------- -------------------------------------- Infrared Search and Track Signal Processing Unit and Optical Lens o Canadian and Dutch ship torpedo Systems assembly for the SIRIUS Long-Range Infrared detection Search and Track (LR-IRST) system, an o Canadian Light Armored Vehicle automatic infrared detection and target target detection tracking system for anti-ship missiles and aircraft. An integral part of the ships' local area defense system. Complements existing radar surveillance systems under conditions unfavorable for radar alone. - --------------------------- ----------------------------------------------- -------------------------------------- Communications Systems Tactical and secure data links, rugged o NATO surface ships and aircraft telephonic devices, digital voice terminals, o Military communications networks high-frequency data modems, network devices. Airborne Link 11 Data Terminal Sets - --------------------------- ----------------------------------------------- --------------------------------------
Other Other includes the activities of the parent company, DRS Corporate Headquarters, DRS Ahead Technology and certain non-operating subsidiaries of the Company. DRS Ahead Technology produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead Technology also services and manufactures video heads used in broadcast television equipment. Strategy Our goal is to enhance our position as a leading supplier of defense electronics products and systems. Our strategy to achieve our objective includes: o Expand Existing Relationships. We intend to expand our relationships with government and industry decision makers by continuing to perform on our existing contracts at a high level from a quality and timeliness perspective. Our experience has shown that these factors greatly enhance our prospects for obtaining additional business. Our strong internal revenue growth rate over the past five years reflects our ability to generate repeat business from existing customers. o Develop and Expand Existing Technologies. We intend to continue to develop our technology through a combination of customer-funded research and development and our own internal research and development. Customer-funded development contracts offer us the opportunity to work with our customers to design and manufacture new systems and components. o Pursue Strategic Acquisitions. We intend to actively participate in the ongoing consolidation of the aerospace and defense supply chain. We intend to continue to enhance our existing product base and enter into new markets through selective acquisitions. o Build Strategic Alliances. Through teaming agreements and industry alliances and joint ventures, we intend to continue to exploit specific programs and product opportunities to obtain new contracts and expand our global reach. o Continue to React Quickly to Changing Defense Environment. In addition to being well positioned for conventional warfare roles, our products such as thermal imaging products, computer ruggedization products and the Mobile Inshore Undersea Warfare (MIUW) are highly adaptable to address the new military requirements such as speed of deployment and non-conventional threats such as terrorism. 11 o Pursue Selective Commercial Opportunities. We seek to identify and exploit commercial applications for selected products and technologies that we currently sell to defense customers. An example of this is our profitable LADARVision program which was generated out of our Electro-Optical Systems Group. Recent Acquisitions On June 14, 2000, we acquired the assets of General Atronics Corporation for approximately $11.5 million in cash and stock. Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC, the company designs, develops and manufactures military data link components and systems, high-frequency communication modems, tactical and secure digital telephone components, and radar surveillance systems for U.S. and international militaries. Customers We sell a significant portion of our products to agencies of the U.S. Government, primarily the Department of Defense, to foreign government agencies or to prime contractors or their subcontractors. Approximately 78%, 80% and 81% of total consolidated revenues for fiscal 2001, 2000 and 1999, respectively, were derived directly or indirectly from defense contracts for end use by the U.S. Government and its agencies. See "Foreign Operations and Export Sales" below for information concerning sales to foreign governments. Backlog The following table sets forth our backlog by major product group (including enhancements, modifications and related logistics support) at the dates indicated. "Backlog" refers to the aggregate revenues remaining to be earned at a specified date under contracts held by us, including, for U.S. Government contracts, the extent of the funded amounts thereunder which have been appropriated by Congress and allotted to the contract by the procuring Government agency. Backlog also includes all firm orders for commercial products. Fluctuations in backlog generally relate to the timing and amount of defense contract awards.
Government Products: March 31, 2001 March 31, 2000 March 31, 1999 -------------- -------------- -------------- U.S. Government..................... $363,777,000 $303,600,000 $293,400,000 Foreign Government.................. 55,388,000 56,200,000 48,400,000 ------------- -------------- -------------- 419,165,000 359,800,000 341,800,000 Commercial Products................... 37,339,000 28,300,000 20,900,000 ------------- -------------- ---------------- $456,504,000 $388,100,000 $362,700,000 ============ ============ ============
Backlog at March 31, 2001 was approximately $456.5 million, as compared with $388.1 million at March 31, 2000. The Company booked $478.8 million in new orders in fiscal 2001. The increase in backlog was due primarily to increased bookings, most notably for combat display workstations and infrared sighting and targeting systems, offset, in part, by the effect of increased revenues and $27.2 million in backlog contributed by the Company's fiscal 2001 first quarter acquisition of DRS Communications Company. Approximately 87% of backlog as of March 31, 2001 is expected to result in revenues during fiscal 2002. Research and Development The defense electronics sector is subject to rapid technological changes, and our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. Thus, our technological expertise is an important factor affecting our growth. A portion of our research and development activities take place in connection with customer-sponsored research and development contracts. We recorded revenues for customer-sponsored research and development of approximately $32.9 million, $23.5 million, and $15.4 million for fiscal 2001, 2000 and 1999, respectively. Such customer-sponsored activities are primarily the result of contracts directly or indirectly with the U.S. Government. We also invest in internal research and development. 12 Such expenditures were approximately $8.0 million, $9.9 million and $5.2 million for fiscal 2001, 2000 and 1999, respectively. Contracts Our contracts are normally for production, service or development. Production and service contracts are typically of the fixed-price variety with development contracts currently of the cost-type variety. Because of their inherent uncertainties and consequent cost overruns, historically, development contracts have been less profitable than production contracts. Fixed-price contracts may provide for a firm fixed price or they may be fixed-price incentive contracts. Under the firm fixed-price contracts, we agree to perform services for an agreed-upon price. Accordingly, we derive benefits from cost savings, but bear the risk of cost overruns. Under the fixed-price incentive contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts, the savings are apportioned between the customer and us. If actual costs under such a contract exceed estimated costs, however, excess costs are apportioned between the customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if any. Cost-type contracts typically provide for reimbursement of allowable costs incurred plus a fee (profit). Unlike fixed-price contracts in which we are committed to deliver without regard to performance cost, cost-type contracts normally obligate us to use our best efforts to accomplish the scope of work within a specified time and a stated contract dollar limitation. In addition, U.S. Government procurement regulations mandate lower profits for cost-type contracts because of our reduced risk. Under cost-plus-incentive-fee contracts, the incentive may be based on cost or performance. When the incentive is based on cost, the contract specifies that we are reimbursed for allowable incurred costs plus a fee adjusted by a formula based on the ratio of total allowable costs to target cost. Target cost, target fee, minimum and maximum fee and adjustment formulae are agreed upon when the contract is negotiated. In the case of performance-based incentives, we are reimbursed for allowable incurred costs plus an incentive, contingent upon meeting or surpassing stated performance targets. The contract provides for increases in the fee to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. In some instances, incentive contracts also may include a combination of both cost and performance incentives. Under cost-plus-fixed-fee contracts, we are reimbursed for costs and receive a fixed fee, which is negotiated and specified in the contract. Such fees have statutory limits. The percentages of revenues during fiscal 2001, 2000 and 1999 attributable to our contracts by contract type were as follows: Fiscal Years Ended March 31, --------------------------------- 2001 2000 1999 ---- ---- ---- Firm fixed-price................... 94% 88% 84% Cost-type.......................... 6% 12% 16% We negotiate for and generally receive progress payments from our customers of between 75-90% of allowable costs incurred on the previously described contracts. Included in our reported revenues are certain amounts which we have not billed to customers. These amounts, approximately $9.5 million, $13.7 million and $12.8 million as of March 31, 2001, 2000 and 1999, 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 accounting principles generally accepted in the United States, all U.S. Government contract costs, including applicable general and administrative expenses, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations (FAR), incorporated by reference in U.S. Government contracts, provide that internal research and development costs are allowable general and administrative expenses. To the extent that general and administrative expenses are included in inventory, research and development costs also are included. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. Government contracts. Work-in-process inventory included general and administrative costs (which include internal research and development costs) of $14.5 million and $12.7 million at March 31, 2001 and 2000, respectively. Our defense contracts and subcontracts are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. Multiyear U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. In addition, if 13 certain technical or other program requirements are not met in the developmental phases of the contract, then the follow-on production phase may not be realized. Upon termination other than for a contractor's default, the contractor normally is entitled to reimbursement for allowable costs, but not necessarily all costs, and to an allowance for the proportionate share of fees or earnings for the work completed. Competition Our products are sold in markets containing competitors which are substantially larger than we are, devote substantially greater resources to research and development and generally have greater financial resources. Certain competitors are also our customers and suppliers. The extent of competition for any single project generally varies according to the complexity of the product and the dollar volume of the anticipated award. We believe that we compete on the basis of: o The performance and flexibility of our products; o Reputation for prompt and responsive contract performance; o Accumulated technical knowledge and expertise; and o Breadth of our product lines. Our future success will depend in large part upon our ability to improve existing product lines and to develop new products and technologies in the same or related fields. In the military sector, we compete with large and mid-tier defense contractors on the basis of product performance, cost, overall value, delivery and reputation. As the size of the overall defense industry has decreased in recent years, the number of consolidations and mergers of defense suppliers has increased. We expect this consolidation trend to continue. As the industry consolidates, the large defense contractors are narrowing their supplier base and awarding increasing portions of projects to strategic mid- and lower-tier suppliers, and, in the process, are becoming oriented more toward system integration and assembly. We believe that we have benefited from this trend, as evidenced by the formation of strategic alliances with several large suppliers. Patents and Licenses We have patents on certain of our commercial and data recording products, semi-conductor devices, rugged computer related items, and electro-optical and focal plane array products. DRS and its subsidiaries have certain registered trademarks, none of which are considered significant to current operations. We believe our patent position and intellectual property portfolio, in the aggregate, is valuable to our operations. We do not believe that the conduct of our business as a whole is materially dependent on any single patent, trademark or copyright. Manufacturing and Suppliers Our manufacturing processes for our products, excluding certain electro-optical products, includes the assembly of purchased components and testing of products at various stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors, silicon wafers and other conductive materials, insulated wire and cables. In addition, many of our products use machined castings and housings, motors and recording and reproducing heads. Many of the purchased components are fabricated to our designs and specifications. The manufacturing process for certain of our optics products includes the grinding, polishing and coating of various optical materials and the machining of metal components. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are our sole source of certain components. If a supplier should cease to deliver such components, other sources probably would be available; however, added cost and manufacturing delays might result. We have not experienced significant production delays attributable to supply shortages, but occasionally experience quality and other related problems with respect to certain components, such as semiconductors and connectors. In addition, with respect to our optical products, certain exotic materials, such as germanium, zinc sulfide and cobalt, may not always be readily available. 14 Foreign Operations and Export Sales We currently sell several of our products and services in the international marketplace to Canada, Israel, Spain, Australia, Venezuela, and other countries in Europe and Southeast Asia. Foreign sales are derived under export licenses granted on a case-by-case basis by the United States Department of State. Our foreign contracts generally are payable in United States dollars. Export sales accounted for less than 10% of total revenues in the fiscal years ended March 31, 2001 and 2000. We operate outside the United States through FSCG in Canada and the United Kingdom, and through ESG primarily in the United Kingdom. See Note 15 to our Consolidated Financial Statements in this Form 10-K for information required by this item with respect to revenues and long-lived assets by geographic area. The addition of international businesses involves additional risks for us, such as exposure to currency fluctuations, future investment obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely different legal systems, customs and practices in foreign countries. 15 EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers The names of our executive officers, their positions and offices with us, and their ages are set forth below:
Name Age Position - ---- --- -------- Mark S. Newman........................ 51 Chairman of the Board, President and Chief Executive Officer Paul G. Casner, Jr.................... 63 Executive Vice President, Chief Operating Officer Nina Laserson Dunn.................... 54 Executive Vice President, General Counsel and Secretary Richard A. Schneider.................. 48 Executive Vice President, Chief Financial Officer and Treasurer Robert F. Mehmel...................... 38 Executive Vice President, Business Operations and Strategies
Mark S. Newman has been employed by us since 1973. He was named Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. Mr. Newman became a Director of DRS in 1988. In May 1994, Mr. Newman became the President and Chief Executive Officer of DRS and in August 1995 became Chairman of the Board. Paul G. Casner, Jr. joined us in 1993 as President of Technology Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he became President of the DRS Electronic Systems Group and a Vice President of DRS. In 1998, he became Executive Vice President, Operations, and in May 2000 he became our Executive Vice President, Chief Operating Officer. Mr. Casner has over 30 years of experience in the defense electronics industry and has held positions in engineering, marketing and general management. Nina Laserson Dunn joined us as Executive Vice President, General Counsel and Secretary in July 1997. Prior to joining DRS, Ms. Dunn was a director in the corporate law department of Hannoch Weisman, a Professional Corporation, where she served as our outside legal counsel. Ms. Dunn is admitted to practice law in New York and New Jersey and is a member of the American, New York State and New Jersey State Bar Associations. Richard A. Schneider joined us in 1999 as Executive Vice President, Chief Financial Officer and Treasurer of DRS. He held similar positions at NAI Technologies, Inc. (NAI) and was a member of its Board of Directors prior to its acquisition by DRS in February 1999. Mr. Schneider has over 20 years of experience in corporate financial management, including ten years with NAI. Robert F. Mehmel joined us as Executive Vice President, Business Operations and Strategy, in January 2001. Before joining us, he was Director, Corporate Development, at Jabil Circuit, Inc. Prior to that, he was Vice President, planning, at L-3 Communications Corporation from its inception in April 1997 until June 2000. Earlier, Mr. Mehmel held various positions in divisional and corporate financial management with Lockheed Martin Corporation, Loral Corporation and Lear Siegler, Inc. Employees At March 31, 2001, we had approximately 2,200 employees, 1,750 of whom were located in the United States. None of our employees are represented by labor unions, and we have experienced no work stoppages. There is a continuing demand for qualified technical personnel, and we believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. 16 Item 2. Properties We lease the following properties:
Approximate Square Lease Division Location Activities Footage Expiration - --------------------------------------------------------------------------------------------------------------------- Corporate Parsippany, New Jersey Corporate 18,900 Fiscal 2011 Headquarters Corporate Arlington, Virginia Administrative 4,300 Fiscal 2007 ESG Gaithersburg, Maryland Administrative, 42,500 Fiscal 2006 Engineering and Manufacturing ESG Johnstown, Pennsylvania Administrative and 130,000 Fiscal 2011 Manufacturing ESG San Diego, California Engineering 7,200 Fiscal 2005 Support Services ESG Chesapeake, Virginia Field Service and 22,000 Fiscal 2005 Engineering Support ESG Columbia, Maryland Administrative, 25,000 Fiscal 2002 Engineering and Manufacturing ESG Farnham, Surrey, Administrative, 26,000 Fiscal 2015 United Kingdom Engineering and Manufacturing ESG Chippenham, Wiltshire, Administrative, 1,400 Fiscal 2007 United Kingdom Engineering and Manufacturing ESG Gaithersburg, Maryland Administrative, 10,700 Fiscal 2008 Engineering and Product Development EOSG Oakland, New Jersey Administrative, 61,000 Fiscal 2003 Engineering and Manufacturing EOSG Palm Bay, Florida Administrative, 85,200 Fiscal 2011 Engineering and Manufacturing EOSG Melbourne, Florida Administrative, 93,500 Fiscal 2011 Engineering and Manufacturing
17
Approximate Square Lease Division Location Activities Footage Expiration - --------------------------------------------------------------------------------------------------------------------- EOSG Dallas, Texas Administrative, 117,000 Fiscal 2008 Engineering and Manufacturing EOSG Torrance, California Administrative, 33,800 Fiscal 2009 Engineering and Manufacturing FSCG Kanata, Ottawa, Administrative 62,000 Fiscal 2012 Canada and Engineering FSCG Nepean, Ontario, Administrative and 21,200 Fiscal 2004 Canada Engineering FSCG Santa Clara, California Administrative, 33,200 Fiscal 2006 Engineering and Manufacturing FSCG Wyndmoor, Pennsylvania Administrative and 92,200 Fiscal 2002 Manufacturing Other San Jose, California Administrative, 32,000 Fiscal 2006 Product Development and Manufacturing
We own the following properties:
Approximate Square Division Location Activities Footage ----------------------------------------------------------------------------------------------------------------- Carleton Place, Administrative and 128,500 FSCG Ontario, Canada Manufacturing Tring, Hertfordshire, Administrative, 7,500 FSCG United Kingdom Engineering and Manufacturing
We believe that all our facilities are in good condition, adequate for our intended use and sufficient for our immediate needs. It is not certain whether we will negotiate new leases as existing leases expire. Such determinations will be made as existing leases approach expiration and will be based on an assessment of our requirements at that time. Further, we believe that we can obtain additional space, if necessary, based on prior experience and current real estate market conditions. Substantially all of our assets, including those properties identified above, are pledged as collateral on our borrowings (see Note 10 to our Consolidated Financial Statements in this Form 10-K). Environmental Protection We believe that our manufacturing operations and properties are, in all material respects, in compliance with existing federal, state and local provisions enacted or adopted to regulate the discharge of materials into the environment or otherwise protect the environment. Such compliance has been achieved without material effect on our earnings or competitive position. 18 Item 3. Legal Proceedings We are a party to various legal actions and claims arising in the ordinary course of our business. In our opinion, we have adequate legal defenses for each of the actions and claims, and we believe that their ultimate disposition will not have a material adverse effect on our consolidated financial position or results of operations. In April and May 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or Photronics. During the Government's investigation, until October 29, 1999, Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, Photronics received authorization to ship such equipment. We are presently involved in a dispute in arbitration with Spar Aerospace Limited (Spar) with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar (see Note 3 to our Consolidated Financial Statements in this Form 10-K). We are also in a dispute with Raytheon Company with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Raytheon dated as of July 28, 1998, pursuant to which we acquired, through certain subsidiaries, certain assets of Raytheon (see Note 3 to our Consolidated Financial Statements in this Form 10-K). Item 4. Submission of Matters to a Vote of Security Holders Not applicable 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters We have not paid any cash dividends since 1976. We intend to retain future earnings for use in our business and do not expect to declare cash dividends on our Common Stock in the foreseeable future. The indenture relating to our bank borrowings restricts our ability to pay dividends or make other distributions on our Common Stock. See Note 10 to our Consolidated Financial Statements in this Form 10-K for information concerning restrictions on the declaration or payment of dividends. Any future declaration of dividends will be subject to the discretion of our Board of Directors. The timing, amount and form of any future dividends will depend, among other things, on our results of operations, financial condition, cash requirements, plans of expansion and other factors deemed relevant by our Board of Directors. The common stock of DRS is traded on the American Stock Exchange under the symbol "DRS." The following table shows the closing high and low sales price of our common stock for the periods indicated: Fiscal 2001 Fiscal 2000 ------------------------ ----------------------- High Low High Low ----------- ---------- ---------- --------- First Quarter $ 12.25 $ 9.88 $ 10.94 $ 6.88 Second Quarter $ 16.25 $ 10.25 $ 10.56 $ 8.94 Third Quarter $ 16.50 $ 12.63 $ 10.00 $ 7.00 Fourth Quarter $ 18.90 $ 12.25 $ 10.38 $ 8.25 The closing sale price of the Company's Common Stock as reported by the American Stock Exchange on June 22, 2001 was $21.16 per share. As of that date there were 711 holders of record of the Company's Common Stock. 20 Item 6. Selected Financial Data
Years Ended March 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ (dollars in thousands, except per-share data) Summary of Earnings Revenues $427,606 $391,467 $265,849 $180,750 $135,286 Operating income $ 37,531 $ 26,178 $ 15,301 $ 14,419 $ 11,551 Earnings from continuing operations before income taxes and extraordinary item $ 24,954 $ 12,832 $ 5,780 $ 9,706 $ 8,256 Earnings from continuing operations before extraordinary item $ 11,978 $ 7,661 $ 3,865 $ 6,634 $ 5,047 Net earnings $ 11,978 $ 4,310 $ 680 $ 6,372 $ 5,663 Per-Share Data From Continuing Operations (1), (2) Basic earnings per share $ 1.14 $ 0.83 $ 0.58 $ 1.18 $ 0.91 Diluted earnings per share $ 1.01 $ 0.76 $ 0.57 $ 0.96 $ 0.77 Book value per share $ 9.28 $ 8.43 $ 7.96 $ 7.16 $ 5.90 Summary of Financial Position Working Capital $ 43,686 $ 21,384 $ 13,491 $ 42,126 $ 32,838 Property, plant and equipment, net $ 37,639 $ 29,006 $ 32,124 $ 20,783 $ 17,944 Total assets $334,940 $320,098 $329,639 $162,813 $ 96,408 Long-term debt, excluding current installments $ 75,076 $ 97,695 $102,091 $ 56,532 $ 30,801 Total stockholders' equity $111,947 $ 78,184 $ 73,442 $ 44,335 $ 32,987 Financial Ratios Pretax return on revenues (1) 5.8% 3.3% 2.2% 5.4% 6.1% After tax return on revenues (1) 2.8% 2.0% 1.5% 3.7% 3.7% Return on average stockholders' equity (1) 12.6% 10.1% 6.6% 17.2% 30.6% Current ratio 1.3 1.2 1.1 1.8 2.2 Long-term debt, excluding current installments, to total capitalization 40.1% 55.5% 58.2% 56.0% 48.3% Interest coverage ratio (6) 4.58 x 3.37 x 2.86 x 4.12 x 4.59 x Supplemental Information EBIT (3) $ 36,415 $ 25,432 $ 15,137 $ 14,804 $ 11,838 EBITDA (4) $ 52,540 $ 42,502 $ 26,738 $ 20,992 $ 16,450 Free cash flow (5) $ 36,355 $ 36,292 $ 20,184 $ 14,733 $ 11,347 Capital expenditures $ 16,185 $ 6,210 $ 6,554 $ 6,259 $ 5,103 Depreciation and amortization $ 16,245 $ 17,070 $ 11,601 $ 6,188 $ 4,612 Internal research and development $ 8,027 $ 9,867 $ 5,104 $ 3,919 $ 3,852 Employees (7) 2,207 2,001 1,825 1,206 929 Revenues per employee (8) $ 203 $ 196 $ 154 $ 139 $ 147
(1) Earnings per share and financial ratios from continuing operations are presented and calculated before extraordinary item in fiscal 1999. (2) No cash dividends have been distributed in any of the years in the five-year period ended March 31, 2001. (3) Earnings from continuing operations before extraordinary items, interest and related expenses, and income taxes. (4) Earnings from continuing operations before extraordinary items, interest and related expenses, income taxes, depreciation and amortization. (5) EBITDA less capital expenditures. (6) Ratio of EBITDA to interest and related expenses (primarily amortization of debt issuance costs). (7) Indicates the number of employees, excluding employees at the Company's discontinued operations, at March 31 for each of the fiscal years presented. (8) Based on average number of employees from continuing operations. 21 Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of our consolidated financial condition and results of operations as of March 31, 2001 and 2000, and for each of the fiscal years in the three-year period ended March 31, 2001. This discussion should be read in conjunction with the audited Consolidated Financial Statements and related notes in this Form 10-K. Forward-Looking Statements The following discussion and analysis contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that risks and uncertainties are inherent in forward-looking statements. Accordingly, our actual results could differ materially from those suggested by such statements. Risks include, without limitation: the effect of our acquisition strategy on future operating results; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to our products and services; the effects of government regulation or shifts in government policy, as they may relate to our products and services; competition; and other matters referred to in this report. Overview We are a leading supplier of defense electronics products and systems. We provide high-technology products and services to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military forces and consumer markets. Incorporated in 1968, we have served the defense industry for over thirty years. We are a leading provider of thermal imaging devices, combat display workstations, electronic sensor systems, mission recorders and deployable flight incident recorders. Our products are deployed on U.S. Navy surface ships, submarines and surveillance aircraft, U.S. Army battle tanks and other vehicles, and are used other military and non-military applications. We have increased our annual revenues and operating income at compound annual growth rates of approximately 33% and 34% respectively over the last five years. In addition, from fiscal 2000 to fiscal 2001, operating income increased over 43% and net earnings from continuing operations increased over 56%. For the year ended March 31, 2001, we generated sales of $427.6 million and operating income of $37.5 million. Funded backlog also has increased substantially. At March 31, 2001, our funded backlog was approximately $456.5 million, an increase of 18% from March 31, 2000. As of March 31, 2001, approximately 41% and 30% of our backlog related to products and services for the U.S. Army and U.S. Navy, respectively, as compared with 45% and 28% at March 31, 2000. 22 Company Organization and Products We operate in three principal business segments on the basis of products and services offered. Separate and distinct businesses comprise each operating segment: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG) and the Flight Safety and Communications Group (FSCG). All of our other operations and activities are combined in "Other." Our Electronic Systems Group is a leader in the development, production and support of high-performance combat display workstations used by the U.S. Navy. In addition, we supply the military and intelligence communities with signal processing systems and computer systems adapted, or "ruggedized," for harsh environments. We incorporate advanced commercial computing technology to provide rapidly fielded and cost-effective system solutions for enhancing the military's ability to attain information dominance in land, sea and air applications. These systems are deployed on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. Our family of rugged computer products is also used in the U.S. Army's ongoing battlefield digitization program. Our Electronic Systems Group provided $186.5 million, or 44% of total sales, for the year ended March 31, 2001. Our Electro-Optical Systems Group is a leading provider of sophisticated thermal imaging and targeting systems. We have one of the few high-performance focal plane array foundries that allows us to design and develop these electro-optical systems for our customers. We design, manufacture and market thermal imaging systems that allow operators to detect, identify and target objects based upon their infrared signatures under adverse conditions, such as darkness, fog, smoke and dust. These systems are used in the U.S. Army's most important battlefield platforms, including the Abrams Battle Tank, the Bradley Infantry Fighting Vehicle, the High-Mobility Multi-Purpose Wheeled Vehicle Scout and the Javelin missile program. We also design and manufacture eye-safe laser range finders and multiple-platform weapons calibration systems for such diverse air platforms as the Apache attack helicopter and the AC-130U gunship. In addition to military applications, we are leveraging our advanced electro-optical production capability by expanding into related non-defense markets. For example, we manufacture electro-optical modules for commercial devices used in corrective laser eye surgery and integrate systems for retinal scanning. Our Electro-Optical Systems Group provided $160.6 million, or 38% of total sales, for the year ended March 31, 2001. Our Flight Safety and Communications Group supplies airborne deployable recorders, surveillance and communications systems and electronic manufacturing services. We are the leading manufacturer of deployable flight voice and data recording equipment, or "black box" recorders, for U.S. and foreign customers. Mounted to the airframe, these recorders eject automatically from the aircraft prior to impact, so that they more easily can be located by search and rescue teams. We have provided over 4,000 of these deployable recorders for military and search and rescue aircraft. We also supply integrated naval ship communications, information management systems, coastal surveillance systems and ultra high-speed digital imaging systems. In addition, we provide electronic manufacturing services, often with value-added engineering content, to the defense and space industries. Our Flight Safety and Communications Group provided $70.9 million, or 17% of total sales, for the year ended March 31, 2001. "Other" includes the activities of DRS Corporate Headquarters and DRS Ahead Technology. DRS Ahead Technology is a commercial operation that produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead Technology also services and manufactures magnetic video recording heads used in broadcast television equipment. 23 Discontinued Operations On May 18, 2000, our Board of Directors approved an agreement to sell our magnetic tape head business units located in St. Croix Falls, Wisconsin, and Razlog, Bulgaria. These operations produced primarily magnetic tape recording heads for transaction products that read data from magnetic cards, tapes and ink. In fiscal 2000, in anticipation of the sale, we recorded a $2.1 million charge, net of tax, on the disposal of these operations. On August 31, 2000, we completed the sale of these business units. The sale of the magnetic tape head business was a strategic decision by us to focus our resources on our core businesses. All financial information presented in this discussion and analysis reflects these business units as discontinued operations. Business Combinations and Disposals The following summarizes certain business combinations and transactions we completed which significantly affect the comparability of the period-to-period results presented in this discussion and analysis. Fiscal 2001 Transaction On June 14, 2000, a newly formed subsidiary of ours acquired the assets of General Atronics Corporation for $7.5 million in cash and $4.0 million in stock (approximately 355,000 shares of our Common Stock). We funded the cash portion of this acquisition through borrowings under our revolving line of credit. Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC, the company designs, develops and manufactures military data link components and systems, high-frequency communication modems, tactical and secure digital telephone components and radar surveillance systems for U.S. and international militaries. The excess of costs over the estimated fair value of identifiable net assets acquired and the appraised value of certain identified intangible assets were approximately $3.5 million and $3.3 million, respectively, and are being amortized on a straight-line basis over twenty years and ten years, respectively. In connection with the acquisition, we incurred approximately $420,000 in transaction costs. Fiscal 2000 Transaction On July 21, 1999, our subsidiary, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total purchase price of $10.2 million. Located in Chippenham, Wiltshire, U.K., and now operating as DRS Rugged Systems (Europe) Products Ltd., the company designs and develops rugged computers and peripherals primarily for military applications. The excess of cost over the estimated fair value of net assets acquired was approximately $8.7 million and is being amortized on a straight-line basis over twenty years. Any additional consideration paid by us would be an adjustment to goodwill. Fiscal 1999 Transactions On October 20, 1998, we acquired, through certain of our subsidiaries, certain assets of Raytheon Company's Second Generation Ground-Based Electro-Optical Systems and Focal Plane Array businesses, which we refer to as the EOS business, and certain of Raytheon's subsidiaries, pursuant to the Asset Purchase Agreement dated as of July 28, 1998, between us and Raytheon, as amended (the EOS Acquisition). We paid approximately $45 million in cash for the acquisition at closing; the purchase price is subject to a post-closing working capital adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment, if any, is the subject of arbitration between us and Raytheon. Although we cannot, at this time, predict the outcome of such arbitration, we do not expect that the final adjustment will have a material impact on our consolidated financial position or results of operations. The excess of cost over the estimated fair value of identifiable net assets acquired (goodwill) and the appraised value of certain identified intangible assets were approximately $34.5 million and $30.8 million, respectively, and are being amortized on a straight-line basis over twenty years. We incurred professional fees and other costs related to the acquisition from Raytheon of approximately $2.0 million, which also were capitalized as part of the total purchase price. We have valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on our effort to complete such contracts. During fiscal 2001, we recorded a $9.8 million reduction to goodwill. The reduction to goodwill was due to accruals for future contract costs that are no longer required on acquired contracts. The EOS business, operating as DRS Sensor Systems, Inc. and 24 DRS Infrared Technologies, LP, provides products used in the detection, identification and acquisition of targets based on infrared data. On February 19, 1999, one of our wholly-owned subsidiaries merged with and into NAI Technologies, Inc., a New York corporation, with NAI being the surviving corporation and continuing as our direct wholly-owned subsidiary, for stock and other consideration valued at approximately $24.8 million. In connection with our merger with NAI, we issued 2,858,266 shares of Common Stock. The excess of cost over the estimated fair value of identifiable net assets acquired was approximately $26.7 million and is being amortized on a straight-line basis over twenty years. During fiscal 2001, new tax regulations became effective which changed the rules for determining how net operating loss carryforwards of an acquired company could be utilized. As a result of this tax law change, we recorded a $3.2 million reduction to our deferred tax asset valuation allowance and goodwill during fiscal 2001. Prior to our merger with NAI, we began to assess and formulate a plan to close NAI's Longmont, Colorado facility and transfer engineering and production to our other locations. In January 2000, we announced our plan, which included relocating/terminating approximately 45 employees. A cost of approximately $1.5 million was recorded as an adjustment to the acquisition cost during fiscal 2000. We completed our exit plan in the first quarter of fiscal 2001. The following table reconciles the related liability at March 31, 2000 to the liability as of March 31, 2001: Liability at Utilized in Liability at March 31, 2000 Fiscal 2001 March 31, 2001 -------------- ----------- -------------- (in thousands) Severance / employee costs $ 1,195 $ 1,195 $ - Estimated lease commitments and related facility costs 215 215 - ------- ------- ---- Total $ 1,410 $ 1,410 $ - ======= ======= ==== We also incurred professional fees and other costs related to our merger with NAI of approximately $2.8 million, which were capitalized as part of the total purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS Rugged Systems (Europe) Ltd., provides rugged computers, peripherals and integrated systems primarily for military and special government applications. The aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in our reported operating results from their respective effective dates of acquisition. Except for our acquisition from Raytheon and our merger with NAI, the financial position and results of operations of these businesses were not significant to ours as of their respective effective dates of acquisition. We selectively target acquisition candidates that complement or expand our product lines, services or technical capabilities. We continue to seek acquisition opportunities consistent with our overall business strategy. Restructuring In addition to the closure of the Longmont, Colorado facility described above, during the third and fourth quarters of fiscal 2000, we announced plans to restructure our operations, which resulted in our recording of restructuring charges totaling approximately $2.2 million. Our restructuring initiatives impacted our EOSG and FSCG operating segments and DRS Corporate. EOSG recorded a restructuring charge of approximately $831,000 primarily for costs relating to consolidating two facilities into one in Oakland, New Jersey. FSCG recorded a restructuring charge of approximately $669,000 and $143,000 at its DRS Hadland Ltd. and DRS Precision Echo, Inc. operating units, respectively, for severance and other employee related costs. The DRS Hadland restructuring charge was recorded in connection with the transition of the day-to-day management of DRS Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In addition, DRS Corporate recorded a restructuring charge of approximately $560,000 for severance and other employee-related costs. Severance and other employee costs were recorded in connection with the termination of 13 employees. As of March 31, 2000, all terminations had occurred. 25 In the third quarter of fiscal 2001, we revised our estimate relating to our facility consolidation efforts in Oakland, New Jersey and recorded a charge of $525,000. At March 31, 2001, the majority of the restructuring liability shown below represents termination benefits to be paid in accordance with contractual terms over the next thirteen months and lease commitments over the next fifteen months. The following table reconciles the restructuring liability at March 31, 2000 to the restructuring liability as of March 31, 2001:
Liability at Fiscal 2001 Utilized in Liability at March 31, 2000 Charges Fiscal 2001 March 31, 2001 -------------- ----------- ----------- -------------- (in thousands) Estimated lease commitments and related facility costs $ 328 $ 525 $ 396 $ 457 Severance/employee costs 690 - 434 256 ------- ----- ----- ----- Total $ 1,018 $ 525 $ 830 $ 713 ======= ===== ===== =====
The overall reduction in direct and indirect operating expenses resulting from these management actions has had a positive effect on our fiscal 2001 operating results and should continue to benefit future periods. Results of Operations Our operating cycle is long-term and involves various types of production contracts and varying production delivery schedules. Accordingly, operating results of a particular year, or year-to-year comparisons of recorded revenues and earnings, may not be indicative of future operating results. The following comparative analysis should be viewed in this context. Fiscal Year Ended March 31, 2001 Compared To Fiscal Year Ended March 31, 2000 Revenues and operating income for the year ended March 31, 2001 increased approximately $36.1 million and $11.4 million, respectively, as compared with the prior fiscal year. The increase in revenues was primarily attributable to increased shipments of infrared detectors, search and navigation radar systems, increased volume in electro-optical contract manufacturing and military display workstation engineering services, as well as to $17.8 million in revenues from our fiscal 2001 acquisition of DRS Communications Company. These increases in revenues were partially offset by a decrease in shipments of certain rugged computers and peripherals in Europe, decreased orders for high-speed cameras and later-than-anticipated orders received for certain mission data recording systems. The 43% increase in operating income was driven by the overall increase in revenues, a $1.6 million operating income contribution from DRS Communications Company, and the year-over-year net impact of changes in estimated profitability on certain long-term contracts. Most of our contracts are long-term in nature, spanning multiple years. We review cost performance and estimates to complete on these contracts at least quarterly and, in many cases, more frequently. If the estimated cost to complete a contract changes from the previous estimate, we will record a favorable or unfavorable adjustment to earnings in the current period. Partially offsetting the fiscal 2001 increase in operating income was the impact of certain charges at our operating segments. See discussion of operating segments below for additional information. Interest and related expenses decreased approximately $1.1 million for the year ended March 31, 2001, as compared with the corresponding prior-year period. The decrease was primarily the result of a 56% decrease in average working capital borrowings outstanding during the year ended March 31, 2001, as compared with the corresponding prior year period and the favorable impact of the fiscal 2001 conversion of approximately $19.1 million of our previously outstanding 9% Senior Subordinated Convertible Debentures into approximately 2.2 million shares of our Common Stock. Partially offsetting the decrease in interest expense was a non-cash charge of approximately $305,000 relating to the conversion of $8.7 million of the debentures during the second quarter of fiscal 2001. Our effective tax rate was 52% and 40% in the fiscal years ended March 31, 2001 and 2000, respectively. The increase in the effective tax rate for fiscal 2001 was primarily due to the following: the continued increase in domestic earnings, which are taxed at higher overall rates in comparison with our foreign tax jurisdictions; losses in our U.K. operations for which the full tax benefit has not yet been recognized; the effects of non-deductible goodwill and lobbying expenses; 26 and the impact of certain domestic and foreign tax benefits utilized in fiscal 2000. It is anticipated that our effective tax rate will decline moderately in future years as we continue to grow and our U.K. operations return to profitability. Minority interest was approximately $1.4 million and $1.3 million in fiscal 2001 and 2000, respectively. The increase was due to higher operating income generated by ESG's DRS Laurel Technologies unit, in which we have an 80% interest. Fiscal Year Ended March 31, 2000 Compared To Fiscal Year Ended March 31, 1999 Revenues and operating income for the year ended March 31, 2000 increased approximately $126.0 million and $11.0 million, respectively, as compared with the prior fiscal year. These increases were primarily attributable to the inclusion of a full year of operations of our fiscal 1999 third quarter acquisition from Raytheon and the fiscal 1999 fourth quarter merger with NAI. In addition to the impact of the fiscal 1999 acquisitions, fiscal 2000 revenues and operating income were positively impacted by our second quarter acquisition of DRS Rugged Systems (Europe) Products Ltd. Fiscal 2000 consolidated operating income also was impacted by the approximately $2.2 million charge recorded in connection with restructuring certain operations (see Restructuring). See discussion of operating segments below for additional information. Interest and related expenses increased approximately $3.2 million for the year ended March 31, 2000, as compared with the corresponding prior-year period. The increase was primarily due to higher average borrowings outstanding in fiscal 2000 related to the fiscal 1999 EOS Acquisition and the impact of the fiscal 2000 second quarter acquisition of DRS Rugged Systems (Europe) Products Ltd. Interest also increased as a result of higher average working capital borrowings in fiscal 2000, as compared with fiscal 1999. Our effective tax rate was 40% and 33% in the fiscal years ended March 31, 2000 and 1999, respectively. The effective rate for fiscal 2000 reflected the continued growth in domestic earnings, which were taxed at higher overall rates in comparison to our foreign tax jurisdictions. The effective rate also increased due to the effect of non-deductible goodwill. Minority interest was approximately $1.3 million and $1.0 million in fiscal 2000 and 1999, respectively. The increase was due to higher operating income generated by our DRS Laurel Technologies unit, in which we have an 80% interest. In fiscal 2000, we recorded a $1.3 million loss, net of tax, from discontinued operations and a $2.1 million loss, net of tax, on the disposal of discontinued operations relating to the then pending sale of our magnetic tape head business. In fiscal 1999, we recorded an extraordinary charge of approximately $2.3 million, net of tax, in connection with a modification of our credit facility. 27 Operating Segments The following tables set forth, by operating segment, revenues, operating income, operating margin and the percentage increase or decrease of those items as compared with the prior period:
Years Ended March 31, Percent Changes --------------------------------------- ------------------------- 2001 vs. 2000 vs. 2001 2000 1999 2000 1999 --------- --------- --------- --------- --------- ESG (dollars in thousands) --------------------------------------- ------------------------- External revenues $ 186,474 $ 187,794 $ 123,558 (0.7%) 52.0% Operating income before amortization of goodwill and related intangibles $ 17,244 $ 16,370 $ 9,497 5.3% 72.4% Operating income $ 15,336 $ 14,593 $ 9,292 5.1% 57.0% Operating margin 8.2% 7.8% 7.5% 5.1% 4.0% --------------------------------------- ------------------------- EOSG --------------------------------------- ------------------------- External revenues $ 160,603 $ 141,108 $ 69,972 13.8% 101.7% Operating income before amortization of goodwill and related intangibles $ 26,232 $ 14,804 $ 5,077 77.2% 191.6% Operating income $ 22,691 $ 11,404 $ 3,581 99.0% 218.5% Operating margin 14.1% 8.1% 5.1% 74.1% 58.8% --------------------------------------- ------------------------- FSCG --------------------------------------- ------------------------- External revenues $ 70,878 $ 54,209 $ 60,438 30.7% (10.3%) Operating income before amortization of goodwill and related intangibles $ 2,125 $ 3,799 $ 5,672 (44.1%) (33.0%) Operating income $ 208 $ 2,762 $ 4,684 (92.5%) (41.0%) Operating margin 0.3% 5.1% 7.8% (94.1%) (34.6%) --------------------------------------- ------------------------- Other --------------------------------------- ------------------------- External revenues $ 9,651 $ 8,356 $ 11,881 15.5% (29.7%) Operating (loss) before amortization of goodwill and related intangibles $ (450) $ (2,391) $ (2,022) 81.2% (18.2%) Operating (loss) $ (704) $ (2,581) $ (2,256) 72.7% (14.4%) Operating margin (7.3%) (30.9%) (19.0%) 76.4% (62.6%) --------------------------------------- -------------------------
Fiscal Year Ended March 31, 2001 Compared With Fiscal Year Ended March 31, 2000 Electronic Systems Group. Our Electronic Systems Group's revenues decreased $1.3 million, or 1%, in fiscal 2001, as compared with fiscal 2000. Lower revenues for the year ended March 31, 2001 were due primarily to a decrease in shipments of certain rugged computers and peripherals in the U.K. This decrease was partially offset by increases in revenues from shipments of search and navigation radar systems and military display workstations, in addition to engineering services for display workstation product lines. Operating income and operating margin both increased 5% in fiscal 2001, as compared with the prior fiscal year. The increases in operating income and operating margin were driven by a change in product mix to higher margin programs, coupled with operating efficiencies and the cost savings derived from the closure of the Longmont, Colorado production facility. The Longmont facility ceased operations on March 31, 2000 and production was moved into our new electronic manufacturing facility in Johnstown, Pennsylvania in fiscal 2001. 28 Electro-Optical Systems Group. Our Electro-Optical Systems Group's revenues increased $19.5 million, or 14%, in fiscal 2001, as compared with fiscal 2000. The increase in revenues was driven by increased volume in commercial electro-optical contract manufacturing and shipments of infrared detectors and fire control systems. Operating income increased $11.3 million in fiscal 2001, as compared with the prior fiscal year. The increase in operating income reflected the increase in revenues and the impact of $8.3 million in favorable program adjustments recorded in fiscal 2001 on certain long-term production programs. Estimates to complete these programs were revised to reflect lower than anticipated overhead costs and the benefit of certain productivity improvements. The Company recorded a $2.9 million favorable adjustment on a long-term production contract in fiscal 2000. Estimates to complete this contract were revised in the third quarter of fiscal 2000 to reflect the benefit of management's efforts to reduce overall production costs, primarily by identifying and procuring certain materials and subassemblies from alternate suppliers. The benefits of management's cost reduction initiatives began to be realized in the third quarter of fiscal 2000, as shipments of certain units commenced, and in fiscal 2001, with increased quantities of units shipped. Partially offsetting these increases were fiscal 2001 charges of $1.3 million for changes in estimates on certain long-term production programs and $525,000 for additional costs expected to be incurred in connection with a facility that was vacated during fiscal 2000. Fiscal 2000 operating income reflected charges of $1.3 million for certain product warranty reserves and additional development costs for a commercial product line. Flight Safety and Communications Group. Our Flight Safety and Communications Group's revenues increased $16.7 million, or 31%, in fiscal 2001, as compared with fiscal 2000. The increase in revenues was primarily attributable to the acquisition of DRS Communications Company at the end of the first quarter of fiscal 2001, as well as continued growth in FSCG's electronic manufacturing and shipboard communications systems businesses. In the year ended March 31, 2001, DRS Communications Company contributed to the FSCG operating segment approximately $17.9 million in revenues. The increase in revenues was partially offset by decreased orders for this group's high-speed digital cameras and temporarily delayed orders for certain mission data recording systems. Operating income decreased approximately $2.6 million in fiscal 2001, as compared with the prior fiscal year. The decrease in operating income was attributed to several factors: a $1.3 million charge in the third quarter of fiscal 2001 for estimated excess inventories associated with a specific product line for which the anticipated future sales are less than previously estimated; a $1.0 million charge for a contract pricing dispute between us and a prime contractor on a U.S. Navy program; a charge of $1.9 million for additional costs incurred to complete the development of a new mission data recording system for the U.S. Navy; less favorable absorption of fixed operating expenses associated with lower production volumes for certain mission data recording systems and high-speed digital cameras; and lower overall profit margins in the Flight Safety and Communication Group's electronic manufacturing business. In an effort to reduce costs and take advantage of certain manufacturing efficiencies, we announced in April 2001 that we would be closing our Santa Clara, California facility and moving production and engineering operations to other DRS facilities. We anticipate that the cost savings associated with this effort will offset the cost to implement the plan and that there should not be any adverse impact to our fiscal 2002 earnings. Partially offsetting the fiscal 2001 decrease in operating income was the positive effect of DRS Communications Company, which contributed approximately $1.6 million in operating income to FSCG for the fiscal year ended March 31, 2001. Other. Revenues increased $1.3 million in fiscal 2001, as compared with fiscal 2000. The increase in revenues was primarily due to increased shipments of components used to manufacture disk drive media. This revenue growth resulted from certain improvements and opportunities in the computer disk drive marketplace and improved marketing of DRS Ahead Technology's products and services. The decrease in the operating loss in fiscal 2001, as compared with the prior fiscal year, was driven by the increase in revenues discussed above, a reduction in general and administrative expenses at DRS Ahead Technology and the allocation of certain costs to the operating units which previously had been recorded at DRS Corporate. This improvement was partially offset by a $1.1 million charge recorded in fiscal 2001 to fully reserve for a note receivable that may not be collectible. 29 Fiscal Year Ended March 31, 2000 Compared With Fiscal Year Ended March 31, 1999 Electronic Systems Group. Our Electronic Systems Group's increase in revenues and operating income for the year ended March 31, 2000, as compared with the prior year, was due primarily to the inclusion of the full-year operating results of our fiscal 1999 fourth quarter merger with NAI. Revenues and operating income for the year ended March 31, 2000 attributable to our merger with NAI increased by $51.8 million and $3.8 million, respectively, as compared with the prior-year period. Following its acquisition in July 1999, DRS Rugged Systems (Europe) Products Ltd. contributed approximately $7.4 million and $1.4 million in additional revenues and operating income, respectively, for the year ended March 31, 2000. The overall increase in this group's revenues and operating income also was attributable to continued growth of our military display workstation programs. Electro-Optical Systems Group. The Electro-Optical Systems Group's increase in revenues and operating income for the year ended March 31, 2000 was primarily attributable to the October 1998 EOS Acquisition. This acquisition contributed approximately $117.5 million in revenues and $13.9 million of operating income for the year ended March 31, 2000. Operating income for the year ended March 31, 2000 included a $2.9 million favorable program adjustment, as discussed above. Revenues and operating income for the year ended March 31, 2000 attributable to the EOS Acquisition increased by $70.2 million and $10.4 million, respectively, as compared with the corresponding prior period. Exclusive of the contributions of the EOS business, this group's operating income decreased by $2.5 million for the year ended March 31, 2000. The decrease in operating income was primarily attributable to the following factors: restructuring charges totaling $831,000 (see Restructuring); $830,000 for anticipated costs to be incurred in connection with certain product warranty issues associated with a specific product line; and a charge of approximately $500,000 relating to additional development costs associated with one of this group's commercial product lines. Flight Safety and Communications Group. The Flight Safety and Communications Group's revenues and operating income for the year ended March 31, 2000 decreased by approximately $6.2 million and $1.9 million, respectively. The decrease in revenues was primarily due to a decrease in shipments of airborne video tape recording systems, and the fact that fiscal 1999 revenues included approximately $1.7 million relating to an equitable adjustment claim settlement between us and the U.S. Navy. The decrease in revenues was partially offset by increased revenues from contract manufacturing and surface ship systems. The decrease in operating income and operating margin was primarily due to the decrease in revenues, a change in product mix and restructuring charges of approximately $812,000 recorded by FSCG (see Restructuring). In addition, during fiscal 2000, the group's management provided $1.6 million for estimated excess inventory and obsolescence relating to certain products. Other. DRS Ahead Technology's revenues for the year ended March 31, 2000 decreased by $3.5 million, resulting from the effects of the sluggish global computer disk drive marketplace. Operating losses of DRS Ahead Technology for the year ended March 31, 2000 were approximately $721,000 less than those posted in the prior year. The improvement resulted from the cumulative effect of DRS Ahead Technology's ongoing cost reduction initiatives. The loss at DRS Corporate increased $1.0 million, primarily relating to $0.6 million of restructuring charges and increased general and administrative expenses. 30 LIQUIDITY AND CAPITAL RESOURCES Cash Flows The following table provides our cash flow data for the fiscal years ended March 31, 2001, 2000 and 1999:
Years Ended March 31, -------------------------------------- 2001 2000 1999 ---------- --------- ---------- (in thousands) Net cash provided by operating activities $ 33,875 $ 7,427 $ 15,081 Net cash used in investing activities $ (19,260) $ (14,956) $ (60,912) Net cash (used in) provided by financing activities $ (16,056) $ 2,245 $ 46,448
Operating Activities Operating cash flow for the fiscal year ended March 31, 2001 improved by approximately $26.4 million, as compared with the corresponding prior-year period. This improvement was driven by increased earnings (net of adjustments for non-cash items), increases in certain liabilities and increased advanced payments from customers. In fiscal 2000, net cash provided by operating activities decreased by approximately $7.7 million. This decrease was primarily driven by a significant decrease in accounts payable, accrued expenses and other current liabilities, and the liquidation of customer advances. Investing Activities Net cash used in investing activities for the fiscal year ended March 31, 2001 included $7.5 million used to acquire DRS Communications Company and $16.2 million for capital expenditures. Payments totaling $3.6 million received in connection with the sale of our magnetic tape head business units partially offset the cash flows used in investing activities. The $16.2 million capital expenditure outlay was significantly higher than in prior years, as a result of us upgrading our manufacturing and information technology capabilities. Future annual capital expenditures are expected to be higher than in the past, but less than the fiscal 2001 figure. Financing Activities During the fiscal year ended March 31, 2001, we paid approximately $7.8 million in principal payments against our term loans, borrowed approximately $44.8 million under our line of credit and repaid approximately $53.7 million (see Capital Resources discussion below for a description of our loan agreement with Mellon Bank, N.A.). Of the total $44.8 million borrowed in fiscal 2001, $7.5 million was used to acquire the net assets of DRS Communications Company, with the balance used to meet temporary working capital requirements. Other than cash flows from operations, the line of credit is our primary source of liquidity. In 2001, we reclassified our entire line of credit borrowings as long-term debt, excluding current installments to reflect the intent of the borrowings and their maturity date of October 1, 2003. Debt Total debt outstanding decreased by approximately $38.1 million, or 31%, during the fiscal year ended March 31, 2001 to $83.1 million. This significant decrease was due primarily to the fiscal 2001 conversion of $19.1 million of our previously outstanding 9% Senior Subordinated Convertible Debentures, as well as our effort during fiscal 2001 to reduce our working capital borrowings. Our total debt to EBITDA ratio improved to 1.6X at March 31, 2001, from 2.9X at March 31, 2000. The improvement in this ratio during fiscal 2001 was driven by increased earnings, as well as the overall reduction in total debt outstanding over the past fiscal year. 31 Capital Resources We have a $160 million secured credit facility with Mellon Bank, N.A., consisting of two term loans: the first in the principal amount of $30 million, and the second in the principal amount of $50 million; and a revolving line of credit for $80 million, subject to a borrowing base calculation (the Credit Facility). The maturity dates of the loans are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments which began on June 30, 1999. The line of credit matures on October 20, 2003. The Credit Facility is secured by substantially all of our assets. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The Credit Facility contains certain covenants and restrictions, including maintenance of a minimum level of consolidated net worth, a restriction on the payment of dividends on our capital stock, a limitation on the issuance of additional debt and certain other restrictions. The Credit Facility amended, restated and replaced our previously existing $60 million secured credit facility, consisting of a $20 million term loan and a $40 million revolving line of credit. For accounting purposes, the modification of the credit facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extraordinary charge in the amount of $2.3 million, net of tax of $1.3 million, during the year ended March 31, 1999. We were in compliance with all covenants under our credit agreements at March 31, 2001 and 2000. As of March 31, 2001, we had approximately $59.5 million of additional available credit, after satisfaction of our borrowing base requirements. As of March 31, 2001, approximately $82.1 million was outstanding against the Credit Facility, in addition to which $6.2 million was contingently payable under letters of credit, as compared with amounts outstanding and contingently payable at March 31, 2000 of $101.0 million and $6.1 million, respectively. Weighted average borrowings under revolving lines of credit for the fiscal years ended March 31, 2001 and 2000 were approximately $24.5 million and $33.0 million, respectively. The weighted average interest rates on outstanding revolving line of credit borrowings as of March 31, 2001 and 2000 were 7.8% and 8.1%, respectively. The effective interest rates on the term loans were 7.5% and 9.45%, as of March 31, 2001 and 7.6% and 10.4% as of March 31, 2000. We actively seek to finance our business in a manner that preserves financial flexibility, while minimizing borrowing costs to the extent practicable. Management continually reviews the changing financial, market and economic conditions to manage the types, amounts and maturities of our indebtedness. Cash and cash equivalents, internally generated cash flow from operations and other available financing resources are expected to be sufficient to meet anticipated operating, capital expenditure and debt service requirements during the next twelve months and the foreseeable future. Consistent with our desire to generate cash to invest in our core businesses and reduce debt, we anticipate that, subject to prevailing financial, market and economic conditions, we may divest certain non-core businesses. Backlog Due to the general nature of defense procurement and contracting, the operating cycle for our military business typically has been long term. Military backlog currently consists of various production and engineering development contracts with varying delivery schedules and project timetables. However, there has been a recent trend in our backlog to include a higher percentage of commercial product orders and commercial off-the-shelf (COTS)-based systems for the military, both of which favor shorter delivery times. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues and related backlog positions, may not be indicative of future results. Backlog at March 31, 2001 was approximately $456.5 million, as compared with $388.1 million at March 31, 2000. We booked $478.8 million in new orders in fiscal 2001. The increase in backlog was due to the net effect of bookings and $27.2 million in backlog contributed by DRS Communications Company, as a result of our acquisition of this operation in June 2000, partially offset by increased revenues. Approximately 87% of backlog as of March 31, 2001 is expected to result in revenues during fiscal 2002. 32 Of the $478.8 million in new contract awards booked in fiscal 2001, our Electronic Systems Group secured $207.0 million in new contracts, including significant awards of approximately $118.0 million for production and engineering for AN/UYQ-70 Advanced Display Systems used in U.S. Navy Aegis ships, aircraft and submarines; $47.6 million for rugged computers, servers and peripheral equipment, consisting of $20.1 million for engineering and production contracts for CH/S-2 rugged, portable computers for the U.S. Army and $27.5 million for rugged computers used in intelligence applications and international battlefield digitization programs. Our Electro-Optical Systems Group booked awards of $173.4 million in fiscal 2001, including contracts valued at $71.7 million from the U.S. Army to provide Horizontal Technology Integration Second Generation Forward Looking Infrared (HTI SGF) Thermal Imaging Systems for the sighting systems of the Abrams M1A2 System Enhancement Package (SEP) and Bradley M2A3 Fighting Vehicles. Fiscal 2001 also marked the first year that we expanded our HTI technology into airborne applications by receiving an award to install this technology on the AH-64 Apache attack helicopter. Other significant EOSG awards for the year included $40.2 million for detectors and cooler assemblies used to support sighting systems, $19.5 million for fire control targeting and acquisition systems, and $26.2 million for commercial electro-optical systems manufacturing to produce upper optics modules for optical laser surgery equipment and retinal scanning devices. Our Flight Safety and Communications Group received a total of $88.4 million in new awards in fiscal 2001, including approximately $27.4 million in contracts for shipboard and data link communications systems, $22.4 million for advanced electronic manufacturing services for major aerospace prime contractors, and $21.4 million for flight incident recorders, locator beacons and other avionics. DRS Ahead Technology, included in the operations of Other, booked $10.0 million in new orders for magnetic burnish, glide and test verification heads used in the manufacture of computer disk drives. Internal Research and Development In addition to customer-sponsored research and development, we also engage in internal research and development. These expenditures reflect our continued investment in new technology and diversification of our products. Expenditures for internal research and development in fiscal 2001, 2000 and 1999 were $8.0 million, $9.9 million and $5.2 million, respectively. The decline in internal research and development was more than offset by a $9.4 million increase in customer-sponsored research and development. Industry / Business Considerations We are primarily engaged in the design and manufacture of high-technology systems and products used for the processing, display and storage of electronic data. Although we have diversified into commercial products and markets, a significant portion of our revenues continues to be derived directly or indirectly from defense industry contracts with the U.S. Government. In recent years, the Federal defense budget has been reduced dramatically in inflation-adjusted terms. However, the overall level of spending for defense electronics has increased, given the nature of modern warfare and its increasing reliance on sophisticated weaponry and support systems. In addition, the U.S. Government has determined that it is often more cost effective to retrofit and upgrade existing weapons platforms than to replace them. These factors have affected the nature and extent of defense procurement and have precipitated a consolidation of the defense industry and a focus principally on cost competitiveness and efficiency of operations. We have participated successfully in this industry consolidation through strategic business acquisitions and by streamlining our existing operations. We also have focused on supporting and improving existing products and programs, as well as identifying opportunities to develop and manufacture new products. The defense electronics sector is characterized by rapid technological change. The nature of modern warfare also has changed, with increasing reliance on timely and accurate battlefield information, both to ensure that increasingly costly assets are deployed efficiently and to minimize the destruction of non-military targets. In response to these factors, as well as to a 1992 mandate by the Joint Chiefs of Staff, we focus on COTS product designs, whereby commercial electronic components are integrated, adapted, upgraded and "ruggedized" for applications in harsh military environments. Using COTS designs, we are able to develop and deliver our products using significantly less development time and with less expense compared with traditional military product cycles. The COTS approach generally results in shorter lead times, lower product costs and the employment of the latest available information and computing technologies. The design and manufacture of COTS-based products is a complex process requiring specific engineering capabilities, extensive knowledge of military platforms in which the equipment will be installed, and an in-depth understanding of military operating environments and requirements. We believe that we have the personnel and technical expertise required to address the technological challenges confronting the defense electronics sector. 33 We are subject to certain inherent risks associated with defense contracting, including changes in government policies and dependence on Congressional support, primarily for appropriations and allocation of funds to products and programs that we support. In recent years, our products and programs have been well supported. However, uncertainty exists with respect to the size and scope of future defense budgets and their possible impact on existing or future products and programs. Further, our existing defense contracts are subject to termination, either at the convenience of the customer or as a result of cancellation of funding. Our contracts and operations also are subject to governmental oversight, particularly with respect to business practices, contract performance and cost accounting practices. Governmental investigations may lead to claims against us, the outcome of which cannot be predicted. As described in Note 14 to our Consolidated Financial Statements in this Form 10-K, in April and May 1998, subpoenas were issued to us by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics. Although additional subpoenas were issued to us on August 12, 1999 and May 10, 2000, to date, no claim has been made against us or DRS Photronics. During the Government's investigation, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in our recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of the investigation. International businesses involve additional risks, such as exposure to currency fluctuations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions, and widely differing legal systems, customs and practices in foreign countries. We expect that international sales as a percentage of our overall sales will continue to increase in future years as a result of, among other factors, our growth strategy and continuing changes in the United States defense industry. Despite the complexity, evolving nature and certain risks associated with the industry, we have continued to grow. Future growth is dependent on our ability to maintain our flexibility and adaptability to changing market and industry conditions. 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk As we seek debt financing to maintain our ongoing operations and sustain our growth, we are exposed to interest rate risk on our variable rate borrowings. Our earnings are affected by changes in interest rates due to the impact those changes have on our outstanding variable rate debt. If interest rates average 50 basis points more in fiscal 2002 than in fiscal 2001, our interest expense would be increased by approximately $415,000. This amount was determined based on the interest rates in effect on our outstanding variable debt at March 31, 2001. In an effort to limit our cash flow and interest expense exposure to interest rate fluctuations, and in accordance with certain covenants in the Credit Facility, we have entered into interest rate collar agreements with notional amounts covering a limited amount of the aggregate outstanding principal balance of our term loans. A summary of the interest rate collar agreements in place as of March 31, 2001 and 2000 follows:
Notional Amount Estimated Fair Value ---------------------- --------------------- March 31, March 31, Effective Expiration ---------------------- Reference Ceiling Floor --------------------- Date Date 2001 2000 Rate Rate Rate 2001 2000 - ----------- ---------- -------- ------- --------- ------- ----- --------- ------ (dollars in thousands) (dollars in thousands) 4/8/98 1/8/01 $ - $ 6,200 3 Month CAD-BA* 6.35% 4.84% $ - $ 4 4/22/99 1/26/02 $20,000 $20,000 3 Month LIBOR 5.75% 4.80% $ (74) $ 426 1/26/01 1/30/03 $10,000 $ - 3 Month LIBOR 6.50% 5.09% $ (110) $ - 1/29/01 1/31/03 $10,000 $ - 3 Month LIBOR 6.50% 5.05% $ (105) $ -
* Canadian Bankers Acceptance Rate The weighted average three-month LIBOR rate in effect for our collar agreements outstanding as of March 31, 2001 was 4.98%. Foreign Currency Exchange Risk We operate and conduct business in foreign countries and, as a result, are exposed to movements in foreign currency exchange rates. More specifically, our net equity is impacted by the conversion of the net assets of foreign subsidiaries for which the functional currency is not the U.S. Dollar for U.S. reporting purposes. Our exposure to foreign currency exchange risk related to our foreign operations is not material to our results of operations, cash flows or financial position. We, at present, do not hedge this risk, but continue to evaluate such foreign currency translation risk exposure. We have experienced the effects of inflation through increased costs of labor, services and raw materials. Although a majority of our 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. 35 Recently Issued Accounting Pronouncements Effective April 1, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives that are not considered "highly effective hedges" are reflected in earnings. Adjustments to reflect changes in fair values of derivatives that are considered highly effective hedges are either reflected in earnings and largely offset by corresponding adjustments related to the fair values of the hedged items, or reflected in comprehensive earnings until the hedged transaction matures and the entire transaction is recognized in earnings. The change in fair value of the ineffective portion of a hedge is recognized immediately in earnings. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amended certain provisions of SFAS 133. The adoption of these statements did not have any impact on our results of operations. 36 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page ---- Independent Auditors' Report............................................................... 38 Consolidated Balance Sheets as of March 31, 2001 and 2000.................................. 39 Consolidated Statements of Earnings for the years ended March 31, 2001, 2000 and 1999...... 40 Consolidated Statements of Stockholders' Equity and Comprehensive Earnings for the years ended March 31, 2001, 2000 and 1999................................. 41 Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999.... 42 Notes to Consolidated Statements........................................................... 43 Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2001, 2000 and 1999.................................. 64
37 Independent Auditors' Report To the Board of Directors and Stockholders DRS Technologies, Inc.: We have audited the consolidated financial statements of DRS Technologies, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DRS Technologies, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Short Hills, New Jersey May 17, 2001 38 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, --------------------------- 2001 2000 ------------- ------------- Assets Current Assets Cash and cash equivalents $ 2,324 $ 3,778 Accounts receivable, net (Note 5) 97,645 80,894 Inventories, net of progress payments (Note 6) 74,327 62,326 Prepaid expenses, deferred income taxes and other current assets (Note 12) 8,697 6,326 Net current assets of discontinued operations (Note 4) - 5,309 ------------- ------------- Total current assets 182,993 158,633 ------------- ------------- Property, plant and equipment, net (Note 7) 37,639 29,006 Goodwill and related intangible assets, net (Note 8) 109,302 125,321 Deferred income taxes and other noncurrent assets (Note 12) 5,006 7,138 ------------- ------------- Total assets $ 334,940 $ 320,098 ============= ============= Liabilities and Stockholders' Equity Current liabilities Current installments of long-term debt (Note 10) $ 7,217 $ 5,699 Short-term bank debt (Note 10) 831 17,781 Accounts payable 40,089 28,295 Accrued expenses and other current liabilities (Note 9) 91,170 85,474 ------------- ------------- Total current liabilities 139,307 137,249 ------------- ------------- Long-term debt, excluding current installments (Note 10) 75,076 97,695 Other liabilities (Notes 13 and 14) 8,610 6,970 ------------- ------------- Total liabilities 222,993 241,914 ------------- ------------- Stockholders' equity (Notes 10 and 13) Preferred Stock, no par value. Authorized 2,000,000 shares; - - none issued at March 31, 2001 and 2000 Common Stock, $.01 par value per share. Authorized 20,000,000 shares; issued 12,058,057 and 9,717,020 shares at March 31, 2001 and 2000, respectively 121 97 Additional paid-in capital 72,033 48,584 Retained earnings 44,025 32,047 Accumulated other comprehensive losses (3,968) (86) Treasury Stock, at cost: 440,939 shares of common stock at March 31, 2000 - (1,988) Unamortized stock compensation (264) (470) ------------- ------------- Total stockholders' equity 111,947 78,184 ------------- ------------- Commitments and contingencies (Notes 3 and 14) Total liabilities and stockholders' equity $ 334,940 $ 320,098 ============= =============
See accompanying Notes to Consolidated Financial Statements. 39 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per-share data)
Years ended March 31, --------------------------------------- 2001 2000 1999 ------------ ----------- ------------ Revenues $ 427,606 $ 391,467 $ 265,849 Costs and expenses (Note 6) 389,550 363,086 250,548 Restructuring charges (Note 2) 525 2,203 - ------------ ----------- ------------ Operating income 37,531 26,178 15,301 Interest and other income, net (310) (572) (857) Interest and related expenses 11,461 12,600 9,357 ------------ ----------- ------------ Earnings from continuing operations before extraordinary item, minority interests and income taxes 26,380 14,150 6,801 Minority interests 1,426 1,318 1,021 ------------ ----------- ------------ Earnings from continuing operations before extraordinary 24,954 12,832 5,780 item and income taxes Income taxes (Note 12) 12,976 5,171 1,915 ------------ ----------- ------------ Earnings from continuing operations before extraordinary item 11,978 7,661 3,865 Loss from discontinued operations, net of tax (Note 4) - (1,255) (879) Loss on disposal of discontinued operations, net of tax (Note 4) - (2,096) - Extraordinary item, net of tax (Note 10) - - (2,306) ------------ ----------- ------------ Net earnings $ 11,978 $ 4,310 $ 680 ============ =========== ============ Net earnings per share of common stock (Note 1) Basic earnings per share: Earnings from continuing operations before extraordinary item $1.14 $0.83 $0.58 Loss from discontinued operations, net of tax - (0.14) (0.13) Loss on disposal of discontinued operations, net of tax - (0.23) - Extraordinary item, net of tax - - (0.35) ------------ ----------- ------------ Net earnings $1.14 $0.47 $0.10 ------------ ----------- ------------ Diluted earnings per share: Earnings from continuing operations before extraordinary item $1.01 $0.76 $0.57 Loss from discontinued operations, net of tax - (0.11) (0.13) Loss on disposal of discontinued operations, net of tax - (0.18) - Extraordinary item, net of tax - - (0.34) ------------ ----------- ------------ Net earnings $1.01 $0.47 $0.10 ------------ ----------- ------------
See accompanying Notes to Consolidated Financial Statements. 40 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS (in thousands, except share data)
Accumulated Treasury Stock Common Stock Additional Other (Note 13) Unamortized Total Years Ended March 31, ------------------ Paid-In Retained Comprehensive ------------------ Stock Stockholders' 2001, 2000 and 1999 Shares Amount Capital Earnings Losses Shares Amount Compensation Equity ---------- ------ ---------- -------- ------------- -------- -------- ------------ ------------- Balances at March 31, 1998 6,596,237 $ 66 $19,399 $ 27,057 $ (135) 402,461 $ (1,561) $ (491) $ 44,335 Comprehensive earnings Net earnings - - - 680 - - - - 680 Foreign currency translation adjustment - - - - (4) - - - (4) ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------ Total comprehensive earnings - - - 680 (4) - - - 676 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------ Stock options exercised 63,600 1 143 - - - - - 144 Compensation relating to stock options and other stock awards, net - - 427 - - - - (314) 113 Restricted stock bonus awards - - 173 - - (17,297) 68 8 249 Conversion of 9% Debentures (Note 10) 97,830 1 855 - - - - - 856 Equity issued in connection with the NAI Merger (Notes 3 and 13) 2,858,266 28 27,041 - - - - - 27,069 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Balances at March 31, 1999 9,615,933 96 48,038 27,737 (139) 385,164 (1,493) (797) 73,442 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Comprehensive earnings Net earnings - - - 4,310 - - - - 4,310 Foreign currency translation adjustment - - - - 53 - - - 53 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Total comprehensive earnings - - - 4,310 53 - - - 4,363 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Stock options exercised 101,087 1 502 - - 55,775 (495) - 8 Compensation relating to stock options and other stock awards, net - - 44 - - - - 327 371 ---------- ------ ---------- -------- ------------ -------- -------- ------------- ------------- Balances at March 31, 2000 9,717,020 97 48,584 32,047 (86) 440,939 (1,988) (470) 78,184 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Comprehensive earnings Net earnings - - - 11,978 - - - - 11,978 Foreign currency translation adjustment - - - - (3,882) - - - (3,882) ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Total comprehensive earnings - - - 11,978 (3,882) - - - 8,096 ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Stock options and warrants exercised 248,391 2 2,289 - - - - - 2,291 Income tax benefit from stock options exercised - - 607 - - - - - 607 Compensation relating to stock options and other stock awards, net of forfeitures (10,465) - (105) - - - - 206 101 Conversion of 9% Debentures (Note 10) 2,188,691 22 18,645 - - - - - 18,667 Equity issued in connection with the GAC acquisition (Notes 3 and 13) 355,359 4 3,997 - - - - - 4,001 Cancellation of treasury stock (440,939) (4) (1,984) - - (440,939) 1,988 - - ---------- ------ ---------- -------- ------------ -------- -------- ------------ ------------- Balances at March 31, 2001 12,058,057 $ 121 $ 72,033 $ 44,025 $ (3,968) - $ - $ (264) $ 111,947 ========== ====== ========== ======== ============ ======== ======== ============ =============
See accompanying Notes to Consolidated Financial Statements. 41 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended March 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Cash Flows from Operating Activities: Net earnings $ 11,978 $ 4,310 $ 680 Adjustments to reconcile net earnings to cash flows from operating activities: Loss from discontinued operations, net of tax - 1,255 879 Loss on disposal of discontinued operations, net of tax - 2,096 - Extraordinary item, net of tax - - 2,306 Depreciation and amortization 16,245 17,070 11,601 Inventory reserves and provision for doubtful accounts 2,103 2,906 4,037 Deferred income taxes (287) (550) (3,364) Other, net 1,856 1,382 373 Changes in assets and liabilities, net of effects from business combinations: Increase in accounts receivable (15,926) (4,200) (21,002) (Increase) decrease in inventories (9,456) 7,052 (22,750) Decrease (increase) in prepaid expenses and other current assets 354 1,573 (646) Increase (decrease) in accounts payable 11,007 (15,450) 12,202 Increase (decrease) in accrued expenses and other current liabilities 6,916 (3,750) 16,168 Increase (decrease) in customer advances 7,057 (6,518) 14,613 Other, net 2,028 841 461 ---------- --------- ---------- Net cash provided by operating activities of continuing operations 33,875 8,017 15,558 Net cash used in operating activities of discontinued operations - (590) (477) ---------- --------- ---------- Net cash provided by operating activities 33,875 7,427 15,081 ---------- --------- ---------- Cash Flows from Investing Activities: Capital expenditures (16,185) (6,210) (6,554) Payments pursuant to business combinations, net of cash acquired (6,979) (8,386) (54,176) Proceeds from sale of business 3,575 - - Other, net 329 (230) 103 ---------- --------- ---------- Net cash used in investing activities from continuing operations (19,260) (14,826) (60,627) Net cash used in investing activities from discontinued operations - (130) (285) ---------- --------- ---------- Net cash used in investing activities (19,260) (14,956) (60,912) ---------- --------- ---------- Cash Flows from Financing Activities: Net proceeds from acquisition-related debt 7,500 8,000 47,075 Payments on long-term debt (63,130) (10,096) (1,193) Proceeds from long-term debt borrowings 37,284 4,925 5,367 Retirement of convertible debt - (690) (4,992) Proceeds from exercise of stock options and warrants 2,188 8 144 Other, net 102 98 47 ---------- --------- ---------- Net cash (used in) provided by financing activities (16,056) 2,245 46,448 ---------- --------- ---------- Effect of exchange rates on cash and cash equivalents (13) (969) (280) ----------- --------- ---------- Net (decrease) increase in cash and cash equivalents (1,454) (6,253) 337 Cash and cash equivalents, beginning of year 3,778 10,031 9,694 ---------- --------- ---------- Cash and cash equivalents, end of year $ 2,324 $ 3,778 $ 10,031 =========== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 42 1. Summary of Significant Accounting Policies A. Organization DRS Technologies, Inc. and Subsidiaries (hereinafter, DRS or the Company) is a supplier of defense electronics systems and components and has served the defense industry for over thirty years. The Company provides advanced technology products and services to government and commercial customers worldwide, developing and manufacturing a broad range of mission-critical products in the areas of communications, combat systems, rugged computers, electro-optics, data storage, digital imaging, flight safety and space. The Company's defense electronics systems and subsystems are sold to all branches of the U.S. military, U.S. government intelligence agencies, major aerospace/defense contractors and international military forces. B. Basis of Presentation and Use of Estimates The consolidated financial statements include the accounts of DRS Technologies, Inc., its subsidiaries (all of which are wholly or majority owned) and a joint venture consisting of an 80% controlling partnership interest. All significant intercompany transactions and balances have been eliminated in consolidation. The Company's magnetic tape head business units, which were sold, are reflected as discontinued operations for all periods presented (see Note 4). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenues utilized in the revenue recognition process, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. Classifications Unbilled receivables, inventories, accrual for future costs on uncompleted contracts, unearned income and accrual for future costs related to acquired contracts are primarily attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, these items are included in current assets and liabilities, respectively. The Company has reclassified its Mellon Bank, N.A. working capital obligations (see Note 10) from short-term bank debt to long-term debt, excluding current installments, on the March 31, 2001 Consolidated Balance Sheet to reflect the intent of the borrowings and their maturity date of October 1, 2003. Certain other amounts for prior years have been reclassified to conform with the fiscal 2001 presentation. D. Translation of Foreign Currency Financial Statements and Foreign Currency Transactions Transactions in foreign currencies are translated into U.S. dollars at the approximate prevailing rate at the time of the transaction. The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts, and a weighted average rate of exchange is used for translating the statement of earnings. Gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a separate component of stockholders' equity. E. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. 43 F. Receivables Receivables consist of amounts billed and currently due from customers, and unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized for accounting purposes, but not yet billed to customers. G. Inventories Commercial and other non-contract inventories are stated at the lower of cost (which includes material, labor and manufacturing overhead) or net realizable value. Costs accumulated under contracts are stated at actual cost, not in excess of estimated net realizable value, including, for long-term government contracts, applicable amounts of general and administrative expenses which include research and development costs, where such costs are recoverable under customer contracts. General and administrative expenses related to commercial products and services provided essentially under commercial terms and conditions are expensed as incurred. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of progress payments and advances. Accordingly, such progress payments and certain advances are reflected as an offset against the related inventory balances. To the extent that customer advances exceed related inventory levels, such advances are classified as current liabilities. H. Property, Plant and Equipment Depreciation and amortization are calculated on the straight-line method. The ranges of estimated useful lives are: office furnishings, laboratory, production and other equipment, 3-10 years; building and building improvements, 15-40 years; and leasehold improvements, over the shorter of the estimated useful lives of the improvements or the life of the lease. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. Costs of assets retired, sold or otherwise disposed of are removed from the accounts, and any gains or losses thereon are reflected in results of operations. I. Goodwill and Related Intangible Assets Goodwill and related intangible assets consist primarily of intangible assets resulting from acquisitions. Goodwill represents the excess of cost of the investments over the fair values of the underlying net assets at the dates of investment and certain identifiable acquired intangible assets (see Note 3). Goodwill and related intangible assets are being amortized on a straight-line basis over appropriate periods, generally 10 to 30 years. J. Impairment of Long-Lived and Intangible Assets The Company assesses the recoverability of the carrying value of its long-lived assets, including goodwill and other related intangibles, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows for each subsidiary or acquired business having a material acquisition-related intangible asset balance. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. K. Derivative Financial Instruments The Company does not use derivative financial instruments for speculative purposes. The Company utilizes, on a limited basis, derivative financial instruments in the form of interest rate collars to manage its exposure to interest rates (see Note 10). An interest rate collar is a combination of an interest rate cap and an interest rate floor. The collars in place allow the Company to manage a portion of its variable rate borrowings to an acceptable, predetermined range. Under the collar, no payments are required to be made by the Company or paid to the Company unless the prevailing market rate (based on the London Interbank Offered Rate or U.S. Prime Rate) drops below the floor or exceeds the ceiling. Any payment made or received by the Company in connection with the settlement of a collar is reflected as an adjustment to interest expense in the period in which 44 it is settled. Effective April 1, 2001, the Company began to account for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (see New Accounting Pronouncements for additional discussion). L. Revenue Recognition Revenues related to long-term, firm fixed-price contracts, which principally provide for the manufacture and delivery of finished units, are recognized as shipments are made and, in certain circumstances, when all applicable revenue recognition criteria are met, prior to shipment to the customer. The estimated profits applicable to shipments are recorded pro rata based upon estimated total profit at completion of the contracts. Revenues from commercial product sales also are recognized upon shipment. Revenues on contracts with significant engineering as well as production requirements are recorded using the percentage-of-completion method measured by the costs incurred on each contract to estimated total contract costs at completion (cost-to-cost) with consideration given for risk of performance and estimated profit. Revenues from cost-reimbursement contracts are recorded, together with the fees earned, as costs are incurred. Most of the Company's contracts are long-term in nature, spanning multiple years. The Company reviews cost performance and estimates to complete on these contracts at least quarterly and in many cases more frequently. If the estimated cost to complete a contract changes from the previous estimate, the Company will record a positive or negative adjustment to earnings in the current period. Amounts representing contract change orders, claims or other items are included in sales only when they can be reliably estimated and realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method. Incentives or penalties and awards applicable to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance. Incentive provisions which increase or decrease earnings based solely on a single significant event generally are not recognized until the event occurs. Included in revenues for fiscal 2001, 2000 and 1999 were $32.9 million, $23.5 million and $15.4 million, respectively, of customer-sponsored research and development. Approximately 78%, 80% and 81% of the Company's revenues in fiscal 2001, 2000 and 1999, respectively, were derived directly or indirectly from defense-industry contracts with the United States Government. In addition, approximately 12% in fiscal 2001, 12% in fiscal 2000 and 8% in fiscal 1999 of the Company's revenues were derived directly or indirectly from sales to foreign governments. M. Stock-Based Compensation As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, compensation cost is recognized for its stock options in the financial statements only as it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company's Common Stock as of the date of grant. The compensation cost of these grants are amortized on a straight-line basis over the lives of the respective grants. The Company follows the provisions of SFAS 123 and provides pro forma disclosures of net earnings and earnings per share as if the fair value-based method of accounting for stock options, as defined in SFAS 123, had been applied (see Note 13). N. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the 45 years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. O. Earnings Per Share Basic earnings per share (EPS) is computed by dividing net earnings by the weighted average number of shares of Common Stock outstanding during each period. The computation of diluted earnings per share includes the effect of shares from the assumed exercise of dilutive stock options and warrants and, when dilutive, the effect of the assumed conversion of the Company's previously outstanding 9% Senior Subordinated Debentures (see Note 10). The following table provides the components of the per-share computations:
Years Ended March 31, -------------------------------------- 2001 2000 1999 ----------- ----------- ----------- (in thousands, except per-share data) Basic EPS Computation Earnings from continuing operations before extraordinary item $ 11,978 $ 7,661 $ 3,865 Loss from discontinued operations, net of tax - (1,255) (879) Loss on disposal of discontinued operations, net of tax - (2,096) - Extraordinary item, net of tax - - (2,306) ----------- ----------- ----------- Net earnings $ 11,978 $ 4,310 $ 680 ----------- ----------- ----------- Weighted average common shares outstanding 10,485 9,268 6,618 ----------- ----------- ----------- Basic earnings (losses) per share: Earnings from continuing operations before extraordinary item $ 1.14 $ 0.83 $ 0.58 Loss from discontinued operations, net of tax - (0.14) (0.13) Loss on disposal of discontinued operations, net of tax - (0.23) - Extraordinary item, net of tax - - (0.35) ----------- ----------- ----------- Net earnings $ 1.14 $ 0.47 $ 0.10 =========== =========== =========== Diluted EPS Computation Earnings from continuing operations before extraordinary item $ 11,978 $ 7,661 $ 3,865 Interest and expenses related to convertible debentures 574 1,130 - ----------- ----------- ----------- Adjusted net earnings from continuing operations before extraordinary item 12,552 8,791 3,865 Loss from discontinued operations, net of tax - (1,255) (879) Loss on disposal of discontinued operations, net of tax - (2,096) - Extraordinary item, net of tax - - (2,306) ----------- ----------- ----------- Adjusted net earnings $ 12,552 $ 5,440 $ 680 ----------- ----------- ----------- Diluted common shares outstanding: Weighted average common shares outstanding 10,485 9,268 6,618 Stock options and warrants 642 172 214 Convertible debentures 1,308 2,162 - ----------- ----------- ----------- Diluted common shares outstanding 12,435 11,602 6,832 ----------- ----------- ----------- Diluted earnings (losses) per share: Earnings from continuing operations before extraordinary item $ 1.01 $ 0.76 $ 0.57 Loss from discontinued operations, net of tax - (0.11) (0.13) Loss on disposal of discontinued operations, net of tax - (0.18) - Extraordinary item, net of tax - - (0.34) ----------- ----------- ----------- Net earnings $ 1.01 $ 0.47 $ 0.10 =========== =========== ===========
46 P. Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities, and certain debt reported in the Consolidated Balance Sheets equal or approximate fair values. The market values of the Company's convertible debentures and interest rate collars are disclosed herein (see Note 10). Q. New Accounting Pronouncements Effective April 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives that are not considered "highly effective hedges" are reflected in earnings. Adjustments to reflect changes in fair values of derivatives that are considered highly effective hedges are either reflected in earnings and largely offset by corresponding adjustments related to the fair values of the hedged items, or reflected in comprehensive earnings until the hedged transaction matures and the entire transaction is recognized in earnings. The change in fair value of the ineffective portion of a hedge is immediately recognized in earnings. The adoption of SFAS 133 did not have any impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001, and its adoption did not have any impact on the Company's results of operations or financial position. 2. Restructuring In addition to the closure of the Longmont, Colorado facility, as described in Note 3, during the third and fourth quarters of fiscal 2000, the Company announced plans to restructure its operations, which resulted in the Company recording restructuring charges totaling approximately $2.2 million. The Company's restructuring initiatives impacted the EOSG and FSCG operating segments and DRS Corporate. EOSG recorded a restructuring charge of approximately $831,000 primarily for costs relating to consolidating two facilities into one in Oakland, New Jersey. FSCG recorded a restructuring charge of approximately $669,000 and $143,000 at its DRS Hadland Ltd. (DRS Hadland) and DRS Precision Echo, Inc. (DRS Precision Echo) operating units, respectively, for severance and other employee-related costs. The DRS Hadland restructuring charge was recorded in connection with the transition of the day-to-day management of DRS Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In addition, DRS Corporate recorded a restructuring charge of approximately $560,000 for severance and other employee-related costs. Severance and other employee costs were recorded in connection with the termination of 13 employees. As of March 31, 2000, all terminations had occurred. In the third quarter of fiscal 2001, the Company revised its estimate relating to its facility consolidation efforts in Oakland, New Jersey and recorded a charge of $525,000. At March 31, 2001, the majority of the restructuring liability shown below represents termination benefits to be paid in accordance with contractual terms over the next thirteen months and lease commitments over the next fifteen months. The following table reconciles the restructuring liability at March 31, 2000 to the restructuring liability as of March 31, 2001:
Liability at Fiscal 2001 Utilized in Liability at March 31, 2000 Charges Fiscal 2001 March 31, 2001 -------------- ----------- ----------- -------------- (in thousands) Estimated lease commitments and related facility costs $ 328 $ 525 $ 396 $ 457 Severance /employee costs 690 - 434 256 ------- ------- ------- ------- Total $ 1,018 $ 525 $ 830 $ 713 ======= ======= ======= =======
47 3. Business Combinations On October 20, 1998, the Company acquired, through certain of its subsidiaries, certain assets of the Second Generation Ground-Based Electro-Optical Systems and Focal Plane Array businesses (together, the EOS Business) of Raytheon Company and certain of its subsidiaries (Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the Company and Raytheon, as amended (the EOS Acquisition). The Company paid approximately $45 million in cash for the acquisition at closing; the purchase price is subject to a post-closing working capital adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7 million. The amount of such working capital adjustment, if any, is the subject of arbitration between DRS and Raytheon. Although the Company cannot, at this time, predict the outcome of such arbitration, management does not expect that the final adjustment will have a material impact on the Company's consolidated financial position or results of operations. The excess of cost over the estimated fair value of identifiable net assets acquired (goodwill) and the appraised value of certain identified intangible assets were approximately $34.1 million and $30.8 million, respectively, and are being amortized on a straight-line basis over twenty years. DRS incurred professional fees and other costs related to the EOS Acquisition of approximately $2.0 million, which were also capitalized as part of the total purchase price. The Company has valued acquired contracts in process at their remaining contract prices, less estimated costs to complete, and an allowance for normal profits on the Company's effort to complete such contracts. During fiscal 2001, the Company recorded a $9.8 million reduction to goodwill. The reduction to goodwill was due to accruals for future contract costs that are no longer required on acquired contracts. The EOS Business, operating as DRS Sensor Systems, Inc. and DRS Infrared Technologies, LP, provides products used in the detection, identification and acquisition of targets based on infrared data. On February 19, 1999, a wholly-owned subsidiary of the Company merged with and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being the surviving corporation and continuing as a direct wholly-owned subsidiary of DRS, for stock and other consideration valued at approximately $24.8 million (the NAI Merger). In connection with the NAI Merger, the Company issued 2,858,266 shares of Common Stock. The excess of cost over the estimated fair value of identifiable net assets acquired was approximately $26.7 million and is being amortized on a straight-line basis over twenty years. During fiscal 2001, new tax regulations became effective which changed the rules for determining how net operating loss carryforwards of an acquired company could be utilized. As a result of this tax law change, the Company recorded a $3.2 million reduction to its deferred tax asset valuation allowance and goodwill during fiscal 2001. Prior to the NAI Merger, the Company began to assess and formulate a plan to close NAI's Longmont, Colorado facility and transfer engineering and production to other DRS locations. In January 2000, the Company announced its plan, which included relocating/terminating approximately 45 employees. A cost of approximately $1.5 million was recorded as an adjustment to the acquisition cost during fiscal 2000. The Company completed its exit plan in the first quarter of fiscal 2001. The following table reconciles the related liability at March 31, 2000 to the liability as of March 31, 2001:
Liability at Utilized in Liability at March 31, 2000 Fiscal 2001 March 31, 2001 -------------- ----------- -------------- (in thousands) Severance / employee costs $ 1,195 $ 1,195 $ - Estimated lease commitments and related facility costs 215 215 - -------- -------- ------ Total $ 1,410 $ 1,410 $ - ======== ======== ======
DRS also incurred professional fees and other costs related to the NAI Merger of approximately $2.8 million, which were capitalized as part of the total purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS Rugged Systems (Europe) Ltd., provides rugged computers, peripherals and integrated systems primarily for military and special government applications. On July 21, 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total purchase price of $10.2 million. Located in Chippenham, Wiltshire, U.K., the company designs and develops rugged computers and peripherals primarily for military applications. The excess of cost over the estimated fair value of identifiable net assets acquired was 48 approximately $8.7 million and is being amortized on a straight-line basis over twenty years. Any additional consideration paid by the Company would be an adjustment to goodwill. On June 14, 2000, a newly formed subsidiary of the Company acquired the assets of General Atronics Corporation for $7.5 million in cash and $4.0 million in Common Stock. The Company funded the cash portion of this acquisition through borrowings under its revolving line of credit. Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC (DRS Communications Company), the company designs, develops and manufactures military data link components and systems, high-frequency communication modems, tactical and secure digital telephone components and radar surveillance systems for U.S. and international militaries. DRS Communications Company is being managed as part of FSCG. The acquisition has been accounted for using the purchase method of accounting. The excess of costs over the estimated fair value of identifiable net assets acquired and the appraised value of certain identified intangible assets were approximately $3.5 million and $3.3 million, respectively, and are being amortized on a straight-line basis over twenty years and ten years, respectively. In connection with the acquisition, the Company incurred approximately $420,000 in transaction costs. All of the aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses were included in the Company's reported consolidated operating results from their respective effective dates of acquisition. Except for the EOS Acquisition and the NAI Merger, the financial position and results of operations of these businesses were not significant to those of the Company as of their respective effective dates of acquisition. 4. Discontinued Operations On May 18, 2000, the Company's Board of Directors approved an agreement to sell its magnetic tape head business units located in St. Croix Falls, Wisconsin, and Razlog, Bulgaria. These operations produced primarily magnetic tape recording heads for transaction products that read data from magnetic cards, tapes and ink. In fiscal 2000, in anticipation of the sale, the Company recorded a $2.1 million charge, net of tax, on the disposal of these operations. On August 31, 2000, the Company completed the sale and received $3.0 million of cash and a note receivable of $1.7 million. Actual income from discontinued operations for the five months ended August 31, 2000 was $135,000 greater than estimated at March 31, 2000. Other costs associated with the disposal substantially offset the improvement in operating results and, therefore, no adjustment to the loss on disposal of discontinued operations recorded at March 31, 2000 was required in fiscal 2001. The results of operations of these magnetic tape head business units are reported as discontinued operations for the years ended March 31, 2000 and 1999 and are summarized as follows: Years Ended March 31, ------------------------ 2000 1999 -------- --------- (in thousands) Revenues $ 9,572 $ 7,579 Loss before income taxes (1,788) (1,038) Income tax benefit 533 159 -------- -------- Loss from discontinued operations $ (1,255) $ (879) ======== ======== 49 The net assets of the discontinued operations in the March 31, 2000 consolidated balance sheet is comprised of: March 31, 2000 -------------- (in thousands) Accounts receivable, net $ 1,522 Inventories 2,671 Property, plant and equipment, net 1,568 Goodwill, net 1,349 Accounts payable (339) Accrued expenses (106) Accrued loss on disposal, net of tax benefit of $935 (2,096) Other, net 740 --------- Net assets of discontinued operations $ 5,309 ========= 5. Accounts Receivable The component elements of accounts receivable, net of allowances for doubtful accounts of $1.1 million and $1.4 million, at March 31, 2001 and 2000, respectively, are as follows: March 31, --------------------------- 2001 2000 -------- -------- (in thousands) U.S. Government: Amounts billed $ 37,835 $ 22,462 Recoverable costs and accrued profit on progress completed, not billed 3,043 3,968 -------- -------- 40,878 26,430 -------- -------- Other Defense Contracts: Amounts billed 42,041 37,489 Recoverable costs and accrued profit on progress completed, not billed 6,506 9,690 -------- -------- 48,547 47,179 -------- -------- Other trade receivables 8,220 7,285 -------- -------- Total $ 97,645 $ 80,894 ======== ======== Included in accounts receivable are $644,000 and $391,000 at March 31, 2001 and 2000, respectively, arising from retainage provisions and holdbacks in certain contracts with the United States and Canadian governments which may not be collected within one year. The Company receives progress payments on certain contracts of 75-90% of allowable costs incurred; the remainder, including profits and incentive fees, if any, is billed upon delivery and final acceptance of the product. In addition, the Company bills based upon units delivered. 50 6. Inventories Inventories are summarized as follows: March 31, ----------------------- 2001 2000 -------- -------- (in thousands) Work-in-process $ 83,058 $ 79,058 Raw material and finished goods 7,992 10,917 -------- -------- 91,050 89,975 Less progress payments (16,723) (27,649) -------- -------- Total $ 74,327 $ 62,326 ======== ======== General and administrative costs included in inventory were $14.5 million and $12.7 million at March 31, 2001 and 2000, respectively. General and administrative costs included in costs and expenses amounted to $78.6 million, $69.5 million and $49.0 million in fiscal 2001, 2000 and 1999, respectively. Included in these amounts are expenditures for internal research and development, amounting to approximately $8.0 million, $9.9 million and $5.2 million in fiscal 2001, 2000 and 1999, respectively. 7. Property, Plant and Equipment Property, plant and equipment are summarized as follows: March 31, --------------------- 2001 2000 --------- --------- (in thousands) Laboratory and production equipment $ 44,927 $ 32,540 Computer equipment 12,499 9,740 Buildings and improvements and leasehold improvements 13,725 9,995 Office furnishings, equipments and other 5,630 4,764 -------- -------- 76,781 57,039 Less accumulated depreciation and amortization 39,142 28,033 -------- -------- Total $ 37,639 $ 29,006 ======== ======== In connection with the EOSG restructuring charge discussed in Note 2, the Company wrote off $17.6 million of gross ($503,000, net) property, plant and equipment in the fourth quarter of fiscal 2000. Annual depreciation and amortization of property, plant and equipment amounted to $8.6 million, $9.5 million and $7.1 million in fiscal 2001, 2000 and 1999, respectively. 8. Goodwill and Related Intangible Assets Goodwill and related intangible assets are summarized as follows: March 31, -------------------- 2001 2000 --------- --------- (in thousands) Goodwill $ 90,144 $ 102,977 Identifiable intangible assets 40,463 37,165 --------- --------- 130,607 140,142 Less accumulated amortization (21,305) (14,821) --------- --------- Total $ 109,302 $ 125,321 ========= ========= 51 9. Accrued Expenses and Other Current Liabilities The component elements of accrued expenses and other current liabilities are as follows: March 31, ----------------------- 2001 2000 ----------- ---------- (in thousands) Payroll, other compensation and related expenses $ 13,492 $ 11,063 Income taxes payable (Note 12) 4,329 2,484 Customer advances 18,796 9,724 Accrual for future costs on uncompleted contracts 8,032 4,971 Unearned income and accrual for future costs related to acquired contracts (Note 3) 26,720 42,027 Other 19,801 15,205 -------- -------- Total $ 91,170 85,474 ======== ======== 10. Debt A summary of debt is as follows: March 31, ---------------------- 2001 2000 --------- ---------- (in thousands) 9% Senior Subordinated Convertible Debentures due October 1, 2003 $ - $ 19,134 Term notes 68,019 75,750 Revolving lines of credit 14,274 25,247 Other obligations 831 1,044 -------- -------- 83,124 121,175 Less: Current installments of long-term debt 7,217 5,699 Short-term bank debt 831 17,781 -------- -------- Total long-term debt $ 75,076 $ 97,695 ======== ======== The 9% Senior Subordinated Convertible Debentures, due October 1, 2003 (9% Convertible Debentures) were issued in fiscal 1996 for an aggregate principal amount of $25.0 million and were convertible at their face amount any time prior to maturity into shares of Common Stock, unless previously redeemed, at a conversion price of $8.85 per share, subject to adjustment under certain circumstances. In fiscal 2001, the remaining balance of the 9% Convertible Debentures was converted into approximately 2.2 million shares of the Company's Common Stock. The Company recorded a non-cash charge to interest expense of approximately $305,000 in fiscal 2001 in connection with certain conversions. Prior to their redemption, the 9% Convertible Debentures were listed for trading on the American Stock Exchange. The aggregate market values, based on closing prices, of the then outstanding principal amount was approximately $20.5 million as of March 31, 2000. The Company has a $160 million secured credit facility (Facility) with Mellon Bank, N.A., consisting of two term loans: the first in the principal amount of $30 million (First Term Loan), and the second in the principal amount of $50 million (Second Term Loan); and a revolving line of credit (Line of Credit) for $80 million, subject to a borrowing base calculation. The maturity dates of the First Term Loan and the Second Term Loan are October 20, 2003 and October 20, 2005, respectively, with quarterly principal payments which began on June 30, 1999. The Line of Credit matures on October 20, 2003. The Facility is secured by substantially all of the assets of the Company. Borrowings can be made in United States dollars at rates based on LIBOR (London Interbank Offering Rate) or United States Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the Canadian Bankers Acceptance Rate. The Facility contains certain covenants and restrictions, including maintenance of a minimum level of consolidated net worth, a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. 52 The Facility amended, restated and replaced the Company's previously existing $60 million secured credit facility, consisting of a $20 million term loan and a $40 million revolving line of credit. For accounting purposes, the modification of the facility was accounted for as an extinguishment of debt pursuant to the guidance of the Emerging Issues Task Force of the Financial Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized balance of deferred financing costs relating to the previous credit facility, plus fees paid in connection with the modification, were recorded as an extraordinary charge in the amount of $2.3 million, net of tax of $1.3 million, during the year ended March 31, 1999. The Company was in compliance with all covenants under its credit agreements at March 31, 2001 and 2000. As of March 31, 2001, the Company had approximately $59.5 million of additional available credit, after satisfaction of its borrowing base requirement. As of March 31, 2001, approximately $82.1 million was outstanding against the Facility, in addition to which $6.2 million was contingently payable under letters of credit, as compared with amounts outstanding and contingently payable at March 31, 2000 of $101.0 million and $6.1 million, respectively. Weighted average borrowings under revolving lines of credit for the fiscal years ended March 31, 2001 and 2000 were approximately $24.5 million and $30.1 million, respectively. The weighted average interest rates on outstanding revolving line of credit borrowings as of March 31, 2001 and 2000 were 7.8% and 8.1%, respectively. The effective interest rates on the First and Second Term Loans were 7.5% and 9.45%, respectively, as of March 31, 2001 and 7.6% and 10.4%, respectively, as of March 31, 2000. The aggregate maturities of long-term debt for each of the next five years are as follows: 2002, $7.2 million; 2003, $9.2 million; 2004, $18.7 million; 2005, $22.8 million; and 2006, $24.4 million. Borrowings under the Facility are sensitive to changes in interest rates, as such borrowings bear interest at variable rates. In an effort to limit its cash flow and interest expense exposure to interest rate fluctuations, and in accordance with certain covenants in the Facility agreement, the Company has entered into interest rate collar agreements with notional amounts covering a limited amount of the aggregate outstanding principal balance of the First and Second Term Loans. A summary of the interest rate collar agreements in place as of March 31, 2001 and 2000 follows:
Notional Amount Estimated Fair Value ---------------------- --------------------- Effective Expiration March 31, Reference Ceiling Floor March 31, Date Date 2001 2000 Rate Rate Rate 2001 2000 --------- ---------- --------- -------- --------- ------- ----- --------- ------ (dollars in thousands) (dollars in thousands) 4/8/98 1/8/01 $ - $ 6,200 3 Month CAD-BA* 6.35% 4.84% $ - $ 4 4/22/99 1/26/02 $20,000 $20,000 3 Month LIBOR 5.75% 4.80% $ (74) $ 426 1/26/01 1/30/03 $10,000 $ - 3 Month LIBOR 6.50% 5.09% $ (110) $ - 1/29/01 1/31/03 $10,000 $ - 3 Month LIBOR 6.50% 5.05% $ (105) $ -
* Canadian Bankers Acceptance Rate The weighted average three-month LIBOR rate in effect for the Company's collars outstanding as of March 31, 2001 was 4.98%. 53 11. Supplemental Cash Flow Information
Years Ended March 31, -------------------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Supplemental disclosure of cash flow information: Cash paid for: Interest $ 11,518 $ 11,055 $ 7,978 Income taxes $ 9,175 $ 6,382 $ 3,577 Supplemental disclosure of noncash investing and financing activities: Common Stock issued for purchase of GAC $ 4,000 $ - $ - Common Stock issued for purchase of NAI $ - $ 27,069 $ - Note receivable - sale of magnetic tape head business $ 1,741 $ - $ - Conversion of 9% Convertible Debentures $ 18,870 $ - $ 856
12. Income Taxes Earnings from continuing operations before extraordinary item and income taxes consist of the following: Years Ended March 31, ---------------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Earnings from continuing operations before extraordinary item and income taxes: Domestic earnings $29,384 $ 9,594 $ 3,307 Foreign (losses) earnings (4,430) 3,238 2,473 ------- -------- ------- Total $24,954 $ 12,832 $ 5,780 ======= ======== ======= Income tax expense from continuing operations before extraordinary item consists of the following: Years Ended March 31, ---------------------------- 2001 2000 1999 ------- ------ ------ (in thousands) Income Tax Expense (Benefit) Current: Federal $ 8,962 $ 2,728 $ 2,418 State 2,654 885 448 Foreign 1,647 2,108 2,413 -------- ------- ------- 13,263 5,721 5,279 -------- ------- ------- Deferred: Federal 844 804 (1,946) State 928 (492) 58 Foreign (2,059) (862) (1,476) -------- ------- ------- (287) (550) (3,364) -------- ------- ------- Total $ 12,976 $ 5,171 $ 1,915 ======== ======= ======= 54 Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2001 and 2000 are as follows:
March 31, ------------------------- 2001 2000 ------- ------- (in thousands) Deferred tax assets: Acquired federal net operating loss (NOL) carryforwards $ 4,814 $ 5,062 State NOL carryforwards 3,808 5,340 Costs accrued on uncompleted contracts 3,845 2,974 Deferred financing costs 628 874 Inventory capitalization 3,359 2,577 Other 5,495 4,858 ------- ------- Total gross deferred tax assets 21,949 21,685 Less valuation allowance (4,395) (8,008) ------- ------- Deferred tax assets 17,554 13,677 ------- ------- Deferred tax liabilities: Depreciation and amortization 1,062 1,014 General and adminisatrative costs 7,450 6,554 Federal impact of state benefits 446 854 Other 745 746 ------- ------- Deferred tax liabilities 9,703 9,168 ------- ------- Net deferred tax assets $ 7,851 $ 4,509 ======= =======
A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company has established a valuation allowance for a portion of the deferred tax asset attributable to state and foreign net operating loss (NOL) carryforwards at March 31, 2001, and a portion of the deferred tax asset attributable to U.S. Federal and state NOL carryforwards as of March 31, 2000, due to the uncertainty of future earnings of certain subsidiaries of the Company and the status of applicable statutory regulation that could limit or preclude utilization of these benefits in future periods. During the year ended March 31, 2001, the valuation allowance attributable to the U.S. Federal NOL in the amount of approximately $3.2 million was reduced to reflect a change in the expectation of the utilization of such NOL, primarily due to a change in the Internal Revenue Code with regard to the separate return limitation rules. Since the valuation allowance was established as a result of the NAI Merger (see Note 3), the change in such valuation allowance did not reduce income tax expense, but rather reduced goodwill. Based upon the level of historical taxable income and projections for future taxable income over the period in which the Company's deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2001 and 2000. During the year ended March 31, 2001, the valuation allowance decreased by approximately $3.6 million, primarily as a result of the above mentioned change in the expectation of the utilization of the U.S. Federal NOL, and actual realizations in other state NOLs, offset by an increase related to certain foreign NOLs. During the year ended March 31, 2000, the valuation allowance increased by approximately $1.1 million, primarily as a result of increases in state NOLs to the extent not anticipated to be realized. The Company provides for the potential repatriation of certain undistributed earnings of its foreign subsidiaries and considers earnings above the amounts on which tax has been provided to be permanently reinvested. While these earnings would be subject to additional tax if repatriated, such repatriation is not anticipated. Any additional amount of tax is not practical to estimate. 55 Current and noncurrent deferred tax assets of $6.3 million and $1.6 million, and $3.6 million and $0.9 million, respectively, are included in the Consolidated Balance Sheets as of March 31, 2001 and 2000, respectively. At March 31, 2001, approximately $15.3 million of U.S. Federal and $40.9 million of state NOL carryforwards, which expire between fiscal years 2002 and 2020, and $8.4 million of foreign NOLs, which carry forward indefinitely, were available. All of the Company's U.S. Federal and $11.2 million of its state NOL carryforwards were acquired in connection with the NAI Merger (see Note 3). The annual utilization of these NOL carryforwards is limited under certain provisions of the Internal Revenue Code. Any future utilization of these net operating loss carryforwards will result in an adjustment to goodwill to the extent it reduces the valuation allowance. A reconciliation of the expected U.S. Federal income tax expense to the actual (effective) income tax expense from continuing operations is as follows:
Years Ended March 31, ------------------------------------- 2001 2000 1999 ------- ------- ------- (in thousands) Expected U.S. Federal income tax expense $ 8,734 $ 4,491 $ 1,965 Difference between U.S. and foreign tax rates 386 185 (290) State income tax, net of Federal income tax benefit 1,985 256 334 Nondeductible expenses 1,458 820 486 U.S. tax (benefit) expense on foreign undistributed earnings - (196) 196 U.S. tax benefits not previously recognized - - (629) Other 413 (385) (147) -------- ------- ------- Total $ 12,976 $ 5,171 $ 1,915 ======== ======= =======
The provision for income taxes includes all estimated income taxes payable to Federal, state and foreign governments, as applicable. 13. Common Stock, Stock Compensation Plans and Employee Benefit Plans Common Stock As of March 31, 2001, the authorized capital of the Company was composed of 20.0 million shares of Common Stock (approximately 12.1 million shares issued), and 2.0 million shares of Preferred Stock (no shares issued). In connection with the NAI Merger, holders of NAI common stock received 0.25 of a share of DRS Common Stock for each share of NAI common stock, and each then outstanding NAI 12% Convertible Subordinated Promissory Note (12% Notes) due January 15, 2001 was convertible into 0.25 of a share of DRS Common Stock. In connection with the NAI Merger, the Company issued 2,858,266 shares of Common Stock, including 546,187 shares issued upon conversion of approximately $4.4 million of the 12% Notes. In connection with the acquisition of General Atronics Corporation (see Note 3), the Company issued approximately 355,000 shares of Common Stock. As of March 31, 2001, approximately 89,000 of these shares were held in escrow. Such shares will be held in escrow for a period of eighteen months from the acquisition date and are subject to certain potential claims by DRS. Also during fiscal 2001, the Company cancelled all shares of treasury stock held by the Company. Stock Compensation Plans The 1991 Stock Option Plan (the Plan), which was approved by the Company's stockholders on August 8, 1991, provided for the grant of options to purchase a total of 600,000 shares of DRS Common Stock through February 6, 2001. Under the terms of the Plan, options were granted to key employees, directors and consultants of the Company. Options granted under the Stock Option Plan were at the discretion of the Board (Executive 56 Compensation Committee) and could be incentive stock options or non-qualified stock options, except that incentive stock options could be granted only to employees. The option price was determined by the Executive Compensation Committee and had to be a price per share which was not less than the par value per share of the Common Stock, and in the case of an incentive stock option, could not be less than the fair-market value of the Common Stock on the date of the grant. Options could be exercised during the exercise period, as determined by the Executive Compensation Committee, except that no option could be exercised within six months of its grant date, and in the case of an incentive stock option, generally, the exercise period could not exceed ten years from the date of the grant. Upon the expiration of the Plan, a total of 161,550 shares of Common Stock remained ungranted. Options still outstanding at the time of the Plan's expiration on February 6, 2001 remain in effect as granted. On June 17, 1996, the Board adopted, and on August 7, 1996, the stockholders approved, the 1996 Omnibus Plan (Omnibus Plan). The Omnibus Plan was initially limited to 500,000 shares and has since been increased, with stockholder approval, to 2,375,000 shares. Awards under the Omnibus Plan are at the discretion of the Executive Compensation Committee and may be made in the form of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) phantom stock, (vi) stock bonuses and (vii) other awards. Unless the Executive Compensation Committee expressly provides otherwise, options granted under the Omnibus Plan are not exercisable prior to one year after the date of grant and become exercisable as to 25% of the shares granted on each of the first four anniversaries of the date of grant. As of March 31, 2001, 735,913 shares were reserved for future grants under the Omnibus Plan. Pursuant to the terms of exercise under the grant, the excess of the fair-market value of shares under option at the date of grant over the option price may be charged to unamortized restricted stock compensation or to earnings as compensation expense and credited to additional paid-in capital. The unamortized restricted stock compensation, if any, is charged to net earnings as it becomes exercisable, in accordance with the terms of the grant. The amount of compensation charged to earnings in fiscal 2001, 2000 and 1999 was $112,000, $155,000 and $67,000, respectively. In connection with the NAI Merger, each issued and outstanding NAI warrant to purchase NAI common stock at an exercise price of $2.50 per share was converted into DRS warrants at a conversion ratio of 0.25 of a share of DRS Common Stock to one share of NAI common stock; each NAI stock option, whether vested or unvested, was assumed by DRS and now constitutes an option to acquire, on the same terms and conditions as were applicable under such option prior to the Merger, the number of shares of DRS Common Stock equal to the product (rounded down to the nearest whole number) of 0.25 of a share and the number of shares of NAI common stock, subject to such option prior to the merger at a per-share exercise price equal to four times the exercise price of such option prior to the Merger. The Company issued stock options and warrants to purchase a total of 161,230 and 603,175 shares, respectively, of DRS Common Stock (as adjusted for the exchange ratio). The terms of the NAI stock options assumed, except for the exercise price and number of shares, were not amended. As of March 31, 2001, 581,313 warrants assumed in the Merger remained outstanding. These warrants are exercisable at $10.00 per share and expire February 15, 2002. The Board may, at its discretion, grant equity-based compensation awards, subject to certain regulatory restrictions. In fiscal 1999, the Board issued options to purchase up to 250,000 shares of DRS Common Stock with vesting terms similar to awards issued in fiscal 1999 under the Omnibus Plan at exercise prices in excess of the market price on the date of grant. The per-share weighted-average fair value and exercise price of these options were $1.89 and $10.44, respectively. 57 A summary of stock option activity is as follows:
Number of Weighted Shares of Average Common Exercise Stock Price ---------- -------- Outstanding at March 31, 1998 (of which 303,100 shares were exercisable) 706,100 $7.33 Granted/Assumed 893,930 $9.34 Exercised (63,600) $2.24 Expired or cancelled (45,200) $10.27 --------- Outstanding at March 31, 1999 1,491,230 $8.66 (of which 461,579 shares were exercisable) Granted 436,050 $7.25 Exercised (151,087) $3.33 Expired or cancelled (92,122) $8.91 --------- Outstanding at March 31, 2000 1,684,071 $8.76 (of which 611,446 shares were exercisable) Granted 532,600 $13.42 Exercised (225,579) $9.15 Expired or cancelled (57,562) $8.55 --------- Outstanding at March 31, 2001 (of which 792,668 shares were exercisable) 1,933,530 $9.99 =========
The stock options exercised during fiscal 2000 include 50,000 shares, which are being held by the Company in "book entry" form, and 100,000 shares, which were exercised via a stock-for-stock transaction. Book entry shares are not considered issued or outstanding as of March 31, 2001. However, these shares are included in the Company's diluted earnings per share calculation. In connection with the stock-for-stock transaction, 55,755 "mature shares" (i.e., common shares held by the option holder for at least six months), with a fair value equal to the aggregate exercise price of the stock options exercised, were tendered by the option holder to the Company to satisfy the total exercise price of the options. Information regarding all options outstanding at March 31, 2001 follows:
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------- Weighted Weighted Average Number Weighted Number of Average Remaining of Average Range of Exercise Prices: Options Exercise Price Contractual Life Options Exercise Price - ------------------------------- ------------- --------------- ---------------- ------- -------------- Less than $7.75 378,400 $ 6.70 8.3 years 104,663 $ 6.01 $7.75 332,050 $ 7.75 7.0 years 191,775 $ 7.75 $7.76 - $9.99 329,800 $ 9.25 7.1 years 231,050 $ 9.35 $10.00 - $13.25 370,050 $ 10.86 6.9 years 245,050 $ 10.77 Greater than $13.25 523,230 $ 13.66 9.4 years 20,130 $ 16.65 ---------- -------- --------- ------- -------- Total 1,933,530 $ 9.99 7.9 years 792,668 $ 9.15 ========== =======
58 Pro forma information regarding net earnings and earnings per share, as required by SFAS 123, has been determined as if the Company had accounted for its employee stock options under the fair-value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.7%, 6.0% and 5.0% in fiscal 2001, 2000 and 1999, respectively; dividend yield of 0%; volatility factor related to the expected market price of the Company's Common Stock of .2893 in fiscal 2001, .2953 in fiscal 2000, and .2974 in fiscal 1999; and weighted-average expected option life of five years. The weighted-average fair values of options granted at market during fiscal 2001, 2000 and 1999 were $4.85, $2.71 and $2.95 per share, respectively. The per-share weighted-average fair value and exercise price of options granted with an exercise price less than market during 1999 were $3.96 and $8.20, respectively. For purposes of pro forma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. Accordingly, the pro forma results for fiscal 2001, 2000 and 1999 presented below include, 48%, 107% and 49%, respectively, of the total pro forma expense for options awarded in each year. The pro forma amounts may not be representative of the effects on reported earnings for future years. The Company's pro forma information is as follows: Years Ended March, 31 ------------------------------------- 2001 2000 1999 --------- -------- -------- (in thousands, except per-share data) Net income, as reported $ 11,978 $ 4,310 $ 680 Net income, pro forma $ 11,381 $ 3,579 $ 7 Earnings per share, as reported Basic $ 1.14 $ 0.47 $ 0.10 Diluted $ 1.01 $ 0.47 $ 0.10 Earnings per share, pro forma Basic $ 1.09 $ 0.39 $ - Diluted $ 0.92 $ 0.41 $ - Employee Benefit Plans The Company maintains defined contribution plans covering substantially all domestic full-time eligible employees. The Company's contributions to these plans for fiscal 2001, 2000 and 1999 amounted to $2.3 million, $1.9 million and $1.2 million, respectively. Certain employees of the Company's foreign operating units participate in defined benefit pension plans sponsored by the Company. Plan assets are invested in publicly traded equity and fixed-income securities. Retirement benefits are based on various factors, including remuneration and years of service. DRS funds these plans based on independent actuarial valuations. The net pension obligations and related expenses associated with these plans are not material to the consolidated financial position and results of operations of the Company. On February 1, 1996, the Company established a Supplemental Executive Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant to the SERP, the Company will provide retirement benefits to each key executive, based on years of service and final average annual compensation as defined therein. In addition, the Company will advance premiums for life insurance policies providing a death benefit equal to five times the participants' salary at time of death. In the event of a change in control, as defined therein, benefits become fully vested. The SERP is non-contributory and unfunded. Benefits under the SERP currently are being funded from working capital. As of March 31, 2001 and 2000, the Company's liability for benefits accrued under the SERP was approximately $1.9 million and $1.7 million, respectively, and is included in Other Liabilities in the Consolidated Balance Sheets. Charges of $549,000, $583,000 and $463,000, relating to the SERP were included in the consolidated results of operations for fiscal 2001, 2000 and 1999, respectively. 59 14. Commitments, Contingencies and Related Party Transactions At March 31, 2001, the Company was party to various noncancellable operating leases (principally for administration, engineering and production facilities) with minimum rental payments as follows: (in thousands) -------------- 2002 $ 11,929 2003 9,303 2004 8,128 2005 7,701 2006 7,245 Thereafter 29,627 ------------- Total $ 73,933 ============= 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 $11.3 million, $8.7 million and $4.5 million in fiscal 2001, 2000 and 1999, respectively. Effective July 20, 1994, the Company entered into an Employment, Non-Competition and Termination Agreement (the Gross Agreement) with David E. Gross, who retired as President and Chief Technical Officer of the Company on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross has received a total of $600,000 as compensation for his services under a five-year consulting agreement with the Company and $750,000 as consideration for a five-year non-compete arrangement. The payments were charged to expense over the five-year term as services were performed and obligations were fulfilled by Mr. Gross. He also will receive, at the conclusion of such initial five-year period, an aggregate of approximately $1.3 million payable over a nine-year period as deferred compensation. The approximate net present value of the deferred compensation payments to be made to Mr. Gross is included in Other Liabilities in the Consolidated Balance Sheets. In April and May 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or DRS Photronics. During the government's investigation, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of the investigation. The Company itself is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. Since a substantial amount of the Company's revenues are derived from contracts or subcontracts with the U.S. Government and foreign governments, future revenues and profits will be dependent upon continued contract awards, Company performance and volume of Government business. The books and records of the Company are subject to audit and post-award review by the Defense Contract Audit Agency and similar foreign agencies. 60 15. Operating Segments DRS operates in three principal business segments on the basis of products and services offered. Separate and distinct businesses comprise each operating segment: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG). All other operations are combined in "Other." ESG is a supplier of computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, acoustic signal processing and display equipment, and combat control systems. The Group's products are used on front-line platforms, including Aegis destroyers and cruisers, aircraft carriers, submarines and surveillance aircraft. ESG's products also are used in U.S. Army and international battlefield digitization programs. EOSG produces systems and subsystems for infrared night vision and targeting systems used in the U.S. Army's Abrams Main Battle Tank, Bradley Fighting Vehicle and the High-Mobility Multipurpose Wheeled Vehicle Scout. EOSG designs, manufactures and markets products that allow operators to detect, identify and target objects based upon their infrared signatures, regardless of the ambient light level. This Group also designs and manufactures eye-safe laser range finders and multi-platform weapons calibration systems for the AH-64 Apache attack helicopter and AC-130U gunship. FSCG is a manufacturer of deployable flight emergency or "black box" recording equipment used by military and search and rescue aircraft. FSCG also manufactures shipboard and data link communications systems and infrared surveillance systems for the U.S., Canadian and other navies. This Group uses advanced commercial technology in the design and manufacture of multi-sensor digital, analog and video data capture recording products, as well as high-capacity data storage devices for the harsh environments of aerospace and defense applications. FSCG also provides advanced manufacturing services of international military and space customers. FSCG products are used on such platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target verification and battle damage assessment. FSCG is also a producer of ultra high-speed digital imaging systems and is the leading supplier of Link 11 Data Terminal Systems for NATO and allied international navies. FSCG manufactures and markets ship and ground surveillance radar and infrared imaging systems. "Other" includes the activities of DRS Corporate Headquarters, DRS Ahead Technology and certain non-operating subsidiaries of the Company. DRS Ahead Technology produces magnetic head components used in the manufacturing process of computer disk drives, which burnish and verify the quality of disk surfaces. DRS Ahead Technology also services and manufactures magnetic video recording heads used in broadcast television equipment. Transactions between segments are generally negotiated and accounted for under terms and conditions that are similar to other government and commercial contracts; however, these intercompany transactions are eliminated in consolidation. Other accounting policies of the segments are consistent with those described in the summary of significant accounting policies (see Note 1). The Company evaluates segment-level performance based on revenues and operating income, as presented in the Consolidated Statements of Earnings. Operating income, as shown, includes amounts allocated from DRS Corporate operations. 61 Information about the Company's continuing operations in these segments for each of the three years ended March 31, 2001 is as follows:
(in thousands) ESG EOSG FSCG Other Total ------------- ------------- ----------- ----------- ------------- Fiscal 2001: Total revenues $ 186,731 $ 160,825 $ 74,614 $ 9,651 $ 431,821 Intersegment revenues $ (257) $ (222) $ (3,736) $ - $ (4,215) ------------- ------------- ----------- ----------- ------------- External revenues $ 186,474 $ 160,603 $ 70,878 $ 9,651 $ 427,606 ------------- ------------- ----------- ----------- ------------- Operating income (loss) before amortization of goodwill and related intangibles $ 17,244 $ 26,232 $ 2,125 $ (450) $ 45,151 Operating income (loss) $ 15,336 $ 22,691 $ 208 $ (704) $ 37,531 Identifiable assets $ 106,627 $ 120,684 $ 89,261 $ 18,368 $ 334,940 Depreciation and amortization $ 3,447 $ 7,711 $ 3,290 $ 1,797 $ 16,245 Capital expenditures $ 2,239 $ 10,381 $ 1,934 $ 1,631 $ 16,185 ------------- ------------- ----------- ----------- ------------- Fiscal 2000: Total revenues $ 187,971 $ 142,948 $ 54,596 $ 8,356 $ 393,871 Intersegment revenues $ (177) $ (1,840) $ (387) $ - $ (2,404) ------------- ------------- ----------- ----------- ------------- External revenues $ 187,794 $ 141,108 $ 54,209 $ 8,356 $ 391,467 ------------- ------------- ----------- ----------- ------------- Operating income (loss) before amortization of goodwill and related intangibles $ 16,370 $ 14,804 $ 3,799 $ (2,391) $ 32,582 Operating income (loss) $ 14,593 $ 11,404 $ 2,762 $ (2,581) $ 26,178 Identifiable assets $ 94,719 $ 137,075 $ 62,517 $ 20,478 $ 314,789 Depreciation and amortization $ 3,813 $ 8,136 $ 2,832 $ 2,289 $ 17,070 Capital expenditures $ 1,722 $ 1,973 $ 525 $ 1,990 $ 6,210 ------------- ------------- ----------- ----------- ------------- Fiscal 1999: Total revenues $ 123,558 $ 69,972 $ 60,768 $ 11,881 $ 266,179 Intersegment revenues $ - $ - $ (330) $ - $ (330) ------------- ------------- ----------- ----------- ------------- External revenues $ 123,558 $ 69,972 $ 60,438 $ 11,881 $ 265,849 ------------- ------------- ----------- ----------- ------------- Operating income (loss) before amortization of goodwill and related intangibles $ 9,497 $ 5,077 $ 5,672 $ (2,022) $ 18,224 Operating income (loss) $ 9,292 $ 3,581 $ 4,684 $ (2,256) $ 15,301 Identifiable assets $ 84,475 $ 151,313 $ 66,273 $ 19,638 $ 321,699 Depreciation and amortization $ 1,356 $ 5,001 $ 3,003 $ 2,241 $ 11,601 Capital expenditures $ 1,916 $ 1,820 $ 2,177 $ 641 $ 6,554 ------------- ------------- ----------- ----------- -------------
As a result of changes in estimates to complete on certain long-term programs, operating income for EOSG included the net effect of favorable program adjustments of approximately $7.0 million and $1.6 million in fiscal 2001 and fiscal 2000, respectively. Similarly, operating income for FSCG included the effect of a negative program adjustment of approximately $1.9 million in fiscal 2001. 62 Revenues, total assets and property, plant and equipment by geographic location are presented in the table below. Revenues are attributed to countries based on the physical location of the operating unit generating the revenues. Information about the Company's operations in these geographic locations for each of the three years ended March 31, 2001 is as follows:
(in thousands) United Total United States Canada Kingdom --------- ------------- -------- -------- Fiscal 2001: Revenues $ 427,606 $ 380,279 $ 26,964 $ 20,363 Total assets $ 334,940 $ 273,178 $ 33,162 $ 28,600 Property, plant and equipment $ 37,639 $ 34,343 $ 2,046 $ 1,250 Fiscal 2000: Revenues $ 391,467 $ 319,331 $ 32,437 $ 39,699 Total assets $ 314,789 $ 245,450 $ 32,765 $ 36,574 Property, plant and equipment $ 29,006 $ 25,465 $ 1,958 $ 1,583 Fiscal 1999: Revenues $ 265,849 $ 221,812 $ 29,554 $ 14,483 Total assets $ 321,699 $ 264,926 $ 30,679 $ 26,094 Property, plant and equipment $ 32,124 $ 28,415 $ 2,240 $ 1,469
16. Quarterly Financial Information (Unaudited) The following table sets forth unaudited quarterly financial information for fiscal 2001 and 2000:
(in thousands, except per-share data) First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- -------- --------- Fiscal year ended March 31, 2001 Revenues $ 94,521 $ 107,227 $ 95,935 $ 129,923 Operating income $ 7,155 $ 8,503 $ 10,091 $ 11,782 Net earnings $ 1,898 $ 2,239 $ 3,479 $ 4,362 Basic earnings per share $ 0.20 $ 0.22 $ 0.32 $ 0.37 Diluted earnings per share $ 0.18 $ 0.20 $ 0.28 $ 0.34 Fiscal year ended March 31, 2000 Revenues $ 85,646 $ 88,253 $103,570 $ 113,998 Operating income $ 5,274 $ 5,119 $ 7,120 $ 8,665 Net earnings $ 968 $ 1,060 $ 1,773 $ 509 Basic earnings per share $ 0.10 $ 0.11 $ 0.19 $ 0.05 Diluted earnings per share $ 0.10 $ 0.11 $ 0.18 $ 0.07
In connection with the then pending sale of the magnetic tape head business units (see Note 4), the Company recorded a loss on the sale of discontinued operations of approximately $2.1 million, net of tax, in the fiscal 2000 fourth quarter results of operations. Also in the fourth quarter of fiscal 2000, the Company recorded restructuring charges of approximately $1.8 million. 63 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule II. Valuation and Qualifying Accounts Years Ended March 31, 2001, 2000 and 1999
Col. A Col. B Col. C Col. D Col. E Additions (a) Deductions (b) ---------------------------- --------------------------- (1) (2) (1) (2) Charged to Credited to Balance at Charged to Other Credited to Other Balance at Beginning of Costs and Accounts-- Costs and Accounts-- End of Description Period Expenses Describe Expenses Describe Period Inventory Reserve Year ended March 31, 2001 $5,340,000 $4,138,000 $ 437,000(c) $2,021,000 $2,434,000(d) $5,460,000 Year ended March 31, 2000 $3,166,000 $4,885,000 $ 151,000(c) $2,752,000 $ 110,000(d) $5,340,000 Year ended March 31, 1999 $1,545,000 $3,424,000 $ 266,000(c) $1,461,000 $ 608,000(d) $3,166,000 Accrual for Future Costs on Uncompleted Contracts Year ended March 31, 2001 $4,973,000 $6,576,000 $ 56,000(c) $2,562,000 $1,011,000 e) $8,032,000 Year ended March 31, 2000 $8,119,000 $3,491,000 $ 121,000(c) $4,269,000 $2,489,000(e) $4,973,000 Year ended March 31, 1999 $4,120,000 $2,717,000 $5,784,000(c) $1,197,000 $3,305,000(e) $8,119,000 Allowance for Doubtful Accounts Year ended March 31, 2001 $1,140,000 $ 677,000 $ 2,000(c) $ 140,000 $ 875,000(d) $1,074,000 Year ended March 31, 2000 $1,182,000 $ 389,000 $ 7,000(c) $ 149,000 $ 19,000(d) $1,410,000 Year ended March 31, 1999 $ 486,000 $ 492,000 $ 258,000(c) $ 48,000 $ 6,000(d) $1,182,000 Other Current Assets Year ended March 31, 2001 $ 259,000 $1,116,000 $ 0 $ 0 $ 0 $1,375,000 Year ended March 31, 2000 $ 0 $ 259,000 $ 0 $ 0 $ 0 $ 259,000
(a) Represents, on a full-year basis, net credits to reserve accounts. (b) Represents, on a full-year basis, net charges to reserve accounts. (c) Represents amounts reclassified from related reserve accounts. (d) Represents amounts utilized and credited to related asset accounts. (e) Represents amounts reclassified to related reserve accounts. 64 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None 65 PART III The information required by Items 10 through 13 of this Part is incorporated herein by reference to our Definitive Proxy Statement, dated June 27, 2001, for the 2001 Annual Meeting of Stockholders. Reference also is made to the information under "Executive Officers of the Registrant" in Part I of this report. 66 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following are documents filed as part of this report: Page ---- 1. Financial Statements See Item 8. Financial Statements and Supplementary Data....... 37 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts............... 64 All other financial statement schedules have been omitted because they are either not required, not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 3. Exhibits filed as part of this report are listed in the Exhibit Index at the end of this report................... 70 (b) Reports on Form 8-K None. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DRS TECHNOLOGIES, INC. Dated: June 27, 2001 /s/ MARK S. NEWMAN ---------------------------------------- Mark S. Newman, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ MARK S. NEWMAN Chairman of the Board, President, June 22, 2001 - -------------------------------------- Chief Executive Officer and Director Mark S. Newman /s/ RICHARD A. SCHNEIDER Executive Vice President, Chief June 22, 2001 - -------------------------------------- Financial Officer and Treasurer Richard A. Schneider /s/ IRA ALBOM Director June 22, 2001 - -------------------------------------- Ira Albom /s/ DONALD C. FRASER Director June 22, 2001 - -------------------------------------- Donald C. Fraser /s/ WILLIAM F. HEITMANN Director June 22, 2001 - -------------------------------------- William F. Heitmann /s/ STEVEN S. HONIGMAN Director June 22, 2001 - -------------------------------------- Steven S. Honigman /s/ C. SHELTON JAMES Director June 22, 2001 - -------------------------------------- C. Shelton James /s/ MARK N. KAPLAN Director June 22, 2001 - -------------------------------------- Mark N. Kaplan /s/ STUART F. PLATT Director June 22, 2001 - -------------------------------------- Stuart F. Platt /s/ DENNIS J. REIMER Director June 22, 2001 - -------------------------------------- Dennis J. Reimer /s/ ERIC J. ROSEN Director June 22, 2001 - -------------------------------------- Eric J. Rosen
68 EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*) are filed herewith. Certain of the following exhibits, designated with a "P", are being filed on paper, pursuant to a hardship exemption under Rule 202 of Regulaton S-T. The exhibits not so designated have been previously filed with the Commission and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits.
Exhibit No. Description - ---------------------------- 3.1 -- Restated Certificate of Incorporation of the Company [Registration Statement No. 2-70062-NY, Amendment No. 1, Exhibit 2(a)] 3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation of the Company, as filed July 7, 1983 [Registration Statement on Form 8-A of the Company, dated July 13, 1983, Exhibit 2.2] 3.3 -- Composite copy of the Restated Certificate of Incorporation of the Company, as amended [Registration Statement No. 2-85238, Exhibit 3.3] 3.4 -- Amended and Restated Certificate of Incorporation of the Company, as filed April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.4] 3.5 -- By-laws of the Company, as amended to November 7, 1994 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.4] 3.6 -- Certificate of Amendment of the Certificate of Incorporation of Precision Echo Acquisition Corp., as filed March 10, 1995 [Form 10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 3.5] 3.7 -- Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter ended December 31, 1995, File No. 1-8533, Exhibit 3] 3.8 -- Amended and Restated By-Laws of the Company, as of April 1, 1996 [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 3.8] 4.1 -- Registration Rights Agreement, dated as of September 22, 1995 between the Company and Forum Capital Markets L.P. [Registration Statement No. 33-64641, Amendment No. 1, Exhibit 4.3] 10.1 -- 1991 Stock Option Plan of the Company [Registration Statement No. 33-42886, Exhibit 28.1] 10.2 -- 1996 Omnibus Plan of the Company [Registration Statement No. 333-14487, Exhibit 99.1] 10.3 -- Joint Venture Agreement, dated as of November 3, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(3)] 10.4 -- Waiver Letter, dated as of December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(4)] 10.5 -- Partnership Agreement, dated December 13, 1993, by and between DRS Systems Management Corporation and Laurel Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993, File No. 1-8533, Exhibit 6(a)(5)] 10.6 -- 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]
69
Exhibit No. Description - -------------------------- 10.7 -- 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] 10.8 -- 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] 10.9 -- Asset Purchase Agreement, dated as of February 9, 1996, by and among Mag-Head Engineering, Company, Inc. and Ahead Technology Acquisition Corporation, a subsidiary of Precision Echo, Inc. [Registration Statement No. 33-64641, Post-Effective Amendment No. 1, Exhibit 10.93] 10.10 -- Asset Purchase Agreement, dated June 17, 1996, by and among Vikron, Inc., Northland Aluminum, Inc., Ahead Wisconsin Acquisition Corporation, a third-tier subsidiary of the Company, and Ahead Technology, Inc., a second-tier subsidiary of the Company [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.99] 10.11 -- Agreement and Plan of Merger, dated September 30, 1996, by and among PTI Acquisition Corp., a subsidiary of the Company, Pacific Technologies, Inc., David A. Leedom, Karen A. Mason, Robert T. Miller, Carl S. Ito and Barry S. Kindig [Form 10-K, fiscal year ended March 31, 1997, File No. 1-8533, Exhibit 10.101] 10.12 -- Asset Purchase Agreement, dated October 22, 1996, by and among Ahead Technology, Inc., a second-tier subsidiary of the Company, Nortronics Acquisition Corporation, a third-tier subsidiary of the Company, Nortronics Company, Inc., Alan Kronfeld, Thomas Philipich and Robert Liston [Form 10-K, fiscal year ended March 31, 1997, File No. 1- 8533, Exhibit 10.102] 10.13 -- Purchase Agreement, dated as of September 19, 1997, between DRS Technologies, Inc. and Spar Aerospace Limited. [Form 8-K, October 27, 1997, File No. 1-8533, Exhibit 1] 10.14 -- Asset Purchase Agreement, dated July 28, 1998, by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 1] 10.15 -- Letter Amendment by and among the Company, Raytheon TI Systems, Inc., Raytheon Company and Raytheon Systems Georgia, Inc., dated October 20, 1998, amending the Asset Purchase Agreement. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 2] 10.16 -- Amended and Restated Revolving Credit Loan and Term Loan Agreement, dated October 20, 1998, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS EO, Inc., DRS FPA, L.P. and Mellon Bank, N.A. [Form 8-K, November 4, 1998, File No. 1-8533, Exhibit 3] 10.17 -- Agreement and Plan of Merger dated August 26, 1998, as amended, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1, Exhibit 2.1]). 10.18 -- Amendment to Agreement and Plan of Merger, dated February 17, 1999, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI Technologies, Inc. [Form 8-K, March 5, 1999, File No. 1-8533, Exhibit 2] 10.19 -- 1991 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.4] 10.20 -- 1993 Stock Option Plan for Directors of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.5] 10.21 -- 1996 Stock Option Plan of NAI Technologies, Inc. [Registration Statement No. 333-69751, Post Effective Amendment No. 1 on Form S-8, Exhibit 4.6] 10.22 Employment Agreement, dated as of November 20, 1996, by and between the Company and Mark S. Newman [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.47] 10.23 Employment Agreement, dated as of April 30, 1997, by and between the Company and Nina Laserson Dunn [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.48]
70
Exhibit No. Description - -------------------------- 10.24 Employment Agreement, dated as of February 19, 1999, by and between the Company and Richard A. Schneider [Form 10-K, fiscal year ended March 31, 1999, File No. 1-8533, Exhibit 10.49] 10.25[P] Subcontract No. 483901(D), dated June 24, 1994, under Contract No. N00024-94-D-5204, between the Company and Unisys Corporation Government Systems Group [Form 10-K, fiscal year ended March 31, 1995, 1995, File No. 1-8533, Exhibit 10.37] 10.26[P] Purchase Order No. 10606321 1, dated October 28, 1998, between the Company and Raytheon TI Systems, Inc. 10.27[P] Contract DAAH01-97-C-0390, dated September 24, 1997, between Hughes Georgia, Inc. and the U.S. Army 10.28[P] Modification P00001, dated January 16, 1998, to Contract DAAH01-97-C-0390 10.29[P] Modification P00008, dated October 30, 1998, to Contract DAAH01-97-C-0390 10.30[P] Contract DAAB07-97-C-J430, dated April 1, 1997, between Hughes Aircraft Co. and the U.S. Army 10.31[P] Modification P00037, dated March 31, 1999, to Contract DAAB07-97-C-J430 10.32 First Amendment and Modification Agreement, dated August 15, 1999, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS Sensor Systems, Inc., formerly known as "DRS EO, Inc.", and DRS Infrared Technologies, LP, formerly known as "DRS FPA, L.P." and Mellon Bank, N.A. as the Agent and Lender [Form 10-K, Fiscal Year ended March 31, 2000, File No. 1-8533, Exhibit 10.32] 10.33 Second Amendment and Modification Agreement, dated February 4, 2000, by and among the Company, DRS Technologies Canada Company, DRS Technologies Canada, Inc., DRS Sensor Systems, Inc., formerly known as "DRS EO, Inc.", and DRS Infrared Technologies, LP, formerly known as "DRS FPA, L.P." and Mellon Bank, N.A. as the Agent and Lender [Form 10-K, Fiscal Year ended March 31, 2000, File No. 1-8533, Exhibit 10.33] *10.34 Asset Purchase Agreement, dated June 12, 2000, by and between DRS Technologies, Inc. and General Atronics Corporation *10.35 Employment Agreement, dated as of August 9, 2000, by and between the Company and Paul G. Casner, Jr. *21 -- List of subsidiaries of the Company as of March 31, 2001 *23.1 -- Consent of KPMG LLP
71 EX-10.35 2 ex10-34.txt EMPLOYMENT AGREEMENT EXECUTION COPY -------------------------------------------- ASSET PURCHASE AGREEMENT BY AND BETWEEN DRS TECHNOLOGIES, INC. AND GENERAL ATRONICS CORPORATION -------------------------------------------- ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (this "Agreement"') dated as of June 12, 2000, is by and between DRS TECHNOLOGIES, INC, a Delaware corporation ("Buyer"), and GENERAL ATRONICS CORPORATION, a Pennsylvania corporation ("Seller"). WITNESSETH WHEREAS, Seller designs, engineers and manufactures proprietary, technological products and systems for the defense and communications industry (the "Defense Business"); WHEREAS, Seller retains a 51% partnership interest ("MSSC Interest", and together with the Defense Business, the "Business") in a joint venture, named MSSC Company ("MSSC"), with Signaal America Corporation, a wholly owned subsidiary of Hollandse Signaalappaarten B.V., ("Signaal"); and WHEREAS, Buyer wishes to purchase from Seller and Seller wishes to sell to Buyer, the Acquired Assets and the Assumed Liabilities (each as defined below) related to the conduct and operations of the Business (the "Acquisition"). NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS The following terms, as used herein, shall have the following meanings: "Acquisition" shall have the meaning set forth in the recitals hereto. "Accepting Employees" shall have the meaning set forth in Section 8.2(c) hereof. "Adjustment" shall have the meaning set forth in Section 2.7(c) hereof. "Acquired Assets" shall have the meaning set forth in Section 2.1 hereof. "Accounts Receivable" shall have the meaning set forth in Section 2.1(c) hereof. "Affiliate" shall mean with respect to any Person, another Person that directly or indirectly, controls, is controlled by, or is under common control with such Person. "Allocation Schedule" shall have the meaning set forth in Section 6.11(b) hereof. "AMEX" shall have the meaning set forth in Section 2.6(c) hereof. "Assumed Liabilities" shall have the meaning set forth in Section 2.3 hereof. "Average Market Price" shall have the meaning set forth in Section 2.6(c) hereof. A-I-1 "Business" shall have the meaning set forth in the recitals hereto. "Business Contracts" shall have the meaning set forth in Section 2.1(e) hereof. "Buyer Indemnified Parties" shall have the meaning set forth in Section 10.1 hereof. "Buyer Material Adverse Effect" shall have the meaning set forth in Section 4.1 hereof. "Buyer's Proposed Calculations" shall have the meaning set forth in Section 2.7(a) hereof "Cash Consideration" shall have the meaning set forth in Section 2.6(c) hereof. "Claims" shall have the meaning set forth in Section 10.1 hereof. "Closing" shall have the meaning set forth in Section 2.8 hereof. "Closing Balance Sheet" shall have the meaning set forth in Section 2.7(a) hereof. "Closing Date" shall have the meaning set forth in Section 2.8 hereof. "Closing Net Assets" shall have the meaning set forth in Section 2.7(c) hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Common Stock" shall mean the common stock, par value $0.01 per share, of Buyer. "December Balance Sheet" shall have the meaning set forth in Section 2.5 hereof. "Defense Business" shall have the meaning set forth in the recitals hereto. "Designated Employees" shall have the meaning set forth in Section 8.2(a). "Designated Officer" shall have the meaning set forth in Section 6.1(d) hereof. "Dispute" shall have the meaning set forth in Section 12.12 (b) hereof. "Employees" shall mean all current employees of the Defense Business. Except where the context expressly indicates to the contrary the term "Employees" shall include Inactive Employees. "Encumbrance" shall mean all liens, security interests, pledges, charges, mortgages, conditional sales agreements, title retention agreements and other encumbrances. "Equipment" shall have the meaning set forth in Section 2.1(b) hereof. "ERISA" shall have the meaning set forth in Section 3.16(b) hereof. "ERISA Affiliate" shall have the meaning set forth in Section 3.16(a) hereof. "Escrow Agreement" shall have the meaning set forth in Section 2.6(d) hereof. A-I-2 "Escrowed Shares" shall have the meaning set forth in Section 2.6(d) hereof. "Estimated Balance Sheet" shall have the meaning set forth in Section 2.5(a) hereof. "Excess Net Assets" shall have the meaning set forth in Section 2.5(c) hereof. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended. "Excluded Assets" shall have the meaning set forth in Section 2.2 hereof. "Excluded Environmental Liabilities" shall have the meaning set forth in Section 2.4(g) hereof. "Excluded Liabilities" shall have the meaning set forth in Section 2.4 hereof. "Excluded Proceeds" shall have the meaning set forth in Section 2.2(h) hereof. "FAR" shall have the meaning set forth in Section 3.19(a) hereof. "FCA" shall have the meaning set forth in Section 3.19(a) hereof. "GAAP" shall have the meaning set forth in Section 2.5(a) hereof. "GAC Material Adverse Effect" means any material adverse effect on the general affairs, business, management, operations, revenues, earnings, assets and liabilities or prospects of the Defense Business as conducted by Seller, or the business of MSSC as conducted by MSSC, prior to the Closing. "GARC" shall mean General Atronics Realty Corporation, a Pennsylvania corporation formed to hold the real estate located at 1100 and 1200 East Mermaid Lane, Wyndmoor, Pennsylvania, and in which Seller retains a 79% interest. "Governmental Entity" shall mean any government or any court, arbitral tribunal, administrative agency or commission or other governmental or regulatory authority or agency, Federal, state, local, transnational or foreign. "Hazardous Materials" shall mean all pollutants, contaminants, or chemical, hazardous or toxic materials, substances, constituents or wastes, including, without limitation, asbestos or asbestos-containing materials, polychlorinated biphenyl's and petroleum, oil, or petroleum or oil derivatives or constituents, including, without limitation, crude oil or any fraction thereof. "Inactive Employee Hire Date" shall have the meaning set forth in Section 8.2(b) hereof. "Inactive Employees" shall mean those Employees who, as of the Closing Date, are on leave of absence, are on short or long term disability leave, or are otherwise not actively at work and who are identified on Schedule 3.17(a) hereto; provided, however, that Inactive Employees shall not include Employees who are not actively at work on the Closing Date due to a vacation day, personal day absence or occasional absence day or other similar short term leave for reasons other than illness. "Indemnified Party" shall have the meaning set forth in Section 10.4 hereof. A-I-3 "Indemnifying Party" shall have the meaning set forth in Section 10.4 hereof. "Independent Accounting Firm" shall have the meaning set forth in Section 2.7(b) hereof. "Insurance Policy" shall have the meaning set forth in Section 6.14(a) hereof. "Inventories" shall have the meaning set forth in Section 2.1(d) hereof. "Joint Venture Agreement" shall mean the Limited Partnership Agreement, dated as of June 22, 1984, by and between Signaal and Magnavox European Defense Electronics Company ("MEDEC"), as assigned by MEDEC to Seller, and as amended by Amendment No. 1, dated as of June 1, 1999, between Signaal and Seller. "Key Shareholders" shall mean collectively George E. Huffman, Howard S. Brown, Michel M. Goutmann, and Joseph A. Gothie. "Lease" shall have the meaning set forth in Section 6.13 hereof. "License Agreement" shall have the meaning set forth in Section 3.14(e) hereof. "Magnavox" shall mean Magnavox Electronics Systems Company and any of its successors. "Magnavox Asset Purchase Agreement" shall mean the Asset Purchase and Sale Agreement, dated as of October 28, 1991, by and among Magnavox Electronics Systems Company, General Atronics Corporation (a subsidiary of Magnavox) and Atronics Acquisition Corporation. "Magnavox Indemnity" shall have the meaning set forth in Section 10.5(a) hereof. "Market Value" shall have the meaning set forth in Section 2.6(b) hereof. "Maximum Indemnification Amount" shall have the meaning set forth in Section 10.3(a). "MSSC Interest" shall have the meaning set forth in the recitals hereto. "Net Assets Requirement" shall have the meaning set forth in Section 2.5(a) hereof "Novation Agreement" shall have the meaning set forth in Section 6.3(a) hereof. "PADEP" shall have the meaning set forth in Section 6.14(b) hereof. "Permitted Encumbrances" shall mean Encumbrances that (i) arise out of Taxes not in default and payable without penalty or interest or the validity of which is being contested in good faith by appropriate proceedings, (ii) are mechanics', carriers', workers', repairmen's, or other similar liens that do not, individually or in the aggregate, have a GAC Material Adverse Effect, (iii) in connection with any agreement or instrument constituting part of the Acquired Assets and specifically listed on Schedule 1 hereto; (iv) represent the rights of customers, suppliers and subcontractors in the ordinary course of business under contracts or under general principles of commercial law; or (v) that individually or in the aggregate could not reasonably be expected to A-I-4 interfere with the use of the encumbered assets in the conduct of the normal business operations of the Defense Business or of the business of MSSC. "Person" shall mean any individual, corporation, limited liability company, or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plans" shall have the meaning set forth in Section 3.16(a) hereof. "Property" shall have the meaning set forth in Section 6.13 hereof. "Purchase Price" shall have the meaning set forth in Section 2.6(b) hereof. "Remaining Disputed Items" shall have the meaning set forth in Section 2.7(b) hereof. "Restraints" shall have the meaning set forth in Section 9.1(a) hereof. "Restricted Business" shall have the meaning set forth in Section 7.1 hereof. "Securities Act" shall have the meaning set forth in Section 3.25 hereof. "Seller Indemnified Parties" shall have the meaning set forth in Section 10.2 hereof. "Seller's Knowledge" shall mean the actual knowledge of any of the Key Shareholders. "Seller Plan" shall have the meaning set forth in Section 3.16(a) hereof. "Seller's Proposed Calculations" shall have the meaning set forth in Section 2.7(b) hereof. "Share Consideration" shall have the meaning set forth in Section 2.6(c) hereof. "Solicit" shall have the meaning in Section 7.2(c) hereof. "Split Period" shall mean a Taxable Year that begins on or before the Closing Date and ends after the Closing Date. "Tax" or "Taxes" shall mean all taxes, however denominated, including any interest, penalties or additions to tax or other additional amounts that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all net or gross income taxes, payroll and employee taxes (including withholding, payroll and employment taxes required to be withheld with respect to income paid to employees), withholding taxes, unemployment insurance taxes, social security (or similar) taxes, disability taxes, registration taxes, sales and use taxes, excise taxes, franchise taxes, gross receipts taxes, occupation taxes, premium taxes, windfall profits taxes, environmental taxes, real and personal property taxes, ad valorem taxes, stamp taxes, value added taxes, customs, duties, fees, assessments, charges or obligations of the same or of a similar nature. "Tax Returns" shall mean all returns, declarations, reports, estimates, and information statements and returns required or permitted to be filed relating to Taxes, including but not A-I-5 limited to, original returns and filings, amended returns, claims for refunds, information returns, ruling requests, administrative or judicial filings, accounting method change requests, responses to revenue agents' reports (federal, state or local) and settlement documents, and any schedules or attachments to any of the foregoing. "Taxable Year" shall mean any taxable year or any other taxable period with respect to which any Tax may be imposed under any applicable statute, rule or regulation. "Threshold" shall have the meaning set forth in Section 10.3(a) hereof. "TINA" shall have the meaning set forth in Section 3.19(a) hereof. "Transferred Permits" shall have the meaning set forth in Section 2.1(i) hereof. "Transfer Taxes" shall have the meaning set forth in Section 6.11(c) hereof. "Transaction Documents" shall mean, collectively, this Agreement, the Escrow Agreement, the Lease referred to in Section 6.13 hereof, and the lock-up agreement referred to in Section 9.2(h) hereof. "Underground Tanks" shall have the meaning set forth in Section 2.4(f) hereof. "Valuations" shall have the meaning set forth in Section 6.11(c) hereof. ARTICLE II SALE AND PURCHASE 2.1 Acquired Assets. Subject to the terms and conditions set forth in this Agreement, at the Closing, Seller shall sell, assign, transfer and deliver to Buyer, and Buyer shall purchase, acquire and take assignment and delivery of, all of the assets (other than the Excluded Assets) of the Business (all of which assets are hereinafter referred to collectively as the "Acquired Assets"), including but not limited to the following assets of Seller: (a) all of Seller's right, title and interest in and to the MSSC Interest and in, to and under the Joint Venture Agreement; (b) all of Seller's right, title and interest in and to all machinery, equipment, computers (including the software embodied therein), installations, fixtures, furniture, tools, supplies, booths, displays, materials and other personal property used primarily in connection with the Defense Business as described on Schedule 2.1(b) hereto, which Schedule shall clearly identify the extent of Seller's interest in such property, with such additions and deletions thereto as may arise, as a result of normal business operations consistent with Seller's obligations under Article 5 hereof (the "Equipment"); (c) all of Seller's billed and unbilled accounts receivable, other than the Excluded Accounts Receivable, relating primarily to the Defense Business outstanding on the Closing Date ("Accounts Receivable"); (d) all of Seller's inventories held for use primarily in the Defense Business, including raw materials, work in process (subject to the customers' rights in the case of any A-I-6 government-funded work in process), supplies, samples, prototypes and finished goods (the "Inventories"), to the extent not consumed in the operation of the Defense Business prior to the Closing; (e) all of Seller's rights under all contracts and agreements, including without limitation joint venture agreements, teaming agreements, distribution agreements, service agreements, supply agreements, license agreements, sublicense agreements, personal property leases, and development contracts, including, without limitation the Magnavox Asset Purchase Agreement (subject to Section 10.5 hereof), entered into by a Seller primarily in connection with the Defense Business, listed on Schedule 2.1(e) hereto, but excluding Government Contracts (as defined in Section 3.19(x)(iv) hereof and which are described below) and any such contracts that have been performed in full by Seller prior to Closing (collectively the "Business Contracts"); (f) all of Seller's rights under all Government Contracts (as defined in Section 3.19(x)(iv) hereof), excluding all such contracts that have been performed in full by Seller prior to Closing; (g) all of Seller's rights under purchase orders, in each case to the extent outstanding on the Closing Date and relating primarily to the Defense Business (collectively, the "Purchase Orders"); (h) all of Seller's right, title and interest in and to the Intellectual Property (as defined in Section 3.14(k)) listed on Schedule 2.1(h) hereto together with the good will of the Business; (i) to the extent transferable and permitted by applicable laws and regulations, all of Seller's rights with respect to any licenses, permits, consents, concessions, orders, authorizations, approvals or registrations from, of or with any Governmental Entity and relating primarily to the Defense Business, listed on Schedule 2.1(i) hereto (collectively, "Transferred Permits"); (j) all records of Seller relating primarily to the Defense Business, including, without limitation, property records, shipping records, supplier lists, production records, purchasing and sales records, customer lists, proposals, credit records, accounting records and such other records as Buyer may reasonably require to conduct the Defense Business subsequent to the Closing; (k) the payroll and personnel records of all the Accepting Employees; (l) all sales and promotional literature and other marketing and sales-related materials owned or used by Seller primarily in connection with the Defense Business; (m) to the extent transferable and permitted by applicable laws and regulations, other than the claims listed on Schedule 2.1(m) hereto, all claims, causes of action, rights of recovery and rights of set off of any kind against any third Persons, other than Seller and its Affiliates and Seller's claims against the United States Navy relating to the Wireline Software Licenses, and all rights under and pursuant to all warranties, representations and guaranties made by suppliers of products, materials or equipment or components thereof, pertaining to, arising out of, and inuring to the benefit of Seller and relating primarily to the Defense Business; and A-I-7 (n) all of Seller's cash and marketable securities. 2.2 Excluded Assets. Notwithstanding the foregoing, Seller is not selling and Buyer is not purchasing pursuant to this Agreement, and the term "Acquired Assets" shall not include any assets of Seller that are not specifically used in the Business, including, without limitation, any of the following assets (the "Excluded Assets"): (a) any of Seller's right, title and interest in and to GARC; (b) any of Seller's title to, interest in or rights with respect to any real property other than to the extent set forth in the Lease; (c) any computers not used primarily in the Defense Business, and any software embodied in any such computers, any communication or data network systems not used primarily in the Defense Business; (d) any other assets of Seller not used primarily in the Defense Business and not otherwise described in this Section 2.2, as listed on Schedule 2.2(d) hereto; (e) all corporate records of Seller, all original copies of tax records of Seller and all other records and files not relating primarily to the Defense Business; (f) any insurance policies of Seller or any Plans; (g) Seller's claims against the United States Navy relating to the Wireline Software Licenses; (h) as set forth in Schedule 2.2(h) hereto, a percentage of the proceeds paid by certain customers upon performance of the contracts listed on such Schedule 2.2(h) hereto and such cash equal to the amount as determined in accordance with Schedule 2.2(h), but if and only to the extent specified in Section 2.5(c) hereof (collectively, the "Excluded Proceeds"); and (i) all of Seller's right, title and interest to the securities of Mikros Systems Corporation currently held by Seller. 2.3 Assumed Liabilities. Anything in this Agreement to the contrary notwithstanding, Buyer shall not assume, and shall not be deemed to have assumed, any liability or obligation of any nature, fixed or contingent or known or unknown, of Seller or relating to the MSSC Interest or the operation of the Defense Business prior to the Closing (including without limitation the Excluded Environmental Liabilities referred to below), except that, at the Closing, Buyer shall assume, and agree to pay, perform, fulfill and discharge, the following obligations and liabilities of Seller (collectively, the "Assumed Liabilities"): (a) the liabilities of the Business included or reserved for in the December Balance Sheet, but only to the extent included or reserved for in the Closing Balance Sheet; A-I-8 (b) liabilities incurred by Seller since December 31, 1999 in the ordinary course of the Business consistent with past practice and in accordance with the provisions of this Agreement, but only to the extent included or reserved for in the Closing Balance Sheet; (c) liabilities in respect of the conduct of the Business or ownership of the Acquired Assets subsequent to the Closing Date, including but not limited to liabilities in respect of the Business Contracts and the Government Contracts subsequent to the Closing Date, subject to (i) Seller's receipt of the necessary approvals and/or consents as contemplated by Section 6.2 hereof to transfer, assign and convey such contracts and agreements to Buyer hereunder and (ii) the novation of such contracts and agreements in accordance with Section 6.3 hereof; and (d) liabilities and obligations of Buyer relating to the Accepting Employees to the extent specified in Section 8.3 hereof. 2.4 Excluded Liabilities. Notwithstanding anything to the contrary set forth in this Agreement or otherwise, all liabilities and obligations of any nature, fixed or contingent or known or unknown, of Seller or relating to the MSSC Interest or the operation of the Defense Business prior to the Closing, other than the Assumed Liabilities, shall be retained by Seller, which are referred to herein as the "Excluded Liabilities". The Excluded Liabilities shall include without limitation: (a) all liabilities and obligations of Seller relating to or incurred in connection with the Excluded Assets; (b) all liabilities and obligations of Seller for Taxes attributable to the conduct of the Defense Business and incurred with respect to any Taxable Year on or before the Closing Date or that portion of any Split Period ending on the Closing Date; (c) any liabilities under any Tax sharing or allocation agreement between Seller, MSCC or any Affiliate of Seller, on the one hand, and any other Person, on the other hand; (d) all liabilities and obligations of Seller arising in connection with its operations unrelated to the Business; (e) (i) with respect to Accepting Employees, all liabilities and obligations of Seller (except for accrued vacation benefit days as specified in Section 8.3(c)) relating to such Accepting Employees for the period on or before the Closing Date (the Inactive Employee Hire Date in the case of an Inactive Employee who is an Accepting Employee) and those liabilities and obligations in the period following the Closing Date to the extent specified as being retained by Seller in Section 8.2 and 8.3 hereof, and (ii) with respect to all other Employees, all liabilities and obligations of Seller relating to such other Employees; (f) (i) any alleged or actual liability for the investigation, cleanup or removal of any Hazardous Materials, or for death or injury to person or property, as a result of the generation, transportation, disposal, storage, release, emission or discharge of any Hazardous Materials onsite or offsite and in, on, under, from or onto the Property, past or present, solely to the extent that such liability arises out of any matter or circumstances that occurred or existed on or before the Closing Date and (ii) any leak, discharge or release of Hazardous Materials emanating from any underground storage tanks or their appurtenant pipes, lines, fixtures and other related A-I-9 equipment located on the Property (collectively, the "Underground Tanks") occurring before, on or after the Closing Date unless such leak, discharge or release results from Buyer or any Affiliate of Buyer or any of their respective employees, invitees, agents or contractors piercing or cracking an Underground Tank or pressure testing it without Seller's prior written consent; and (g) any alleged or actual liability and penalties for violations of or noncompliance with Environmental Laws (as defined in Section 3.18(b)(iii)), to the extent that such liability arises out of any matter that occurred or existed on or before the Closing Date and, with respect to the Underground Tanks, on, before or after the Closing Date unless such leak, discharge or release results from Buyer or any Affiliate of Buyer or any of their respective employees, invitees, agents or contractors piercing or cracking an Underground Tank or pressure testing it without Seller's prior written consent (with the obligations and liabilities referred to in paragraph (f) above and this paragraph collectively referred to as the "Excluded Environmental Liabilities"). 2.5 Estimated Balance Sheet and Net Assets. (a) No later than two business days prior to the Closing Date, Seller shall deliver to Buyer a pro forma balance sheet ("Estimated Balance Sheet") that shall fairly present as of such date the Acquired Assets and Assumed Liabilities of the Business being transferred to Buyer hereunder as of the Closing Date. The Estimated Balance Sheet shall be prepared in accordance with generally accepted accounting principles ("GAAP") subject to those specific understandings set forth in Schedule 2.5 hereto, applied on a basis consistent with Seller's December 31, 1999 audited consolidated balance sheet ("December Balance Sheet"). In addition, there shall be no changes to the methodologies and assumptions used to prepare the reserves and contract estimates reflected on the Estimated Balance Sheet as compared to the methodologies and assumptions used to prepare the December Balance Sheet. (b) At Closing, the net assets of the Business as reflected on the Estimated Balance Sheet shall be no less than Five Million One Hundred Thousand Dollars ($5,100,000) ("Net Assets Requirement"). In addition, at Closing, the amount of working capital of the Business shall be no less than the working capital as reflected in Seller's balance sheet dated June 31, 1999. (c) If the Estimated Balance Sheet reflects net assets in excess of the Net Assets Requirement (the amount of such excess referred to herein as the "Excess Net Assets"), the Excluded Proceeds (whose value shall not exceed the value of the Excess Net Assets) shall be retained by Seller and shall constitute Excluded Assets. Buyer shall collect, in the ordinary course of business, all such Excluded Proceeds and, upon receipt, tender all such proceeds promptly to Seller. 2.6 Purchase Price. (a) In consideration of the sale, transfer and assignment by Seller of the Acquired Assets and the agreements of Seller contained herein and in the other Transaction Documents, Buyer shall pay and Seller shall receive from Buyer the Purchase Price set forth in Section 2.6(b) hereof and calculated in accordance with Section 2.6(c) hereof. (b) The purchase price shall be Eleven Million Dollars ($11,000,000) (the "Purchase Price"). A-I-10 (c) The Purchase Price shall be payable by (i) cash consideration equal to Seven Million Dollars ($ 7,000,000) ("Cash Consideration") plus (ii) subject to Section 2.6(d), shares of Common Stock the Market Value (as defined below) of which is Four Million Dollars ($4,000,000) ("Share Consideration"). The "Market Value" of the Share Consideration shall be calculated by multiplying the number of shares of Common Stock constituting the Share Consideration times the Average Market Price. The "Average Market Price" shall mean, with respect to one share of Common Stock, the average closing price for such share as reported on the American Stock Exchange, Inc. ("AMEX") for the ten (10) most recent trading days ending three (3) business days before the Closing Date. (d) Of the Share Consideration, shares of Common Stock the Market Value of which is One Million Dollars ($1,000,000) ("Escrowed Shares") shall be held in escrow, pursuant to an agreement substantially in the form attached hereto as Exhibit 2.6 (the "Escrow Agreement") which Buyer and Seller shall enter into at the Closing. The Escrow Agreement shall provide, among other things, that the Escrowed Shares shall be held in escrow for a period of eighteen (18) months following the Closing and shall be subject to claims by Buyer for any amounts owed to a Buyer Indemnified Party by Seller pursuant to Section 10.1 hereof. 2.7 Purchase Price Adjustment. (a) Within sixty (60) days after the Closing Date, Buyer shall prepare and deliver to Seller a balance sheet of the Acquired Assets and Assumed Liabilities of the Business as of the close of business on the Closing Date ("Closing Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with GAAP applied on a basis consistent with the December Balance Sheet. In addition, there shall be no changes to the methodologies and assumptions used to prepare the reserves and contract estimates reflected on the Closing Balance Sheet as compared to the methodologies and assumptions used to prepare the December Balance Sheet. Buyer shall also prepare a proposed statement of the net assets of the Business to be transferred to Buyer hereunder using the procedures used in the preparation of the December Balance Sheet ("Buyer's Proposed Calculations"). (b) Within thirty (30) days after receipt of the Closing Balance Sheet, Seller shall notify Buyer of its agreement or disagreement with the Closing Balance Sheet and the accuracy of any of Buyer's Proposed Calculations; provided, that Seller may only dispute the Closing Balance Sheet and Buyer's Proposed Calculations to the extent that they are inaccurate or deviate from the requirements of paragraph (a) above. During such period, Buyer shall afford Seller and its representatives reasonable access to any of the Business' books, records and work papers, personnel, facilities and accountants necessary to enable Seller and its representatives to review the Closing Balance Sheet and Buyer's Proposed Calculations. If Seller disputes any aspect of the Closing Balance Sheet or the amount of any of the Buyer's Proposed Calculations, then Seller shall have the right to direct its independent accountants, at Seller's expense, to review and test the Closing Balance Sheet. Seller's representatives or accountants shall complete their review and test within thirty (30) days after the date Seller disputes Buyer's Proposed Calculations. If Seller and its independent accountants, after such review and test, still disagree with Buyer's Proposed Calculations, and Buyer does not accept Seller's proposed alternative calculation (the "Seller's Proposed Calculations"), then, within thirty (30) days after the date Buyer disputes Seller's Proposed Calculations, Seller and Buyer shall select a third nationally recognized independent accounting firm (the "Independent Accounting Firm") to resolve the remaining disputed items (the "Remaining Disputed Items") by conducting its own review and test of the A-I-11 Closing Balance Sheet and thereafter selecting either Seller's Proposed Calculation of the Remaining Disputed Items or Buyer's Proposed Calculation of the Remaining Disputed Items or an amount in between the two. The Independent Accounting Firm shall be instructed (i) that the scope of its review shall be limited solely to the Remaining Disputed Items, (ii) that it shall accept the Closing Balance Sheet and Buyer's Proposed Calculations except to the extent that they are inaccurate or deviate from the requirements of paragraph (a) above, and (iii) that it is to use every reasonable effort to complete such assignment and deliver copies of such opinion and, if required, revised Closing Balance Sheet to Buyer and Seller within thirty (30) days following the date such Remaining Disputed Items are referred to it. Buyer and Seller agree that they shall be bound by the determination of the Remaining Disputed Items by the Independent Accounting Firm. The fees and expenses of the Independent Accounting Firm shall be paid jointly by Buyer and Seller. (c) Upon the determination pursuant to paragraph (b) above as to the definitive Closing Balance Sheet and the net assets of the Business to be transferred to Buyer hereunder as of the Closing Date ("Closing Net Assets"), the Purchase Price shall be either (i) increased by the amount, if any, by which the Closing Net Assets is greater than the Net Assets Requirement or (ii) decreased by the amount, if any, by which the amount of the Closing Net Assets is less than the Net Assets Requirement (the "Adjustment"); provided, however, in no event will any upward Adjustment exceed Five Hundred Thousand Dollars ($500,000). If the Purchase Price is increased, Buyer shall pay such amount to Seller, and if the Purchase Price is decreased, Seller shall pay such amount to Buyer. Any such payment shall be made in cash or same day funds within ten (10) days after the determination of the Adjustment pursuant to paragraph (b) above. Any such payment shall bear interest from the Closing Date to the date preceding payment at a rate equal to the "Prime Rate" as set forth from time to time in The Wall Street Journal "Money Rates" column from the Closing Date to the date preceding payment. 2.8 Closing. The sale and purchase of the Acquired Assets hereunder shall occur at a closing (the "Closing") to be held at the offices of Arnold & Porter, at 399 Park Avenue, New York, New York on June 14, 2000 or at such other place and time as the parties hereto may agree (the date of the Closing being referred to herein as the "Closing Date"). 2.9 Transactions at Closing. (a) At the Closing, Seller shall deliver or shall cause to be delivered to Buyer the following: (i) all such bills of sale, certificates of title and other instruments of assignment or transfer with respect to the Acquired Assets as Buyer may reasonably request and as may be necessary to vest in Buyer all of the Seller's right, title and interest in and to the Acquired Assets; (ii) the Escrow Agreement; (iii) the Lease; (iv) the officer's certificate referred to in Section 9.2(f) hereof; (v) the legal opinion referred to in Section 9.2(g) hereof; A-I-12 (vi) the lock-up agreement referred to in Section 9.2(h) hereof; (vii) all third party consents required to consummate the transactions contemplated hereby as referred to in Section 9.2(d) hereof; and (viii) any Schedules (supplemented as necessary) required to be delivered by Seller to Buyer under the terms of this Agreement. (b) At the Closing, Buyer shall deliver or shall cause to be delivered to Seller the following: (i) the Cash Consideration by wire transfer to Seller to an account designated by Seller two (2) business days prior to the Closing Date; (ii) the stock certificates representing the Share Consideration less the Escrowed Shares, duly endorsed in blank, free and clear of all Encumbrances; (iii) the Escrow Agreement; (iv) the Lease; (v) the officer's certificate referred to in Section 9.3(f) hereof; (vi) the legal opinion referred to in Section 9.3(g) hereof; (vii) all third party consents required to consummate the transactions contemplated hereby as referred to in Section 9.3(d); (viii) any Schedules (supplemented as necessary) required to be delivered by Buyer to Seller under the terms of this Agreement; and (ix) all such instruments of assumption with respect to the Assumed Liabilities as Seller may reasonably request. (c) At the Closing or as promptly as practicable thereafter and subject to Buyer having met applicable security requirements under applicable law, Seller shall deliver all such keys, locks, safe combinations, security system codes and other similar items as Seller possesses for Buyer to obtain full occupation and control of the Acquired Assets and access to the premises subject to the Lease. A-I-13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: 3.1 Organization and Qualification. Each of Seller and MSSC is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation. Seller has all requisite corporate power and authority and MSSC has all partnership authority to own, lease and operate its properties and to carry on its business as it is now being conducted, except for such failures that could not reasonably be expected to have, individually or in the aggregate, a GAC Material Adverse Effect. Each of Seller and MSSC is duly qualified to conduct its business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated, or the nature of its activities, makes such qualification necessary, except for such failures that could not reasonably be expected to have, individually or in the aggregate, a GAC Material Adverse Effect. Neither Seller nor MSSC is in violation of any of the provisions of its Certificate of Incorporation (or other applicable charter document) or its By-Laws (or other applicable organizational document). 3.2 Authority Relative to this Agreement. Seller has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Acquisition and the other transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Seller, and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller and, assuming the due authorization, execution and delivery hereof by Buyer, constitutes a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except as such validity, binding effect or enforcement may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally or by equitable principles relating to the availability of remedies. 3.3 No Violations, etc. (a) Other than the filings, permits, authorizations, consents and approvals or waivers thereof that are identified in Section 3.3(b) below and that have been duly made or obtained as contemplated herein, and except as listed in Schedule 3.3 hereto, neither the execution and delivery of this Agreement by Seller nor the consummation of the transactions contemplated hereby nor compliance by Seller with any of the provisions hereof will (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or suspension of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Encumbrance upon any of the properties or assets of Seller or MSSC under, any of the terms, conditions or provisions of (x) their respective charters or by-laws (or other applicable organizational document), (y) any note, bond, mortgage, debenture, indenture or deed of trust or (z) any license, lease, contract, agreement or other instrument or obligation to which Seller or MSSC is a party or to which they or any of their respective properties or assets A-I-14 may be subject; or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Seller or MSSC or any of their respective properties or assets, except, in the case of clause (i) above, for any such violations, conflicts, breaches, defaults or other alterations or occurrences that could not have, individually or in the aggregate, a GAC Material Adverse Effect and would not, in any material respect, prevent or delay or otherwise prevent Seller from performing its obligations hereunder. (b) Except as set forth on Schedule 3.3 hereto, no filing or registration with, no notification to and no permit, authorization, consent or approval of any Governmental Entity is required of Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except such other filings, registrations, notifications, permits, authorizations, consents or approvals the failure of which to be obtained, made or given would not, individually or in the aggregate, either have a GAC Material Adverse Effect or materially impair or delay the ability of Seller to consummate the transactions contemplated hereby. (c) Seller and MSSC are not in violation of or default under, except as set forth in Schedule 3.3 hereto, (i) any note, bond, mortgage, debenture, indenture or deed of trust; or (ii) any license, lease, contract, agreement or other instrument or obligation to which Seller or any of its subsidiaries or MSSC is a party or to which they or any of their respective properties or assets may be subject, except, in the case of clauses (i) and (ii) above, for such violations or defaults that would not, individually or in the aggregate, either reasonably be expected to have a GAC Material Adverse Effect or materially impair the ability of Seller to consummate the transactions contemplated hereby. 3.4 Absence of Changes or Events. (a) Except as set forth on Schedule 3.4(a) hereto, since December 31, 1999, Seller and MSSC have conducted their respective businesses in the ordinary course consistent with their past practices and have not incurred any material liability, except in the ordinary course of their businesses consistent with their past practices. (b) Except as specifically described in Schedule 3.4(b) hereto and other than the sale or distribution of Seller's interest in DGH (including amounts owed to Seller by DGH), since December 31, 1999 there has not been (i) any change, or any event involving a prospective change, in the business, financial condition or results of operations of Seller or MSSC which has had, or could have, individually or in the aggregate, a GAC Material Adverse Effect; (ii) any damage, destruction or loss, whether covered by insurance or not, which has had, or could have, individually or in the aggregate, a GAC Material Adverse Effect; (iii) any entry into or termination of any material commitment, contract, agreement or transaction (including, without limitation, any material borrowing or capital expenditure or sale or other disposition of any material asset or assets) of or involving Seller and MSSC, other than this Agreement or in the ordinary course of business; (iv) any redemption, repurchase or other acquisition for value of their respective capital stock by Seller, or any issuance of capital stock of Seller or MSSC or of securities convertible into or rights to acquire any such capital stock or any dividend or distribution declared, set aside, or paid on capital stock of Seller or MSSC; (v) any transfer of or right granted under any material lease, license, agreement or Intellectual Property of Seller or MSSC or any liens or other security interests in any Intellectual Property of Seller or MSSC; (vi) any sale or other disposition of any asset of Seller or MSSC or any Encumbrance (or any satisfaction and discharge thereof) on any A-I-15 asset of Seller or MSSC, other than in the ordinary course of business, or any agreement relating to any of the foregoing; (vii) any default or breach by Seller or MSSC in any material respect under any contract, license or permit; (viii) any general wage or salary increase or any increase in compensation payable or to become payable to any executive officers or management employees of Seller or MSSC or any entry into any employment contract with any executive officer or key salaried employee of Seller or MSSC; and (ix) any change in the accounting methods of Seller or MSSC. 3.5 Accounts Receivable. Except as specifically described in Schedule 3.5 hereto, all Accounts Receivable reflected in the Estimated Balance Sheet will represent transactions in the ordinary course of business (including without limitation recoverable costs and accrued profits on progress completed but not billed under Government Contracts (as defined in Section 3.19 below) or other contracts) and will be current and collectible net of any reserves shown on such Estimated Balance Sheet (which reserves will be adequate and will be calculated consistent with past practice). Schedule 3.5 hereto sets forth as of May 31, 2000, a complete and correct list of all the billed and unbilled Accounts Receivable, as well as (i) the aging of each Accounts Receivable in excess of $25,000; (ii) each Accounts Receivable in excess of $25,000; (iii) each Accounts Receivable in an amount in excess of $25,000 that is more than ninety (90) days outstanding; and (iv) each Accounts Receivable from a person or entity from whom the aggregate of such receivables exceeds $25,000. Seller shall provide to Buyer two (2) business days prior to the Closing, a revised Schedule 3.5 updated as of such date. 3.6 Litigation. Except as set forth in Schedule 3.6 hereto, there is no (i) claim, action, suit or proceeding pending or, to the best of Seller's Knowledge, threatened against or relating to Seller or MSSC before any Government Entity; or (ii) outstanding judgment, order, writ, injunction or decree, or application, request or motion therefor, of any Government Entity in a proceeding, seeking unspecified damages, damages in excess of $100,000 or any injunctive or other equitable relief to which Seller or MSSC or any of their respective assets is a party. 3.7 Compliance with Law. (a) Except as set forth in Schedule 3.7 hereto, neither Seller nor MSSC has violated or failed to comply with any applicable statute, law, ordinance, regulation, rule or order (including without limitation any U.S. export control statutes, regulations and Executive Orders) of any Governmental Entity or any judgment, decree or order of any Government Entity, applicable to the Defense Business or the business of MSSC or the operations thereof by Seller or MSSC, as the case may be, except for such violations, if any, that could not have, individually or in the aggregate, a GAC Material Adverse Effect. (b) Seller and MSSC have all permits, licenses and franchises from Governmental Entities required to conduct the Defense Business and the business of MSSC as now conducted, except for any permits, licenses, franchises, the absence of which could not have, individually or in the aggregate, a GAC Material Adverse Effect. A-I-16 3.8 Title to Assets. (a) Seller owns or has the right to transfer all of the Acquired Assets. Seller has, and at and as of the Closing, Seller will convey to Buyer, good and marketable title to the respective Acquired Assets owned by it, free and clear of all Encumbrances except for Permitted Encumbrances. (b) Except as set forth on Schedule 3.8 hereto, the Acquired Assets constitute all of the assets and rights necessary and sufficient to conduct the Defense Business as currently conducted, as of the Closing, other than the Excluded Assets. 3.9 MSSC Interest and Joint Venture Agreement. (a) Since acquiring its MSSC Interest and the rights under the Joint Venture Agreement, Seller has not assigned, transferred or conveyed the MSSC Interest or its rights under the Joint Venture Agreement, in whole or in part, nor is the MSSC Interest or Seller's rights under the Joint Venture Agreement subject to any Encumbrance. (b) Seller has the right, and as of the date hereof shall have all the necessary consents of third Persons, to sell, assign, transfer, and deliver the MSSC Interest and all of Seller's rights under the Joint Venture Agreement to Buyer without (i) violating any contract, agreement or arrangement to which it is a party or by which it or its assets may be bound and (ii) the imposition of any Encumbrances arising from such transfer on the MSSC Interest. (c) The business of MSSC as currently conducted complies with the terms of the Joint Venture Agreement. 3.10 Equipment and Property. (a) Schedule 2.1(b) hereto contains a true and complete list of all Equipment owned or leased by Seller in connection with the Business. With respect to Equipment leased by Seller, as lessee, all leases, conditional sale contracts, franchises or licenses pursuant to which Seller may hold or use (or permit others to hold or use) such Equipment are as of the date of this Agreement valid and in full force and effect, and there is not under any of such instruments any existing default of Seller or, to Seller's Knowledge, of any other party thereto, or event of default of Seller or, to Seller's Knowledge, of any other party thereto or to Seller's Knowledge event which with notice or lapse of time or both would constitute such a default, except for any defaults that would not have a GAC Material Adverse Effect. Except as disclosed in Schedule 2.1(b) hereto, Seller owns, leases or has the legal right to use the Equipment, free and clear of all Encumbrances. (b) The Equipment is in good working condition, ordinary wear and tear excepted, have been properly maintained in all material respects, are suitable in all material respects for the purposes for which they are used, and conform in all material respects to the requirements of all laws, ordinances and regulations applicable to their use and ownership or lease by Seller. (c) The Property and the buildings and structures thereon to be leased to Buyer pursuant to the Lease are suitable in all material respects and properly zoned for the purpose for which they are currently used, have been properly maintained, and there are no material A-I-17 outstanding work orders with respect to any maintenance, repair or alterations to be performed thereon. 3.11 Inventories. Schedule 3.11 hereto identifies all locations at which Inventories having an aggregate value in excess of $100,000 are located as of the date hereof. Except as set forth on such Schedule, there are no Encumbrances which singly or in the aggregate would materially impair Buyer's use of its Inventory. 3.12 Business Contracts. (a) Schedule 2.1(e) hereto lists all the Business Contracts to be transferred to Buyer hereunder. (b) Each of the Business Contracts was duly executed and delivered by Seller and each constitutes valid and legally binding obligations of Seller, and is enforceable by Seller in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency and by other laws and regulation affecting creditor's rights or by general principles of equity. (c) Seller is in compliance in all material respects with the terms and conditions of the applicable Business Contract and all laws, rules and regulations applicable thereto. To the extent Seller is not in compliance with any such law, rule or regulation such non-compliance has not resulted and will not result in a GAC Material Adverse Effect. (d) Except as set forth on Schedule 3.12(d) hereto, to Seller's Knowledge, no event of default (or term of like intent) has occurred under any Business Contract, and Seller has not received or sent formal written notice that an event has occurred which, with the lapse of time or the giving of notice or both, would constitute an event of default (or term of like intent) under the terms of any Business Contract. (e) Except as set forth on Schedule 3.12(e) hereto, Seller has not received written notice from any Person that any Business Contract has been, or is to be, terminated, or that any Business Contract has been, or is to be, terminated prior to its stated term nor, to Seller's Knowledge, does there exist any basis for a termination of any Business Contract. (f) Except as set forth on Schedule 3.12(f) hereto, no consent of any third Person is required to sell, assign and transfer any Business Contract to Buyer hereunder. 3.13 Transferred Permits Schedule 2.1(i) hereto lists all Transferred Permits used in connection with the Defense Business and transferable to the Buyer hereunder. The Transferred Permits are in full force and effect and no suspension or cancellation of any such Transferred Permit has been threatened. 3.14 Intellectual Property. (a) Schedule 2.1(h) hereto lists all of the Intellectual Property to be transferred to Buyer hereunder. A-I-18 (b) Seller and MSSC, as the case may be, own or have the right to use all Intellectual Property used in the conduct of the Defense Business and the business of MSSC. To Seller's Knowledge, none of the Intellectual Property used in the conduct of the Defense Business or the business of MSSC infringes or violates the intellectual property rights of any third parties. Consummation of the transactions contemplated hereby shall not impair any rights or impose any obligations with respect to Intellectual Property used in the conduct of the Defense Business and the businesses of MSSC. (c) There is no pending or, to Seller's Knowledge, threatened (or unasserted but considered probable of assertion) claim against Seller or MSSC, nor has Seller or MSSC received any notice, (i) asserting that any of the Intellectual Property, or that the past or present conduct of Seller's or MSSC's business, infringes or violates the intellectual property rights of any third parties; (ii) asserting that any third parties have any rights to use any of the Intellectual Property except for Licensed Intellectual Property licensed to Seller or MSSC on a nonexclusive basis; or (iii) which could, if adversely determined against Seller or MSSC, adversely affect the ability of Seller or MSSC to use any of the Intellectual Property upon consummation of the transactions contemplated hereby or thereafter, and to Seller's Knowledge, there is no basis for any claim of the foregoing types. (d) Neither Seller nor MSSC has given notice to any third parties asserting infringement by such third parties of any of the Intellectual Property, and to Seller's Knowledge, there is no basis for any such claim against a third party. (e) All of the Licensed Intellectual Property is licensed pursuant to valid written agreements (the "License Agreements"), enforceable in accordance with their terms except as such enforceability may be limited by bankruptcy, insolvency and other laws and regulations affecting creditors' rights and by general principles of equity. (f) Neither Seller nor MSSC is subject to any bars or other restrictions with respect to its rights to utilize the Intellectual Property, except for the terms and conditions of the License Agreements and, to Seller's Knowledge, no bars or other restrictions on such rights will be created by the consummation of the transactions contemplated herein. (g) There is no pending or, to Seller's Knowledge, threatened claim that Seller, MSSC or any licensor is in breach of any of the License Agreements and, to Seller's Knowledge, no basis for any such claim exists. (h) There is no pending or, to Seller's Knowledge, threatened claim against Seller, MSSC or the licensor of any Licensed Intellectual Property asserting that any of the Licensed Intellectual Property infringes or conflicts with the rights of third parties, and to Seller's Knowledge, no basis for any such claim exists. (i) Each of Seller and MSSC has performed all of the obligations required to be performed by it, and is not in default under any agreement relating to any Intellectual Property. (j) Schedule 3.14(j) hereto identifies each trade name, fictitious business name, or other similar name under which Seller or MSSC has conducted any part of its business during the five (5) years preceding the date hereof. A-I-19 (k) For purposes of this Section 3.14 and Section 3.4 above: (i) "Copyrights" shall mean all registered and unregistered copyrights and applications for copyright registration in every country of the world; (ii) "Intellectual Property" shall mean Patents, Trademarks, Copyrights and Know-How, including Licensed Intellectual Property; (iii) "Know-How" shall mean technical information, trade secrets, inventions, processes, specifications, manuals, reports, documents, drawings, procedures, processes, devices, software and source code, software documentation, flow charts, recording media, research and development data, notebooks, marketing information, customer lists, database rights, other tangible embodiments of information and proprietary rights other than Copyrights Patents, and Trademarks, in every country of the world; (iv) "Licensed Intellectual Property" shall mean all intellectual property owned by third parties and licensed to Seller or MSSC; (v) "Patents" shall mean all utility and design patents and patent applications (including any divisions, continuations, continuations-in-part, reexaminations, extensions, renewals or reissues thereof), design, design registrations, utility models and any similar rights and applications therefor, in every country of the world; and (vi) "Trademarks" shall mean all registered and unregistered trademarks, service marks, trade dress, trade names, fictitious business names or other similar names and applications for registration of any of the foregoing, in every country of the world. 3.15 Taxes. Except as set forth in Schedule 3.15 hereto: (i) all Tax Returns required to be filed by Seller, MSSC or any Affiliate of Seller have been or will be timely filed; (ii) all Tax Returns are true, accurate, correct and complete in all material respects; (iii) all Taxes due and payable (for Taxable Years ending on or before the Closing Date and for that portion of any Split Period ending on the Closing Date) by Seller, MSSC or any Affiliate of Seller have been or will be paid in full on a timely basis, other than such Taxes as are being contested in good faith by appropriate proceedings and/or are adequately reserved for in accordance with generally accepted accounting principles; (iv) none of Seller, MSSC or any Affiliate of Seller is currently the beneficiary of any extension of time to file any Tax Return or pay any Tax; (iv) none of Seller, MSSC or any Affiliate of Seller has received any written notice of deficiency or assessment from any Federal, state, local or foreign taxing authority with respect to liability for Taxes which has not been paid or settled; (v) no examination, inquiry or investigation of Seller, MSSC or any Affiliate of Seller is pending or, to Seller's Knowledge, threatened for any amount of Tax by any taxing authority; (vi) no claim has been made by an authority in a jurisdiction where any of Seller, MSSC or an Affiliate of Seller does not file Tax Returns that it is or may be subject to taxation by that jurisdiction; (vii) other than liens for Taxes not yet due, no Tax liens A-I-20 have been filed with respect to any Taxes; (viii) Seller and MSSC will not make any voluntary adjustment by reason of a change in their accounting methods for any period prior to the Closing that would affect the taxable income or deductions of Seller or MSSC for any period ending after the Closing Date; (ix) each of Seller, MSCC and any Affiliate of Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any shareholder, employee, creditor, independent contractor or other third party; (x) neither Seller nor MSCC has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency; (xi) none of Seller, MSCC or any Affiliate of Seller has made any payments, is obligated to make any payments or is a party to any agreement that could obligate it to make any payments that will not be deductible by reason of Section 280G of the Code (or any corresponding provision of any state, local or foreign income Tax law); (xii) none of the Acquired Assets directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code; (xiii) none of the Acquired Assets is "tax-exempt use property" within the meaning of Section 168(h) of the Code; and (xiv) Seller and MSSC are not parties to any Tax sharing or Tax matters agreement other than the Joint Venture Agreement. 3.16 Employee Benefit Plans. (a) Schedule 3.16(a) hereto contains a true and complete list of each material bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance pay, vacation, worker's compensation, medical, life or other material insurance, profit-sharing, or pension plan, program, agreement or arrangement, and each other material employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to or required to be contributed to by Seller or MSSC or by any trade or business, whether or not incorporated, that together with Seller or MSSC would be deemed a "single employer" under Section 414 of the Code (an "ERISA Affiliate") for the benefit of any employee or director or former employee or former director of Seller or MSSC whether formal or informal and whether legally binding or not (the "Plans"). Schedule 3.16(a) hereto identifies each Plan that is sponsored, maintained or contributed to or required to be contributed to by Seller or any ERISA Affiliate thereof (each a "Seller Plan"). With respect to each Plan, Schedule 3.16(a) hereto identifies each ERISA Affiliate that sponsors, maintains, or contributes to the Plan and whether the Plan covers or provides benefits to current or former employees or directors of any ERISA Affiliate (and if so, the identity of each such ERISA Affiliate). Except as may be required by law, neither Seller nor MSSC has any formal plan or commitment, whether legally binding or not, to create any additional plan or modify or change any existing Plan that would affect any employee or director or former employee or former director of Seller or MSSC. (b) With respect to each of the Plans, Seller has heretofore delivered to Buyer true and complete copies of each of the following documents: (i) the Plan and related documents (including all amendments thereto); (ii) the two most recent annual reports, actuarial reports, and financial statements, if any; (iii) the most recent Summary Plan Description, together with each Summary of Material Modifications, required under The Employee Retirement Income Security Act of 1974, as amended ("ERISA") with respect to such Plan, and all material employee communications made within the last two (2) years relating to such Plan; and (iv) the most recent determination letter received from the IRS with respect to each Plan that is intended to be qualified under the Code and all material communications to or from the IRS or any other governmental or regulatory authority relating to each Plan. A-I-21 (c) Neither Seller, nor MSSC nor any ERISA Affiliate now sponsors, maintains or contributes to, or is required to contribute to, nor has any of them heretofore ever sponsored, maintained, contributed to, or been required to contribute to, any Plan or other plan, program, agreement or arrangement that is or was (i) subject to the provisions of Title IV of ERISA, (ii) subject to the provisions of Section 412 of the Code, (iii) a "multiemployer plan" (as defined in Section 3(37) of ERISA, (iv) a "multiple employer welfare arrangement" (as defined in Section 3(40) of ERISA), or (v) a single employer plan having two or more contributing sponsors, at least two of whom are not under common control, within the meaning of Section 4063(a) of ERISA. (d) With respect to any Plan adopted by Buyer pursuant to Section 3.16(f)(ii) hereof, neither Seller nor MSSC nor any ERISA Affiliate nor any of such Plans, any trust created thereunder, any trustee or administrator thereof has engaged in a transaction in connection with which Seller or MSSC, any of such Plans, any such trust, or any trustee or administrator thereof, could, directly or indirectly, be subject to a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA, a tax imposed pursuant to Section 4975, 4976, 4980B or 4980D of the Code, or any other material liability. (e) With respect to any Plan adopted by Buyer pursuant to Section 3.16(f)(ii) hereof, full payment has been made, or will be made in accordance with Section 404(a)(6) of the Code, of all amounts that Seller, MSSC or any ERISA Affiliate is required to pay under the terms of such Plans and the applicable contracts of employment, and all such amounts properly accrued through the Closing Date will be paid on or prior to the Closing Date or will be properly recorded on Seller's financial statements. (f) Except to the extent that (i) Buyer assumes responsibility for accrued vacation benefit days not taken by, or otherwise not paid by Seller to, an Accepting Employee prior to the Closing under Section 8.3(c) hereof, or (ii) Buyer specifically acts on its own initiative to adopt or maintain one or more of the Plans in its entirety (Seller acknowledges that, except to the extent provided in Section 8.3(c) hereof, Buyer is under no obligation of any kind whatsoever to adopt or maintain any of such Plans), and then except with respect to the Plan or Plans so adopted or maintained, neither the consummation of the transactions contemplated by this Agreement nor the engagement by Buyer of any present or former employee or present of former director of Seller, MSSC or any ERISA Affiliate will impose upon Buyer any liability of any nature with respect to any Plan. (g) With respect to any Plan adopted by Buyer pursuant to Section 3.16(f)(ii) hereof, each of such Plans that is intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and a favorable determination to that effect has been issued by the IRS with respect to each such Plan. Each of the Plans that is intended to satisfy the requirements of Section 125 or 501(c)(9) of the Code satisfies such requirements. Each of the Plans has been operated and administered in all material respects in accordance with its terms and all applicable laws, including but not limited to ERISA and the Code. (h) To Seller's Knowledge, each person who performs services for Seller or MSSC has been, and is, properly classified by Seller or MSSC as an employee or independent contractor. (i) With respect to any Plan adopted by Buyer pursuant to Section 3.16(f)(ii) hereof, there are no material claims pending, or, to Seller's Knowledge, threatened or anticipated A-I-22 (other than routine claims for benefits) against any such Plan, the assets of any such Plan or against Seller or MSSC or any ERISA Affiliate with respect to any such Plan. There is no judgment, decree, injunction, rule or order of any court, governmental body, commission, agency or arbitrator outstanding against or in favor of any such Plan or any fiduciary thereof (other than rules of general applicability). There are no pending or, to Seller's Knowledge, threatened audits or investigations by any governmental body, commission or agency involving any such Plan. (j) Except as set forth in Schedule 3.16(j) hereto, no Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees or directors after retirement or other termination of service (other than (i) coverage mandated by applicable law; (ii) death benefit or retirement benefits under any "employee pension plan," as that term is defined in Section 3(2) of ERISA; (iii) deferred compensation benefits accrued as liabilities on the books of Seller, MSSC or the ERISA Affiliates; or (iv) benefits, the full cost of which is borne by the current or former employee or director (or his beneficiary)). (k) With respect to any Plan adopted by Buyer pursuant to Section 3.16(f)(ii) hereof, except as set forth in Schedule 3.16(k) hereto, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or director of Seller or MSSC to severance pay, unemployment compensation, termination or any similar payment; or (ii) accelerate the time of payment or vesting, or increase the amount, of any compensation due to any such current or former employee or director; or (iii) renew or extend the term of any agreement regarding compensation for any such current or former employee or director. 3.17 Employees. (a) Schedule 3.17(a) hereto sets forth a complete list of the Employees as of the date hereof and the information required by Section 8.1 and all such information is true and correct as of the date hereof. None of the Employees is covered by any union, collective bargaining or similar agreement in connection with his or her employment with Seller. MSSC does not have, nor has it ever had or intend to have prior to the Closing, any employees. (b) Except for the Employees listed on Schedule 3.17(b) hereto, all Employees are employees "at will" whose employment is terminable without liability to Seller therefor (other than for benefits under Seller's applicable severance policy and other employee benefit plans and programs and benefits required to be provided under applicable law) and there are no employment contracts entered into between Seller and any of the Employees. All Employees are authorized to work in accordance with the Immigration and Reform Control Act. (c) Except as disclosed on Schedule 3.17(c) hereto, no Employee has received a written warning from Seller within the last twelve (12) months or is under any internal, or to Seller's Knowledge, any external, investigation in connection with their employment. (d) Seller has complied in all material respects with the requirements of Executive Order 11246. (e) Except as set forth on Schedule 3.17(e) hereto, there are no contracts, other agreements or offer letters providing Employees with stay bonuses, sign on bonuses, commissions, compensation, special monetary or vacation awards, non-compete provisions or agreements. A-I-23 (f) Seller is in compliance in all material respects with all applicable laws relating to employment and employment practices, terms and conditions of employment and wages and hours. To Seller's Knowledge, there is no labor strike, slowdown or work stoppage pending or threatened by the Employees against or affecting the Defense Business or the business of MSSC. To Seller's Knowledge, no petition for certification has been filed and is pending before the National Labor Relations Board with respect to any Employees. 3.18 Environmental Matters. (a) Except as set forth in Schedule 3.18 hereto: (i) Seller and MSSC have obtained all material Environmental Permits and all material licenses and other authorizations and have made all registrations and given all notifications that are required under any applicable Environmental Law, except where such failure could not, individually or in the aggregate, have a GAC Material Adverse Effect. (ii) There is no Environmental Claim pending against Seller, GARC or MSSC under an Environmental Law. (iii) Seller and MSSC are in compliance with all material terms and conditions of their Environmental Permits, and are in compliance with all applicable Environmental Laws. (iv) Seller and MSSC did not, in any material respect, generate, treat, store, transport, discharge, dispose of or release any Hazardous Materials on or from any property now or previously owned, leased or used by Seller or MSSC. (v) Seller has disclosed to the insurer listed on Schedule 6.14 hereto prior to obtaining the Insurance Policy all Hazardous Materials and any other environmental conditions that affect or have the potential to affect the Property, except to the extent that Seller's failure to disclose any such facts would not provide such insurer with any grounds to deny, exclude from or defend against providing coverage or other benefits to the insured under the Insurance Policy. (b) For purposes of this Section 3.18: (i) "Environment" shall mean any surface water, ground water, or drinking water supply, land surface or subsurface strata, or ambient air and includes, without limitation, any indoor location; (ii) "Environmental Claim" means any written notice or written claim by any person alleging potential liability (including, without limitation, potential liability for investigator costs, cleanup costs, governmental costs, or harm, injuries or damages to any person, property or natural resources, and any fines or penalties) arising out of, based upon, resulting from or relating to (1) the emission, discharge, disposal or other release or threatened release in or into A-I-24 the Environment of any Hazardous Materials or (2) circumstances forming the basis of any violation, or alleged violation, of any applicable Environmental Law; (iii) "Environmental Laws" means any national, supranational, federal, state, and local laws, codes, and regulations as now or previously in effect relating to pollution, the protection of human health, the protection of the Environment or the emission, discharge, disposal or other release or threatened release of Hazardous Materials in or into the Environment; and (iv) "Environmental Permit" shall mean a permit, identification number, license or other written authorization required under any applicable Environmental Law. 3.19 Government Contracts. (a) Schedule 3.19 hereto constitutes a complete and accurate record of (i) all of Seller's past and present Government Contracts that were in force since June 30, 1999; (ii) all of Seller's Government Contracts currently in force; (iii) all of Seller's outstanding quotations, bids and proposals for Government Contracts; and (iv) to Seller's Knowledge, all of Seller's Government Contracts as to which Seller is currently or is likely to experience substantial cost, schedule, technical or quality problems that could result in a claim against Seller (or its successors in interest) by the Government, a prime contractor or a higher-tier subcontractor. Seller has made available to Buyer true and complete copies of all Government Contracts listed in Schedule 3.19 hereto. Except as described in Schedule 3.19 hereto, all of Seller's Government Contracts were legally awarded, are binding on Seller and to Seller's Knowledge the other parties thereto, and are in full force and effect. Such Government Contracts (or, to Seller's Knowledge, the applicable Prime Government Contracts under which such Government Contracts were awarded) are not currently the subject of bid protest or analogous proceedings in any agency, administrative or judicial forum, and to Seller's Knowledge no such Government Contracts (or, where applicable, the applicable Prime Government Contracts under which such Government Contracts were awarded) are reasonably likely to become the subject of bid protest or analogous proceedings. (b) Seller has complied with all statutory and regulatory requirements, including, but not limited to, the False Claims Act ("FCA"), the Truth in Negotiations Act ("TINA"), the Federal Acquisition Regulation ("FAR"), the FAR Cost Principles and the Cost Accounting Standards, where and as applicable to each of Seller's Government Contracts and each of Seller's quotations, bids and proposals for Government Contracts. (c) Seller has complied in all material respects with all terms, conditions, clauses, provisions and specifications of Seller's Government Contracts, whether incorporated expressly, by reference, or by operation of law. (d) To Seller's Knowledge all facts set forth in or acknowledged by any representations, certifications or disclosure schedules made or submitted by or on behalf of Seller in connection with each of Seller's Government Contracts and each of Seller's quotations, bids and proposals for Government Contracts were current, accurate and complete as of the date of submission. (e) Seller has complied in all material respects with all applicable representations, certifications and disclosure requirements under each of Seller's Government Contracts and each of Seller's quotations, bids and proposals for Government Contracts. A-I-25 (f) Seller has developed and implemented a government contracts compliance program that includes corporate policies and procedures to ensure compliance with applicable government procurement statutes, regulations and contract requirements, except where the failure to do so could not reasonably be expected to have a GAC Material Adverse Effect. Seller has delivered to Buyer a true and complete copy of such compliance program. (g) With respect to Seller's Government Contracts, neither the Government nor any prime contractor or higher-tier subcontractor under a Government Contract nor any other person has notified Seller, in writing or to Seller's Knowledge, orally, of any actual or alleged violation or breach of any statute, regulation, representation, certification or contract term, condition, clause, provision or specification. (h) To Seller's Knowledge, no facts exist which could give rise to a claim for price adjustment under any of Seller's Government Contracts under the TINA or to any other request for a material reduction in the price of any of Seller's Government Contracts. (i) Except as described in Schedule 3.19(i) hereto, Seller has received no show cause, cure, deficiency, default or similar notice relating to its outstanding Government Contracts, and none of Seller's Government Contracts has been terminated for default. Except as described in Schedule 3.19(i) hereto, Seller has received no notice of an intent to terminate any of Seller's contracts for convenience or of any consideration of such termination. (j) Except as described in Schedule 3.19(j) hereto, there are no outstanding disputes or claims against Seller relating to Seller's Government Contracts and involving either the Government, any prime contractor, any higher-tier subcontractor or any third party, and to Seller's Knowledge no facts or allegations exist that could give rise to such a dispute or claim in the future. (k) Except as described in Schedule 3.19(k) hereto, there are no outstanding disputes or claims against Seller relating to Seller's Government Contracts which, if resolved unfavorably to Seller, would materially increase Seller's cost to complete performance of such Government Contract above the amounts set forth in the Estimates to Complete prepared by Seller and made available to Buyer for each Government Contract. In addition, except as described in Schedule 3.19(k) hereto, there are no known or reasonably foreseeable expenditures which would increase the cost to complete performance of Seller's Government Contracts above the amounts set forth in the Estimates to Complete. (l) Seller has not been and is not now blacklisted, suspended or debarred, or proposed for suspension or debarment, from participation in the award of Government Contracts. No facts exist which could give rise to such suspension or debarment. (m) No negative determination of responsibility has ever been issued against Seller with respect to any quotation, bid or proposal for a Government Contract. (n) No audit, review, survey, inspection, investigation or examination of records relating to Seller's Government Contracts has revealed any occurrence or practice that could adversely affect the assets, business or financial statements of Seller. (o) Seller has not been and to Seller's Knowledge is not now under any administrative, civil or criminal investigation or indictment involving alleged false statements, false claims or other improprieties relating to Seller's Government Contracts or quotations, bids and proposals for Government Contracts. To Seller's Knowledge there is no basis for any such investigation or indictment. A-I-26 (p) Seller has not been and is not now a party to any administrative or civil litigation involving alleged false statements, false claims or other improprieties relating to Seller's Government Contracts or quotations, bids and proposals for Government Contracts. To Seller's Knowledge there is no basis for any such proceeding. (q) Seller has made no payment, directly or indirectly, to any person in violation of applicable Government procurement laws, including (but not limited to) laws relating to bribes, gratuities, kickbacks, lobbying expenditures, political contributions and contingent fee payments. (r) Except as described in Schedule 3.19(r) hereto, neither the Government nor any prime contractor or higher-tier subcontractor under a Government Contract has withheld or set off, or attempted to withhold or set off, monies due to Seller under any of Seller's Government Contracts. (s) Seller's cost accounting, purchasing, inventory and quality control systems are in compliance with all applicable Government procurement statutes and regulations and with the requirements of all of Seller's Government Contracts. (t) Except as described in Schedule 3.19(t) hereto, neither the Government nor any prime contractor or higher-tier subcontractor under a Government Contract has disputed or disallowed any costs claimed by Seller under Seller's outstanding Government Contracts. To Seller's Knowledge there is no basis for disallowing any such costs. (u) Except as described in Schedule 3.19(u) hereto, Seller has made no assignments of Seller's Government Contracts or of any interests in Seller's Government Contracts, and Seller has entered into no financing arrangements with respect to the performance of any outstanding Government Contract. (v) Seller lists in Schedule 3.19(v) hereto all Government property that has been provided to Seller pursuant to Seller's Government Contracts. (w) Seller has complied with all applicable requirements under each of Seller's Government Contracts relating to the protection of classified information, except as described in Schedule 3.19(w) hereto. (x) For purposes of this Section 3.19 and, in the case of clauses (i), (iii), (iv) and (v) only, for purposes of Section 6.3 hereof: (i) The term "Government" means any agency, department, ministry, division, subdivision or office of a Government, including the officials, employees and agents thereof; where a representation is elicited with respect to compliance with regulations applicable to United States Government Contracts, "Government" shall mean the Government of the United States of America. A-I-27 (ii) The term "Seller" means Seller and/or MSSC and, insofar as they were acting on behalf of the foregoing, their respective directors, officers, employees and agents; provided, however, that when combined with the word "Knowledge", "Seller" is limited to General Atronics Corporation and the definition of "Seller's Knowledge" as set forth in Article I hereof controls. (iii) The term "Contract" means any prime contract, subcontract, basic ordering agreement, letter contract, purchase order or delivery order of any kind, including all amendments, modifications and options thereunder or relating thereto. (iv) The term "Government Contract" means any prime Contract with a Government and any subcontract with a prime contractor or higher-tier subcontractor under a prime contract with a Government. (v) The term "Prime Government Contract" means any prime Contract with a Government. 3.20 Financial Information Seller has maintained its books of account in the usual, regular and ordinary course. The December Balance Sheet (including the related notes and schedules) and related statements of income, fairly present the financial position of Seller as of its date and accurately reflect the income, results of operations, retained earnings and changes in financial position, as the case may be, of Seller, for the periods set forth therein, in each case in accordance with GAAP consistently applied during the periods involved. 3.21 Customers. (a) Schedule 3.21 hereto sets forth a list of each paying account that represented more than $50,000 of gross sales in 1999 of the Defense Business and the business of MSSC and the amount of sale attributable to such customers during such period. (b) As to each of Seller's and MSSC's customers, including those listed on Schedule 3.21 hereto, the accounting, financial and other books and records kept by Seller and MSSC are in all material respects complete and accurate and have been maintained in the usual, regular and ordinary course of business and in accordance with sound business practices with regard to the maintenance of such book and records. 3.22 Disclosure. All of the facts and circumstances not required to be disclosed as exceptions under or to any of the foregoing representations and warranties made by Seller in this Article 3 by reason of any minimum disclosure requirement in any such representation and warranty would not, in the aggregate, have a GAC Material Adverse Effect. The information contained in the Schedules (and any updated Schedules) as it relates to the representations and warranties made by Seller in this Article 3 does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements contained therein not misleading under circumstances in which such statements were made. A-I-28 3.23 Finders or Brokers. Neither Seller nor MSSC nor any of their respective Affiliates, officers, directors, employees or agents has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated hereby, except for the retention of Phillpott, Ball & Company by Seller to perform various investment banking services in connection with the Acquisition and for legal, accounting and other professional fees payable in connection with the transactions contemplated hereby, all of which shall be paid by Seller. 3.24 Insurance. Schedule 3.24 hereto contains a list of all insurance policies maintained by Seller and MSSC for the benefit of or in connection with the Defense Business or the business of MSSC. Neither Seller nor MSSC has received any notice of cancellation, termination or reduction of coverage, nor has Seller or MSSC received any notice of intention to cancel, terminate or reduce coverage, relating thereto. Seller has given Buyer access to complete and correct copies of all such policies together with all riders and amendments thereto. Such policies are (i) in such amounts as are consistent with current industry standards and practices, taking into account Seller's and MSSC's properties, business and operations; and (ii) are in full force and effect, with all premiums due thereon having been paid. 3.25 Access and Sophistication. Seller acknowledges that all documents, books and records requested by Seller pertaining to Buyer have been made available for inspection by Seller and its agents and representatives; that Seller and its agents and representatives have had a reasonable opportunity to ask questions of and receive answers from Buyer or officers or employees acting on behalf of Buyer concerning the terms and conditions of the transactions contemplated hereby, including without limitation the issuance of the shares of Common Stock payable to Seller pursuant to Section 2.6 hereof, and the business and prospects of Buyer. Seller and its agents and representatives have such knowledge and experience in financial and business matters as to enable them to utilize the information made available to them in connection with the transactions contemplated hereby, to evaluate the merits and risks of an investment in Buyer and to make an informed decision with respect thereto and such an evaluation and informed decision have been made. Seller is an "accredited investor" within the meaning of Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 3.26 Investment Representation. Seller will acquire the shares of Common Stock payable to Seller pursuant to Section 2.6 hereof for its own account for investment only and not with a view to making a distribution thereof within the meaning of the Securities Act. The parties acknowledge and agree that Seller may distribute the Common Stock to its shareholders in compliance with the applicable securities laws and the applicable exemptions from registration thereunder. Seller is aware that the shares of Common Stock to be distributed to it under the terms of this Agreement have not been registered under the Securities Act, and, as a result thereof, are subject to substantial restrictions on transfer and shall bear a legend in the form specified below restricting the transfer of such shares of Common Stock. Seller further understands that Buyer has no obligation or A-I-29 intention to register the shares of Common Stock to be distributed to Seller hereunder, under any federal or state securities laws and, therefore, Seller may be precluded from selling or otherwise transferring or disposing of any of such shares of Common Stock or any portion thereof and will have to bear the economic risk of Seller's investment. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (SATISFACTORY TO THE COMPANY AND ITS COUNSEL), OR A "NO-ACTION" OR INTERPRETIVE LETTER FROM THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS." ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: 4.1 Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Buyer is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except for failures to be so qualified or in good standing which would not, individually or in the aggregate, have a material adverse effect on the general affairs, management, business, operations, condition (financial or otherwise) or prospects of Buyer and its subsidiaries taken as a whole (an "Buyer Material Adverse Effect"). Except as set forth in Schedule 4.1 hereto, Buyer is not in violation of any of the provisions of its Certificate of Incorporation (or other applicable charter document) or By-Laws (or other applicable organizational document). 4.2 Authority Relative to this Agreement. Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. 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 Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or to consummate the transactions A-I-30 contemplated hereby. This Agreement has been duly and validly executed and delivered by Buyer and, assuming the due authorization, execution and delivery hereof by Seller, constitutes a valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as such validity, binding effect or enforcement may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally or by equitable principles relating to the availability of remedies. 4.3 Capitalization. The authorized capital stock of Buyer consists of 20,000,000 shares of Common Stock, and 20,000,000 shares of undesignated preferred stock, no par value per share. As of February 10, 2000, 9,716,833 shares of Common Stock are issued and outstanding and no shares of preferred stock are issued and outstanding. All of such issued and outstanding shares are validly issued, fully paid and non-assessable and free of preemptive rights. As of February 10, 2000, Buyer holds 440,939 shares of Common Stock in treasury. Except as set forth above and except as disclosed in Schedule 4.3 hereto, there are not as of the date hereof any shares of capital stock of Buyer issued or outstanding or any subscriptions, options, warrants, calls, claims, rights (including without limitation any stock appreciation or similar rights), convertible securities or other agreements or commitments of any character obligating Buyer to issue, transfer or sell any of its securities. Except as disclosed in Schedule 4.3 hereto, Buyer is not a party to any voting agreement, voting trust, proxy or similar agreement, arrangement or understanding relating to its capital stock or any agreement, arrangement or understanding relating to or providing for registration rights with respect to its capital stock. 4.4 Subsidiaries. The only direct or indirect subsidiaries of Buyer as of the date hereof are those listed in Schedule 4.4 hereto. As of the date hereof, Buyer is directly or indirectly the record (except for directors' qualifying shares) and beneficial owner (including all qualifying shares owned by directors of such subsidiaries as reflected in Schedule 4.4 hereto) of all of the outstanding shares of capital stock of its subsidiaries, there are no proxies with respect to such shares, and no equity securities of any of such subsidiaries are or may be required to be issued by reason of any options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any capital stock of any such subsidiaries, and there are no contracts, commitments, understandings or arrangements by which any such subsidiary is bound to issue additional shares of its capital stock or securities convertible into or exchangeable for such shares. 4.5 Valid Issuance of Securities. The shares of Common Stock being issued to the Seller pursuant to Section 2.6 hereof, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable. Subject to the accuracy of the representations of Seller in this Agreement such shares of Common Stock will be issued in compliance with all applicable federal and state securities laws. 4.6 No Violations, etc. (a) Other than the filings, permits, authorizations, consents and approvals or waivers thereof that are identified in Schedule 4.6(a) hereto and that have been duly made or A-I-31 obtained as contemplated herein, neither the execution and delivery of this Agreement by Buyer nor the consummation transactions contemplated hereby nor compliance by Buyer with any of the provisions hereof will (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or suspension of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Encumbrance upon any of the properties or assets of Buyer under, any of the terms, conditions or provisions of (x) its charter or by-laws or the applicable rules of the AMEX, the stock exchange on which the Common Stock is publicly traded, (y) any note, bond, mortgage, indenture or deed of trust or (z) any license, lease, contract, agreement or other instrument or obligation, to which Buyer is a party or to which it or any of its properties or assets may be subject; or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Buyer or any of its properties or assets, except, in the case of clauses (i) and (ii) above, for such violations, conflicts, breaches, defaults, terminations, suspensions, accelerations, rights of termination or acceleration or creations of Encumbrances which would not, individually or in the aggregate, either have an Buyer Material Adverse Effect or materially impair Buyer's ability to consummate the transactions contemplated hereby. (b) No filing or registration with, no notification to and no permit, authorization, consent or approval of any Governmental Entity is required of Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except such filings, registrations, notifications, permits, authorizations, consents or approvals the failure of which to be obtained, made or given would not, individually or in the aggregate, either have an Buyer Material Adverse Effect or materially impair Buyer's ability to consummate the transactions contemplated hereby. (c) Buyer is not in violation of or default under, except as set forth in Schedule 4.6(c) hereto, (i) any note, bond, mortgage, indenture or deed of trust; or (ii) any license, lease, contract, agreement or other instrument or obligation to which Buyer is a party or to which it or any of its properties or assets may be subject, except, in the case of clauses (i) and (ii) above, for such violations or defaults which would not, individually or in the aggregate, either have an Buyer Material Adverse Effect or materially impair Buyer's ability to consummate the transactions contemplated hereby. 4.7 Litigation. Except as set forth in Schedule 4.7 hereto, there is no (i) claim, action, suit or proceeding pending or, to the best knowledge of Buyer, threatened against or relating to Buyer before any court or governmental or regulatory authority or body or arbitration tribunal; or (ii) outstanding judgment, order, writ, injunction or decree, or application, request or motion therefor, of any court, governmental agency or arbitration tribunal in a proceeding to which Buyer is a party, except, in the case of clauses (i) and (ii) above, such as would not, individually or in the aggregate, materially impair Buyer's ability to consummate the transactions contemplated hereby. A-I-32 4.8 Absence of Changes or Events. Except as set forth in Schedule 4.8 hereto, since March 31, 1999 to the date hereof, Buyer and its subsidiaries have not incurred any material liability, except in the ordinary course of their businesses consistent with their past practices, and there has not been any change in the business, financial condition or results of operations of Buyer and its subsidiaries taken as a whole which has had, or could have, a Buyer Material Adverse Effect, and Buyer and its subsidiaries taken as a whole have conducted their respective business in the ordinary course consistent with their past practices. 4.9 Disclosure. The information contained in Buyer's Form 10-K of the fiscal year ended March 31, 1999, as filed with the SEC did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements contained therein not misleading under the circumstances in which such statements were made. Buyer's Form 10-K, when it was filed with the SEC, complied in all material respects with the requirements of the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder. Buyer has made all required filings to be made by it under the Exchange Act for the twelve (12) months prior to the date hereof. 4.10 Finders or Brokers. Neither Buyer nor any of its Affiliates, officers, directors, employees or agents has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the Acquisition or the other transactions contemplated hereby. ARTICLE V CONDUCT OF BUSINESS OF SELLER 5.1 Conduct of Defense Business and Business of MSSC Pending the Acquisition. Except as contemplated by this Agreement, or as expressly agreed to in writing by Buyer, during the period from the date of this Agreement to the Closing Date, each of Seller and MSSC will conduct their respective operations according to its ordinary course of business consistent with past practice, and will use all commercially reasonable efforts to preserve intact its business organization, to keep available the services of its officers and employees and to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with it and will take no action which would materially adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement or have a GAC Material Adverse Effect. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Closing Date, Seller will not nor will it permit MSSC to, without the prior written consent of Buyer, which consent shall not be unreasonably withheld: (a) amend its certificate of incorporation, by-laws or other organizational documents; A-I-33 (b) authorize for issuance, issue, sell, deliver, grant any options for or otherwise agree or commit to issue, sell or deliver any shares of any class of its capital stock or any securities convertible into shares of any class of its capital stock; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock or purchase, redeem or otherwise acquire any shares of its own capital stock or of its subsidiary, except as otherwise expressly provided in this Agreement; (d) (i) create, incur, assume, maintain or permit to exist any debt for borrowed money other than under existing lines of credit in the ordinary course of business consistent with past practice; (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person except in the ordinary course of business and consistent with past practices; or (iii) make any loans, advances or capital contributions to, or investments in, any other person in an aggregate amount not to exceed $10,000; (e) (i) increase in any manner the compensation of (x) any employee except in the ordinary course of business consistent with past practice or (y) any of its directors or officers; (ii) pay or agree to pay any pension, retirement allowance, welfare benefit or other employee benefit not required, or enter into or agree to enter into any agreement or arrangement with such director or officer or employee, whether past or present, relating to any such pension, retirement allowance, welfare benefit or other employee benefit, except as required under currently existing agreements, plans or arrangements; (iii) grant any severance or termination pay to, or enter into any employment or severance agreement with, (x) any employee except in the ordinary course of business consistent with past practice or (y) any of its directors or officers except for honorarium payments to outside directors of Seller or MSSC in an amount not to exceed $10,000 in the aggregate for each director; or (iv) except as may be required to comply with applicable law, become obligated (other than pursuant to any new or renewed collective bargaining agreement) under any new pension plan, welfare plan, multi-employer plan, employee benefit plan, benefit arrangement, or similar plan or arrangement, which was not in existence on the date hereof, including any bonus, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other benefit plan, agreement or arrangement, or employment or consulting agreement with or for the benefit of any person, or amend any of such plans or any of such agreements in existence on the date hereof; provided, however, that this clause (iv) shall not prohibit Seller or MSSC from renewing any such plan, agreement or arrangement already in existence on terms no more favorable to the parties to such plan, agreement or arrangement; (f) except as otherwise expressly contemplated by this Agreement, enter into any other agreements, commitments or contracts, except agreements, commitments or contracts for the purchase, sale or lease of goods or services involving payments or receipts by Seller or MSSC in excess of $10,000, other than (i) customer agreements; (ii) leases for rental space in an amount not to exceed $10,000 for any lease; or (iii) developer agreements in an amount not to exceed $10,000 for any agreement; (g) authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into any agreement in principle or an agreement with respect to, any plan of liquidation or dissolution, any acquisition of a material amount of assets or securities, any sale, transfer, lease, license, pledge, mortgage, or other disposition or encumbrance of a A-I-34 material amount of assets or securities or any material change in its capitalization, or any entry into a material contract or any amendment or modification of any material contract or any release or relinquishment of any material contract rights; (h) authorize or commit to make capital expenditures in excess of $10,000 for any one order in Seller's service business (other than purchases by Seller's or MSSC's systems business in the ordinary course of business consistent with past practice); (i) make any change in the accounting methods, accounting practices or Tax policies or procedures followed by Seller or MSSC; (j) settle any action, suit, claim, investigation or proceeding (legal, administrative or arbitrative) in excess of $10,000 without the consent of Buyer; (k) make any election under the Code which would have a GAC Material Adverse Effect; or (l) agree, commit or state its intention to do any of the foregoing. 5.2 Permitted Actions. Anything in Section 5.1 hereof to the contrary notwithstanding, on or prior to the Closing Date, Seller may distribute to its stockholders all rights it has in connection with claims against the United States Navy relating to the Wireline Software Licenses together with any funds received prior to Closing on account of such claims and may make the distributions described in Schedule 5.2 hereto and specifically agreed to by Buyer. ARTICLE VI COVENANTS AND AGREEMENTS 6.1 Additional Agreements; Cooperation. (a) Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, and to cooperate with each other in connection with the foregoing, including using its best efforts (i) to obtain all necessary waivers, consents and approvals from other parties to the Joint Venture and the Business Contracts, the Government Contracts and any other material agreements, leases and contracts related to the Defense Business; (ii) to obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state or foreign law or regulations; (iii) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby; (iv) to effect all necessary registrations, filings and submissions of information requested by governmental authorities; and (v) to fulfill all conditions to this Agreement. (b) Seller shall use its best efforts to facilitate and assist and cooperate with Buyer in, Buyer's conduct of on-site visits by representatives of Buyer to representatives of customers of Seller and MSSC. A-I-35 (c) Each of the parties hereto agrees to furnish to the other party hereto such necessary information and reasonable assistance as such other party may request in connection with its preparation of necessary filings or submissions to any regulatory or governmental agency or authority. (d) For purposes of this Article VI, prior to the Closing, Seller shall designate and authorize an officer of Seller (the "Designated Officer") to act and sign all necessary documents on Seller's behalf in connection with all of Seller's obligations contemplated in this Article VI. 6.2 Third Party Consents. (a) To the extent that any agreement or contract constituting part of the Acquired Assets is not capable of being transferred by Seller to Buyer pursuant to this Agreement without the consent, approval or waiver of a third Person, and such consent is not obtained prior to the Closing, or if such transfer or attempted transfer would constitute a breach thereof or a violation of any law, rule or regulation in the absence of obtaining such an approval, nothing in this Agreement will constitute a transfer or an attempted transfer thereof. Each of Buyer and Seller shall use commercially reasonable efforts at Buyer's expense to obtain any such approvals. (b) In the event that such consents, approvals and waivers referred to in paragraph (a) are not obtained, then Seller and Buyer will each use commercially reasonable efforts, at Buyer's expense and in compliance with applicable laws and regulations, to (i) provide to Buyer the benefits and burdens of any such agreement, (ii) cooperate in any reasonable and lawful arrangement, including subcontracting, designed to provide such benefits and burdens to Buyer without incurring any obligation to any other Person other than to provide such benefits to Buyer, including without limitation the appointment of Buyer as the agent of Seller for purposes of such agreement, and (iii) enforce, at the request of Buyer for the account of Buyer, any rights of Seller arising from any such agreement. With respect to any files and documentation relating to any such contracts or agreements that are subject to third party proprietary restrictions, Seller and Buyer will enter into arrangements as described above to transition these materials to Buyer. 6.3 Novation of United States Government Contracts. (a) As soon as practicable following the Closing, Buyer shall prepare (with Seller's assistance), in accordance with FAR Part 42, (P) 42.12 and any applicable agency regulations or policies, a written request meeting the requirements of the FAR Part 42, as reasonably interpreted by the Responsible Contracting Officer (as such term is defined in FAR Part 42, (P) 42.1202(a)), which shall be submitted by Seller to each Responsible Contracting Officer, for the United States Government (i) to recognize Buyer as Seller's successor in interest to all the Acquired Assets constituting a United States Government Contract; and (ii) to enter into a novation agreement (a "Novation Agreement") in form and substance reasonably satisfactory to Buyer and Seller and their respective counsel, pursuant to which, subject to the requirements of the FAR Part 42, all of Seller's right, title and interest in and to, and all of Seller's obligations and liabilities under, each such United States Government Contract shall be validly conveyed, transferred and assigned and novated to Buyer by all parties thereto. Seller shall provide to Buyer promptly any information regarding Seller required in connection with such request. Seller and Buyer shall each use all reasonable efforts at Buyer's expense to obtain in the most expeditious manner possible all licenses, consents, approvals and waivers required for the purpose of processing, entering into and A-I-36 completing the Novation Agreements with regard to any of the United States Government Contracts, including responding to any requests for information by the United States Government with regard to such Novation Agreements. Until such time as the Novation Agreements are completed, Buyer and Seller will operate with respect to the applicable United States Government Contract to the extent permitted and within the manner required by law. Seller shall, at Buyer's expense, do each thing reasonably requested by Buyer to enable the performance of the United States Government Contracts and to provide Buyer the benefits of such United States Government Contracts (including, without limitation, enforcement of Seller's rights against other parties to the United States Government Contracts). Buyer agrees that pending novation it will perform, at Buyer's expense, the terms of such United States Government Contracts as Seller's agent. (b) In connection with obtaining the consents contemplated in paragraph (a) hereof, Seller shall not consent to any modification of any Government Contract included in the Acquired Assets without the prior written consent of Buyer, not to be unreasonably withheld or delayed. (c) The parties agree that until all United States Government Contracts have been novated in accordance with paragraphs (a) and (b) above, Seller shall arrange for the deposit of all payments received by it with respect to any United States Government Contract performed by Buyer and any of the billed and unbilled accounts receivables included as part of the Acquired Assets as provided above in a lock-box designated jointly by Seller and Buyer and Seller shall instruct the Designated Officer to promptly endorse all payments to Buyer. 6.4 Patent, Trademark and Copyright Filings. Seller shall use its best commercial efforts, at Buyer's expense, to assist and cooperate with Buyer in Buyer's preparation and filing of documents relating to Seller's Patents, Trademarks and Copyrights with the United States Patent and Trademark Office and the United States Copyright Office. 6.5 Schedules. Seller and Buyer shall supplement the Schedules to this Agreement for which it is responsible to reflect any material change to the information contained therein; provided that no such supplement shall cure any misrepresentation therein. 6.6 Full Access. (a) To the extent permitted under U.S. export control laws and regulations, other applicable law, Seller's security clearances and any third party requirements or restrictions, Seller shall afford to Buyer and its authorized representatives such access during normal business hours and upon no less than 24 hours prior notice to all properties, books, records (including but not limited to Tax records), contracts and documents of the Defense Business and business of MSSC as Buyer shall reasonably request in connection with its review of the Defense Business and business of MSSC, and Seller shall furnish or cause to be furnished to Buyer and its authorized representatives all such information with respect to the Defense Business and business of MSSC as Buyer may reasonably request. Any such investigation shall be on reasonable prior notice and shall be carried out in such a manner as to minimize any disruption of the operations of the Defense Business and the business of MSSC. A-I-37 (b) Buyer will hold and will cause its consultants and advisors to hold in strict confidence on the terms and conditions set forth in the Confidentiality Agreement, dated June 4, 1999, between Buyer and Seller all documents and information furnished to Buyer in connection with the transactions contemplated by this Agreement as if each of the parties hereto and such consultant or advisor was a party thereto, and this provision shall survive any termination of this Agreement. 6.7 No Shopping. Prior to any termination of this Agreement pursuant to Article 10 hereof, Seller shall not solicit or enter into any agreement with respect to (i) the sale of any substantial portion of the Defense Business, the Acquired Assets, or the business of MSSC, or (ii) any merger or other business combination of Seller or MSSC, to or with any Person other than Buyer. 6.8 Notification of Certain Matters. (a) Seller or Buyer, as the case may be, shall promptly notify the other of (i) its obtaining of actual knowledge as to the matters set forth in clauses (x) and (y) below; or (ii) the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be likely to cause (x) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Closing Date, or (y) any material failure of Seller or Buyer, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations or warranties of the parties or the conditions to the obligations of the parties hereunder. (b) Seller shall advise Buyer in writing, promptly after becoming aware thereof, of any material adverse change in the condition (financial or otherwise), operations or assets of the Defense Business or the business of MSSC. 6.9 Publicity. Seller and Buyer agree to consult with each other in issuing any press release and with respect to the general content of other public statements with respect to the transactions contemplated hereby, and shall not issue any such press release prior to such consultation, except as may be required by law. 6.10 Fees and Expenses. Except as otherwise provided herein, whether or not the Acquisition and other transactions contemplated hereby are consummated, Seller and Buyer shall bear their respective expenses incurred in connection with the Acquisition and other transactions contemplated hereby, including, without limitation, the preparation, execution and performance of this Agreement and the transactions contemplated hereby, and all fees and expenses of investment bankers, finders, brokers, agents, representatives, counsel and accountants. A-I-38 6.11 Tax Matters. (a) Pre-Closing Taxes. Seller shall remain responsible for all Taxes of Seller payable in connection with the operation of the Defense Business prior to and including the Closing Date. In this respect, Seller will reimburse Buyer for any Taxes of or relating to the Business or MSSC paid by Buyer after the Closing Date (i) with respect to any Taxable Year that ends on or before the Closing Date or (ii) to the extent that any such Taxes are allocable to that portion of any Split Period that ends on the Closing Date. For purposes of this Agreement, in the case of any Taxes that are payable with respect to a Split Period, the portion of such Taxes allocable to the portion of such Split Period that ends on the Closing Date shall be determined on the basis of a deemed closing on the Closing Date of the books and records of Seller and its Affiliates. Seller shall also remain responsible for the filing of all related Tax Returns relating to the Business and which are due before the Closing Date. (b) Allocation of Purchase Price. The parties agree that the Purchase Price shall be allocated among the Acquired Assets and Assumed Liabilities (the "Allocation Schedule") as set forth on Schedule 6.11(b) attached hereto, subject to such changes in the Acquired Assets and Assumed Liabilities as occur prior to the Closing Date. The Parties agree to file all Tax Returns and other statements for Tax purposes consistently with the allocation set forth on the Allocation Schedule and in particular to report the information required by Section 1060(b) of the Code (including the timely filing of Internal Revenue Service Form 8594), Treasury Regulation Section 1.743-1(k), Treasury Regulation Section 1.755-1 and /or Treasury Regulation Section 1.755-2T in a manner consistent with such allocation which the parties agree complies with those provisions. None of Buyer, Seller or any Affiliate of Buyer or Seller shall take a position in any Tax proceeding, Tax audit, or otherwise that is inconsistent with the allocation set forth on the Allocation Schedule; provided, however, that (i) nothing contained herein shall require Buyer or Seller to contest any challenge to such allocation, and (ii) nothing contained herein shall prevent Buyer, Seller or any of their Affiliates from filing protective amended Tax Returns or claims for refunds after a Tax authority has challenged such allocation. Each of Buyer and Seller shall notify the other if it receives notice that any Tax authority proposes any allocation different from the Allocation Schedule. (c) Transfer Taxes. Notwithstanding any other provisions of this Agreement, Buyer and Seller shall each be responsible for one-half of all applicable transfer, documentary, sales, use, stamp, registration, and other such similar Taxes and related costs ("Transfer Taxes") incurred in connection with the transactions contemplated by this Agreement. Each of the Parties hereby agrees to pay all such Taxes and other related costs and to file all necessary documentation as required under the applicable statutory provisions with respect to all such Taxes in a timely manner. Following any such payment and filing by any party hereto, or any of its Affiliates, such party shall be entitled to be reimbursed by the other party for one-half of the amount paid. The Parties shall take all reasonable actions to minimize the amount of such Transfer Taxes. 6.12 Interim Operating. (a) With respect to any export licenses referred to in Schedule 9.2(d) or 9.3(d), Seller and Buyer will meet the appropriate government officials as promptly as practicable in order to assure a rapid transition process and Seller will cooperate with and provide reasonable assistance to Buyer in connection with such transition process. During a reasonable transition period but in A-I-39 any event only so long as it is permitted by applicable law, at Buyer's request Seller will export products of Buyer under Seller's export licenses. (b) Buyer agrees to reimburse Seller for any out-of-pocket costs incurred in connection with the arrangements described in (a) above. 6.13 Lease of Property. Buyer shall and Seller shall, and shall cause GARC to, enter into a lease, substantially in the form attached hereto as Exhibit 6.13 (the "Lease"), pursuant to which Buyer shall lease from GARC and GARC shall lease to Buyer for a period of six (6) months commencing on the Closing Date the real property and premises located at 1100 and 1200 East Mermaid Lane, Wyndmoor, Pennsylvania (collectively, the "Property") with options to renew the term for six (6) additional consecutive two-month periods on terms and conditions to be agreed upon by Buyer and Seller or GARC, as the case may be, at such time. 6.14 Environmental Matters (a) It is a condition precedent to Buyer's obligation to close that Seller purchase an environmental insurance policy for the benefit of Buyer in the form of the policy endorsements previously agreed to by Buyer and Seller (the "Insurance Policy"). Seller agrees to use its best efforts to obtain such Insurance Policy; provided that the total premium required to be paid by Seller shall not exceed $37,500. (b) From the date hereof through the termination of the Lease (after giving effect to all renewals thereof), Seller agrees to take all steps required under the rules and regulations of the Pennsylvania Department of Environmental Protection ("PADEP") to obtain Act II Clearance with respect to the Property. ARTICLE VII POST-CLOSING COVENANTS 7.1 Non-Compete For a period of five (5) years following the Closing Date, neither the Seller nor any of its affiliates directly or indirectly controlled by Seller nor any Key Shareholder shall establish de novo or directly or indirectly purchase, acquire, invest in or otherwise develop, hold or engage in, any business or operations in the defense or communications industry that is in competition with the Defense Business and/or the business of MSSC ("Restricted Business") in the United States or the countries listed on Schedule 7.1 hereto where MSSC or Seller currently conducts business; provided, however, that ownership by Seller, its Affiliates or the Key Shareholders of less than five percent (5%) of the outstanding stock of any publicly traded corporation that engages in any Restricted Business in the United States shall not violate the foregoing agreement not to compete. 7.2 Non-Solicitation (a) For a period of three (3) years following the Closing Date, the Seller and its Affiliates shall not Solicit any Accepting Employee in any capacity. A-I-40 (b) For an additional (2) year period following the three (3) year period referred to in paragraph (a) above, Seller shall not Solicit any Accepting Employee in connection with any Restricted Business. (c) For purposes of this Section 7.2, "Solicit" shall mean either (i) rehiring any Accepting Employee or (ii) directly or indirectly soliciting the employment of (whether as an employee, consultant or temporary employee) or in any other manner persuading or attempting to persuade any Accepting Employee to discontinue his or her relationship with Buyer. 7.3 Access to Files. Until the expiration of any applicable statutes of limitations, or for such longer period as may be required by Buyer's customary retention policies but in no case for a period less than that called for by applicable law, provided that all Employee records and personnel files shall be retained for ten (10) years from the later of the Closing Date and the pendency of any claims covering such Employees, Buyer will retain and grant Seller and its respective representatives reasonable access to all books, records and other data included in the Defense Business and the business of MSSC during regular business hours upon reasonable prior notice if such access is reasonably required by Seller in connection with its legal, Tax, regulatory or contractual matters (including as may be necessary to enable Seller to prepare Tax Returns or reports for or on behalf of Seller or MSSC or to prepare for or to respond to any Tax audit). 7.4 Further Assurances If at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Buyer with full right, title and possession to the Acquired Assets, including but not limited to, all of Seller's right, title and interest, in and to MSSC Interest and in, to and under the Joint Venture Agreement, the officers of Seller are fully authorized in the name of Seller or otherwise to take, and shall take, all such further action. ARTICLE VIII EMPLOYEES AND EMPLOYEE BENEFITS 8.1 Employees and Employee Benefits. Schedule 3.17(a) hereto is a complete and accurate list of the Employees (and Inactive Employees) employed in the Defense Business, which list contains the following information for each such Employee: name, position held, retention or stay bonus, if any, in accordance with the stay bonus program, if any, the Plans in which the Employee participates, current salary, anticipated salary increase date if prior to or on December 31, 2000 and specified anticipated amount of such increase, official title, 1999 annual bonus and/or sales commission amounts, if any, 2000 annual guaranteed bonus and/or sales commission targets and/or amounts (if any) and Seller's current intentions for such bonuses for 2000, annual vacation entitlement and whether such vacation entitlement is grandfathered, accrued but unused 2000 vacation, Fair Labor Standards Act status, date of hire, current salary grade, whether Employee is employed based upon an employer sponsored non-resident visa program, and social security number and service date for employee benefit plan purposes. Such list will indicate which Employees are Inactive Employees and, to the extent known, the date on which each such Inactive Employee is expected to return to active employment. A-I-41 8.2 Designated and Accepting Employees. (a) Buyer shall offer employment to all Employees (collectively, "Designated Employees") at a base salary or hourly rate of pay that is equal to or in excess of such Employee's base salary or hourly rate of pay with respect to employment by Seller immediately prior to the Closing, and as soon as practicable thereafter will obtain either acceptances or rejections of such offers of employment. Effective as of the Closing Date (the Inactive Employee Hire Date, in the case of an Inactive Employee), no Accepting Employee shall be an employee of Seller. Buyer does not assume and shall have no liability with respect to any former or current employee of Seller arising out of or relating to such employee's employment, or termination of employment, by Seller, other than for accrued vacation benefit days to the extent specified in Section 8.3(c) hereof. (b) Buyer's employment of a Designated Employee is conditioned upon the Closing taking place and compliance with all customary and appropriate conditions established by Buyer, an offer of employment with Buyer and a written response to such offer from the Designated Employee receiving the offer within two days after the date of such offer. Any employment with Buyer pursuant to such an offer of employment shall take effect as of the date following the Closing Date; provided, however, to the extent Buyer offers employment to any Inactive Employee, such employment shall be effective as of the date which is the later of the date following the Closing Date and the date on which each such Inactive Employee is able and willing to commence the performance of services on a full time basis (such later date is the "Inactive Employee Hire Date"); provided, however, that such date occurs within thirteen (13) weeks after the Closing Date. Such employment shall be upon Buyer's usual terms, conditions and policies of employment, including without limitation, all of Buyer's policies regarding modification of the terms of employees' employment. (c) All Designated Employees who are employed by Seller on the Closing Date, having accepted an offer of employment with Buyer, shall be referred to herein as "Accepting Employees." 8.3 Benefits of Accepting Employees. (a) Accepting Employees shall be eligible to participate as of the effective date of their employment with Buyer in the employee benefit plans and other fringe benefits of Buyer on the same basis as such plans and benefits are offered to similarly situated employees of Buyer. Buyer will recognize any prior service of any Accepting Employee with Seller as if it had been service with Buyer for purposes of (i) eligibility for participation and vesting (but not benefit accrual) under its 401(k) plan, (ii) eligibility to participate in Buyer's medical, dental and other welfare plans, but not for purposes of determining eligibility for any post-retirement medical, dental and other similar benefits, (iii) accruing annual vacation under the appropriate schedule applicable to Accepting Employees from time to time, and (iv) determining the amount of severance due to any Accepting Employee on the termination of their employment under Buyer's then existing severance program. (b) Except to the extent provided in Section 8.3(c) hereof, Seller and Seller Plans shall retain all liability, responsibility and obligation for all employment and benefit related liabilities or obligations of whatever nature, including without limitation under any Seller Plan, with respect to all Accepting Employees arising from or relating to their employment with Seller with respect to claims incurred or based on events, acts, omissions, conduct or course of conduct, A-I-42 to the extent that such claims were incurred or such events, acts, omissions, conduct or course of conduct occurred on or before the Closing Date (except that in the case of Inactive Employees, the Inactive Employee Hire Date shall be substituted for the Closing Date.) Buyer and Buyer's benefit plans shall have all liability, responsibility and obligation for all employment related liabilities or obligations with respect to any Accepting Employee, with respect to claims incurred or based on events, acts, omissions, conduct or course of conduct, to the extent that such claims were incurred or such events, acts, omissions, conduct or course of conduct occurred after the Closing Date (except that in the case of Inactive Employees, the Inactive Employee Hire Date shall be substituted for the Closing Date), and relates to their employment with Buyer. Notwithstanding the foregoing, Seller and the Seller Plans have all liability, responsibility and obligation for any eligible health care or other eligible welfare expenses and services incurred through the Closing Date (except that in the case of an Inactive Employee, the Inactive Employee Hire Date shall be substituted for the Closing Date). For purposes of the foregoing sentence, an expense or service is deemed incurred when the medical or dental services are performed (except in the case of hospital services and expenses, which are deemed to be incurred on the date the covered person first enters the hospital), or, with respect to welfare benefits other than medical and dental benefits, when the latest event giving rise to such expense or benefit occurs. (c) Buyer shall be responsible for accrued vacation benefit days not taken by or otherwise not paid by Seller to an Accepting Employee prior to the Closing, but only to the extent accrued for on the Closing Balance Sheet. (d) Buyer agrees that any pre-existing condition exclusion in any of Buyer's health insurance plans and policies shall not be applicable to each Accepting Employee effective as of the effective date of such Accepting Employee's employment with Buyer, except to the extent such exclusions actually applied to limit, restrict or deny coverage to an Accepting Employee under the corresponding Seller Plans that provided medical benefits to the Accepting Employee on the day prior to the effective date of such Accepting Employee's employment with Buyer. Buyer shall cause its health and other welfare benefit plans and policies that provide medical and dental benefits to credit the Accepting Employees with any deductible or maximum out-of-pocket payments made by such Accepting Employees under Seller's health and other welfare benefit plans and policies that provide medical and dental benefits so as to reduce the amount of any deductible or maximum out-of-pocket payments payable by the Accepting Employees under Buyer's health and other welfare benefit plans and policies that provide medical and dental benefits; provided that the Accepting Employees provide to such Buyer benefit plans and policies such information as Buyer may specify to implement such credits. Seller shall make available to each Accepting Employee within twenty (20) days after the Closing such information as is reasonably necessary to permit the Accepting Employee to apply for such credits. (e) Effective as of the Closing Date, all Accepting Employees shall be fully vested in their accrued benefit under any Seller Plan that is an "employee pension plan" as that term is defined in Section 3(2) of ERISA. (f) Prior to the Closing Date, Seller shall pay all bonus and incentive compensation amounts payable or accrued with respect to any Accepting Employee under any Seller Plan or otherwise (including any bonus or incentive compensation of any kind whatsoever) with respect to any period that includes, or ended on or prior to, the Closing Date (except that in the case of an Inactive Employee, the Inactive Employee Hire Date shall be substituted for the Closing Date in this Section 8.3(f)). A-I-43 (g) All wages, employee withholding taxes, commissions, employee payroll deductions, employer matching and any profit sharing or other contribution to any Seller Plan relating to the employment of any Accepting Employee through the Closing Date shall be paid by Seller prior to the Closing Date (except that in the case of an Inactive Employee, the Inactive Employee Hire Date shall be substituted for the Closing Date in this Section 8.3(g)). 8.4 Retention of Employees. Seller shall use commercially reasonable efforts (but shall not be required to expend money, except as set forth herein) to retain the Designated Employees during the period between the execution of this Agreement and through and including the Closing Date and to encourage all such Designated Employees to accept offers of employment from Buyer, including, but not limited to, the following: (a) maintaining all current compensation programs or benefits programs that are intended to assist in retaining employees; and (b) assisting Buyer in communicating with the Designated Employees regarding offers of employment by Buyer. Nothing contained in this Section 8.4 shall prohibit Seller from terminating or disciplining any individual who Seller believes, in its sole discretion, should be terminated or disciplined in a manner consistent with past practices, policies and procedures. 8.5 Cooperation Seller and Buyer agree to cooperate and take such further actions as may be reasonably necessary to carry out the intent of this Article VIII, including but not limited to (i) the conduct of meetings by Buyer, if it so elects, with Employees during breaks outside of scheduled work or at such times reasonably agreed to by Buyer and Seller prior to the Closing Date for purposes including but not limited to employment interviews, enrollment of Accepting Employees in Buyer's benefit plans and employee orientation for Accepting Employees, and (ii) the exchange of such information as may be necessary to administer Buyer's benefit plans and the Seller Plans. Seller agrees to permit, at such times and places reasonably agreed to by Buyer and Seller and to the extent permitted by applicable laws and subject to appropriate safeguards, Buyer to review the Seller's personnel files and other employee-related records and data. ARTICLE IX CONDITIONS TO CLOSING 9.1 Conditions to Each Party's Obligation. The respective obligation of each party to effect the transactions contemplated hereby is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) No Injunctions or Restraints. No judgment, order, decree, statute, law, ordinance, rule or regulation entered, enacted, promulgated, enforced or issued by any Governmental Entity of competent jurisdiction or other legal restraint or prohibition (collectively, A-I-44 "Restraints") shall be in effect preventing the consummation of the transactions contemplated hereby. (b) Governmental Action. No action or proceeding shall be instituted by any Governmental Entity seeking to prevent consummation of the transactions contemplated hereby or seeking material damages in connection with the transactions contemplated hereby which continues to be outstanding. 9.2 Conditions to Obligations of Buyer. The obligation of Buyer to effect the transactions contemplated hereby is further subject to satisfaction or waiver of the following conditions: (a) Representations and Warranties. The representations and warranties of Seller set forth herein shall be true and correct in all material respects both when made and on and as of the Closing Date, as if made on and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date). Seller shall deliver to Buyer all Schedules required to be delivered by it to Buyer hereunder, updated as of the Closing Date. (b) Performance of Obligations of Seller. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) No Material Adverse Change. At any time after the date hereof, there shall not have occurred any material adverse change, in the reasonable judgment of Buyer, in the Acquired Assets, the Defense Business or the business of MSSC, taken individually or the general affairs, business, management, operations, assets, condition (financial or otherwise), liabilities or prospects of Seller and its subsidiaries taken as a whole. (d) Consents. All necessary consents and approvals of any Governmental Entity or any other third Person required for the consummation of the transactions contemplated by this Agreement listed on Schedule 9.2(d) hereto shall have been obtained, except for such consents and approvals the failure to obtain which individually or in the aggregate would not have a material adverse effect on the Defense Business, the Acquired Assets, or the business of MSSC or materially impair the ability of Seller to fulfill its respective obligations under this Agreement. (e) Escrow Agreement and Lease. Seller shall execute and deliver to Buyer the Escrow Agreement as contemplated in Section 2.6(d) hereof and the Lease as contemplated in Section 6.13 hereof, substantially in the form attached hereto as Exhibits 2.6 and 6.13, respectively, and made a part hereof. (f) Officer's Certificate. Buyer shall have received, on and as of the Closing Date, from Seller an officer's certificate, executed by George E. Huffman, Michel M. Goutmann and Howard S. Brown dated the Closing Date, as to the satisfaction of the conditions in paragraphs (a) through (e) and (h) of this Section 9.2. (g) Legal Opinion. Buyer shall have received, on and as of the Closing Date, an opinion of McCausland, Keen & Buckman, in the form attached hereto as Exhibit 9.2(g). A-I-45 (h) Lock-up Agreement. Seller any shareholder of Seller to whom Seller shall distribute the Share Consideration payable to Seller pursuant to Section 2.6 hereof shall execute and deliver to Buyer a lock-up agreement, dated as of the Closing Date, substantially in the form attached hereto as Exhibit 9.2(h) and made a part hereof. (i) Insurance Policy. Seller shall have purchased the Insurance Policy as provided in Section 6.14(a) hereof. 9.3 Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated hereby is further subject to satisfaction or waiver of the following conditions: (a) Representations and Warranties. The representations and warranties of Buyer set forth herein shall be true and correct both when made and on and as of the Closing Date, as if made on and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date). If applicable, Buyer shall deliver to Seller all Schedules required to be delivered by it to Seller hereunder, updated as of the Closing Date. (b) Performance of Obligations of Buyer. Buyer shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) No Material Adverse Change. At any time after the date hereof, there shall not have occurred any material adverse change, in the reasonable judgment of Seller, in the general affairs, management, business, operations, assets, condition (financial or otherwise) liabilities or prospects of Buyer and its subsidiaries taken as a whole. (d) Consents. All necessary consents and approvals of any Governmental Entity or any other third Person required for the consummation by Buyer of the transactions contemplated by this Agreement listed on Schedule 9.3(d) hereto shall have been obtained except for such consents and approvals the failure to obtain which, individually or in the aggregate, would not materially impair the ability of Buyer to fulfill its obligations under this Agreement. (e) Escrow Agreement and Lease. Buyer shall have executed and delivered the Escrow Agreement as contemplated by Section 2.6(d) hereof and the Lease as contemplated by Section 6.13 hereof, substantially in the form attached hereto as Exhibits 2.6 and 6.13, respectively, and made a part hereof. (f) Officer's Certificate. Seller shall have received from Buyer, on and as of the Closing Date, an officer's certificate, executed by the Chief Executive Officer and the Chief Financial Officer of Seller (in their respective capacities as such) dated the Closing Date, as to the satisfaction of the conditions in paragraphs (a) through (e) of this Section 9.3. (g) Legal Opinion. Seller shall have received, for the benefit of the stockholders of Seller, on and as of the Closing Date, an opinion of Buyer's General Counsel, in the form attached hereto as Exhibit 9.3(g). A-I-46 ARTICLE X INDEMNIFICATION 10.1 Indemnification by Seller. From and after the Closing, Seller hereby agrees to indemnify, defend and hold Buyer and its officers, directors, agents and employees (the "Buyer Indemnified Parties"), harmless from, against and in respect of any and all losses, claims, suits, actions, proceedings, awards, judgments, settlements, fines, penalties, liabilities, obligations, damages, deficiencies, costs or expenses (including, without limitation, reasonable expenses of investigation and attorneys' fees) net of any insurance proceeds and tax benefits if, as and when received, in either case to which such Buyer Indemnified Party is entitled by virtue of any of the foregoing (collectively "Claims") arising out of or resulting from: (a) any breach of any warranty or misrepresentation by Seller or the breach or nonperformance of any covenant, agreement or obligation to be performed on the part of Seller under this Agreement, or in any closing certificate contemplated hereby or in any Schedule hereto; (b) the conduct of the Business prior to the Closing, except for liabilities specifically assumed by Buyer herein and reserved for on the Closing Balance Sheet; (c) any liability for Taxes incurred with respect to any Taxable Year ending on or before the Closing Date and that portion of any Split Period ending on the Closing Date; (d) the MSSC Interest or the Joint Venture Agreement on or prior to the Closing; (e) the Excluded Assets; and (f) the Excluded Liabilities. 10.2 Indemnification by Buyer. From and after the Closing, Buyer hereby agrees to indemnify, defend and hold harmless Seller and its officers, directors, agents and employees (the "Seller Indemnified Parties") from, against and in respect of any and all Claims arising out of or resulting from (i) any breach of any warranty or misrepresentation by Buyer or the breach or nonperformance of any covenant, agreement or obligation to be performed on the part of Buyer under this Agreement, or in any closing certificate contemplated hereby or in any Schedule hereto; (ii) any Assumed Liabilities and (iii) except for the Excluded Liabilities and the Excluded Assets, the MSSC Interest, operation of the Defense Business and the use of the Acquired Assets in the operation thereof after the Closing Date. 10.3 Limitations. (a) Notwithstanding anything contained in this Agreement to the contrary: (i) neither party shall be liable for any amounts for which an Indemnified Party (as defined below) is otherwise entitled to indemnification in connection with the breach or inaccuracy of any representation or warranty or any breach of any covenant contained herein until the aggregate amount for which such Indemnified Party is entitled to indemnification with respect to all such A-I-47 Claims for indemnification in the aggregate exceed Fifty Thousand Dollars ($50,000) (the "Threshold"), at which time such party shall be liable for any such excess, and (ii) nor shall a party indemnifying another party hereto be required to make indemnification in connection with the breach or inaccuracy of any representation or warranty or any breach of any covenant contained herein to the extent indemnification payments with respect to all such claims for indemnification would exceed in the aggregate Eleven Million Dollars ($11,000,000) (the "Maximum Indemnification Amount"). In determining the foregoing Threshold and in otherwise determining the amount to which the Indemnified Party is entitled to assert a claim for indemnification pursuant to this Article 10, only actual losses shall be considered. The Threshold and Maximum Indemnification Amount shall not apply as to any Claims related to: (i) the Excluded Assets; (ii) the Excluded Liabilities; and (iii) a final, non-appealable judgment of a court of competent jurisdiction that either party has committed fraud against the other with respect to the transactions contemplated under this Agreement. The parties hereto waive as against each other any claim to consequential, special, exemplary or punitive damages except to the extent consequential, special, exemplary or punitive damages are awarded to a third Person against an Indemnified Party in circumstances in which such Indemnified Party is entitled to indemnification hereunder such consequential, special, exemplary or punitive damages so awarded shall be payable to such Indemnified Party hereunder. (b) Indemnification Claims brought under Section 10.1 other than those arising from the Excluded Assets or the Excluded Liabilities, shall be satisfied exclusively by Seller first from the Escrowed Shares pursuant to the Escrow Agreement and then, to the extent such Claims exceed the value of the Escrowed Shares, or are made after the termination of the escrow established pursuant to the Escrow Agreement, such excess shall be satisfied by the remaining Cash Consideration and then the Share Consideration. (c) The respective obligations of the parties to indemnify in connection with the breach or inaccuracy of any representation or warranty or any breach of a covenant contained herein shall expire: (i) eighteen (18) months after the Closing Date as to Claims solely between the parties hereto which are not brought within such time period, (ii) six (6) months following the expiration of all appropriate statutes of limitations as to Claims involving the representation and warranty referred to in Section 3.15 (Taxes) hereof and Claims brought by third Persons (including Employees), and (iii) seven (7) years after the Closing Date as to Claims involving the representation and warranty referred to in Section 3.18 (Environmental Matters) hereof. Claims relating to the representations and warranties referred to in Section 3.8 (Title to Assets) hereof and Section 4.5 (Valid Issuance of Securities) hereof shall not expire. Notwithstanding the foregoing, the respective indemnification obligations of the parties hereunder shall not expire with respect to any Claim brought within such specified time periods until the indemnification obligation, if any, with respect to such Claim shall have been finally determined and paid. 10.4 Indemnification Procedure. In any case under this Agreement where Seller has indemnified a Buyer Indemnified Party or Buyer has indemnified a Seller Indemnified Party (the indemnifying party hereinafter the "Indemnifying Party" and the party entitled to indemnification hereinafter the "Indemnified Party") against any Claim, indemnification shall be conditioned on compliance with the procedure and shall be subject to the limitations outlined below: A-I-48 (a) Provided that prompt notice is given of a Claim for which indemnification might be claimed under this Article 10, unless the failure to provide such notice does not actually and materially prejudice the interests of the Indemnifying Party, the Indemnifying Party promptly will defend, contest, or otherwise protect against any such Claim at its own cost and expense. Such notice shall describe the Claim in reasonable detail and shall indicate the amount (estimated, if necessary) of the loss that has been or may be suffered by an Indemnified Party. (b) An Indemnified Party may, but will not be obligated to, participate at its own expense in a defense thereof by counsel of its own choosing, but the Indemnifying Party shall be entitled to control the defense unless such Indemnified Party has relieved the Indemnifying Party from liability with respect to the particular matter, provided that the Indemnifying Party may only settle or compromise the matter subject to indemnification without the consent of the Indemnified Party if such settlement includes a complete release of all Indemnified Parties as to the matters in dispute and provided further that such Indemnified Party will not unreasonably withhold consent to any settlement or compromise that requires its consent. (c) In the event the Indemnifying Party fails to timely defend, contest, or otherwise protect against any such Claim, an Indemnified Party may, but will not be obligated to, defend, contest, or otherwise protect against the same, and make any reasonable compromise or settlement thereof and recover the entire costs thereof from the Indemnifying Party, including reasonable attorneys' fees, disbursements and all amounts paid as a result of such Claim or the compromise or settlement thereof; provided, however, that if the Indemnifying Party undertakes the defense of such matter, an Indemnified Party shall not be entitled to recover from the Indemnifying Party for its costs incurred in the defense thereof other than the reasonable costs of providing assistance. (d) The Indemnified Parties shall cooperate and provide such assistance as the Indemnifying Party may reasonably request in connection with the defense of the matter subject to indemnification and in connection with recovering from any third parties amounts that the Indemnifying Party may pay or be required to pay by way of indemnification hereunder. The Indemnified Parties shall take commercially reasonable steps to protect its position with respect to any matter that may be the subject of indemnification hereunder in the same manner as it would any similar matter where no indemnification is available. 10.5 Magnavox Asset Purchase Agreement and Subrogation (a) In the event that Buyer recovers losses from Seller pursuant to this Article 10 and such losses come within the scope of, and are recoverable by Buyer from Magnavox or General Atronics Corporation under, the indemnification provisions contained in Section 10 of the Magnavox Asset Purchase Agreement ("Magnavox Indemnity"), Seller shall be subrogated to the indemnification rights of Buyer under the Magnavox Asset Purchase Agreement, as transferred and assigned to Buyer hereunder, and may enforce and exercise such rights against, and seek recovery from, Magnavox or General Atronics Corporation, as the case may be, to the extent provided under Section 10 of the Magnavox Asset Purchase Agreement. (b) In the event that Seller (and not Buyer) becomes subject to any Claim and such Claim comes within the scope of the Magnavox Indemnity, Buyer agrees to assign to Seller its rights under the Magnavox Indemnity so that Seller may seek redress directly from Magnavox under the terms of the Magnavox Indemnity. A-I-49 ARTICLE XI TERMINATION 11.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of Seller and Buyer; (b) by either Seller or Buyer; (i) if the Closing shall not have occurred by July 31, 2000; (ii) if any Restraint having any of the effects set forth in Section 9.1 shall be in effect and shall have become final and non-appealable; or (iii) if the value of the Acquired Assets prior to Closing is less than Four Million Five Hundred Thousand Dollars ($4,500,000). (c) by Seller, if Buyer shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement; or (d) by Buyer, if Seller shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement. 11.2 Effect of Termination. The termination of this Agreement shall become effective upon delivery to the other party of written notice thereof. In the event of the termination of this Agreement pursuant to Section 11.1, this Agreement shall become void and have no effect, with no liability on the part of any party or its stockholders or directors or officers in respect thereof except for agreements which survive the termination of this Agreement and except for liability that Buyer or Seller might have arising from a breach of this Agreement. ARTICLE XII MISCELLANEOUS 12.1 Survival of Representations and Warranties. The representations and warranties in this Agreement shall survive the Closing for a period equal to the respective expiration periods under Section 10.3(c) hereof. The expenses provision of Section 6.10 hereof shall survive any termination hereof. Notwithstanding anything to the contrary herein, this Section shall in no way limit the survival of any covenant or agreement of the parties set forth herein (except to the extent that covenants may be limited by their terms) and neither Seller nor Buyer shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. A-I-50 12.2 Waiver. At any time prior to the Closing Date, any party hereto may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto; (ii) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto; and (iii) waive compliance with any of the agreements of any other party or with any conditions to its own obligations contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing duly authorized by and signed on behalf of such party. 12.3 Notices. (a) Any notice or communication to any party hereto shall be duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), facsimile or overnight air courier guaranteeing next day delivery, to such other party's address. (b) If to Buyer: DRS Technologies, Inc. 5 Sylvan Way Parsippany, New Jersey 07054 Facsimile No.: (973) 898-4730 Attention: Nina Laserson Dunn, Esq. with a copy to: Arnold & Porter 399 Park Avenue New York, New York 10022 Facsimile No.: (212) 713-1399 Attention: Vijay S. Tata, Esq. If to Seller: General Atronics Corporation 1200 East Mermaid Lane Wyndmoor, Pennsylvania 19038 Attention: George E. Huffman Facsimile No.: (215) 233-9947 with a copy to: McCausland, Keen & Buckman 259 North Radnor-Chester Road, Suite 160 Radnor, Pennsylvania 19087 Attention: Robert H. Young, Jr. Facsimile No.: (610) 341-1099 A-I-51 (c) All notices and communications will be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, if mailed; when sent, if sent by facsimile; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. 12.4 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. 12.5 Interpretation. The headings of articles and sections herein are for convenience of reference, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 12.6 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 12.7 No Third Party Beneficiaries. Nothing in this Agreement shall confer any rights upon any person or entity that is not a party or permitted assignee of a party to this Agreement. 12.8 Successors and Assigns. The Agreement shall be binding upon and shall inure to the benefit of the parties, their respective successors and assigns and their respective shareholders to whom the assets of such party are distributed in the event of dissolution, but only as to each shareholder to the extent of the assets distributed to such shareholder; provided, however, that neither this Agreement nor any rights hereunder may be assigned by any party without the consent of the other party hereto; provided further, however, that Buyer shall, without Seller's consent, have the right to designate prior to the Closing Date, any other direct or indirect wholly-owned subsidiary of Seller that will, in lieu of Buyer, purchase the Acquired Assets and the Assumed Liabilities and that such designation shall not affect the obligations of Buyer hereunder. 12.9 Governing Law. Except as the laws of the Commonwealth of Pennsylvania are by their terms applicable, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to principles of conflicts of laws. 12.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. A-I-52 12.11 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 12.12 Arbitration (a) The parties shall use their best efforts to resolve any Dispute (as defined in paragraph (b) below) through negotiation. If, and only if, the parties fail to resolve the Dispute through such negotiations, either party may initiate an arbitration proceeding in accordance with this Section 12.12. (b) Subject to paragraph (a) above, any dispute, controversy, claim or difference between the parties with respect to any matter related to or arising out of this Agreement (each, a "Dispute"), including any question regarding the existence, validity or termination hereof, shall be referred to and finally resolved by arbitration administered by the American Arbitration Association in accordance with the Commercial Arbitration Rules of the American Arbitration Association and the provisions of this Section 12.12. Any arbitration proceeding (each, a "Proceeding") shall be held in New York, New York. (c) Each party shall appoint one arbitrator within thirty (30) calendar days after the Proceeding has been initiated. If either party fails to appoint an arbitrator within such time, such arbitrator shall be appointed by the American Arbitration Association. The arbitrators so appointed shall appoint a third arbitrator within thirty (30) calendar days after the appointment of the second arbitrator. If they fail to do so within such time, the third arbitrator shall be appointed by the American Arbitration Association within the next twenty (20) calendar days. The third arbitrator shall act as chairman of the arbitration. If any arbitrator is required to be replaced, the replacement arbitrator shall be appointed. (d) The arbitrators shall decide all Disputes by a majority vote in accordance with this Agreement and the laws of the State of Delaware applicable to contracts made and to be performed entirely within such State. The decision of the arbitrators shall be in writing and presented in separate finding of fact and law. The award of the arbitrators shall be final and binding on the parties from which no appeal may be taken, and an order confirming the award or judgment upon the award may be entered in any court having jurisdiction. The award of the arbitrators may include pre-award interest and equitable relief to the extent the arbitrators deem appropriate. The parties agree that the award of the arbitrators shall be the sole and exclusive remedy between them regarding any Dispute presented to the arbitrators; that any monetary award shall be made payable promptly and free of any deduction or offset (except such amount, if any, as may be awarded by the arbitrators in respect of counterclaims brought in the same proceedings); and that any costs or fees incident to enforcing the award shall, to the maximum extent permitted by law, be charged against the party resisting such enforcement. (e) The arbitrators, in the award, may assess the fees and expenses of the arbitrators and the Proceeding, and the witness and attorneys' fees of the parties, or any part thereof, against either or both parties, taking into account the circumstances of the case. Except as assessed by the arbitrators in the award, the fees and expenses of each arbitrator appointed by a A-I-53 party shall be borne by such party and the fees and expenses of the Proceeding and of the third arbitrator shall be divided equally between the parties. (f) Prior to the appointment of the arbitrators, either party may seek provisional remedies, including, without limitation, temporary restraining orders and preliminary injunctions. After the appointment of the arbitrators, the arbitrators shall have sole authority to grant such provisional remedies as the arbitrators, in their sole discretion, deem necessary and appropriate. (g) Notwithstanding anything to the contrary in this Section 12.12, the parties expressly agree that either party may seek provisional relief, including without limitation to temporary restraining orders and preliminary injunctions, in addition to the remedy of arbitration set forth herein. Any such action for relief shall not constitute a waiver of the right to arbitrate. (h) In addition, notwithstanding the foregoing, if either party is required to defend or prosecute third party claims in courts having jurisdiction over such matters, neither party shall be precluded from fully exercising its rights against the other party in such court with respect to such matters. [Signatures begin on the next page] A-I-54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers all as of the day and year first above written. DRS TECHNOLOGIES, INC. By: ---------------------------------------- Name: Title: GENERAL ATRONICS CORPORATION By: ---------------------------------------- Name: Title: Each of George E. Huffman, Howard S. Brown, Michel M. Goutmann and Joseph A. Gothie by their execution below, hereby acknowledge receipt of a copy of this Agreement and agree to comply with the Non-Compete covenant set forth in Section 7.1 hereof. By their execution below, each of Messrs. Huffman, Brown, Goutmann, and Gothie represent and warrant to Seller and Buyer that it has duly executed and delivered this Agreement for purposes of the Non-Compete covenant in Section 7.1 hereof only and the Non-Compete covenant in Section 7.1 hereof constitutes a valid, legal binding obligation of each Key Shareholder enforceable in accordance with its terms. By: ------------------------- Name: George E. Huffman Title: By: ------------------------- Name: Howard S. Brown Title: By: ------------------------- Name: Michel M. Goutmann Title: By: ------------------------- Name: Joseph A. Gothie Title: A-I-55 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS..........................................................1 ARTICLE II SALE AND PURCHASE...................................................6 2.1 Acquired Assets..............................................6 2.2 Excluded Assets..............................................8 2.3 Assumed Liabilities..........................................8 2.4 Excluded Liabilities.........................................9 2.5 Estimated Balance Sheet and Net Assets......................10 2.6 Purchase Price..............................................10 2.7 Purchase Price Adjustment...................................11 2.8 Closing.....................................................12 2.9 Transactions at Closing.....................................12 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER..........................14 3.1 Organization and Qualification..............................14 3.2 Authority Relative to this Agreement........................14 3.3 No Violations, etc..........................................14 3.4 Absence of Changes or Events................................15 3.5 Accounts Receivable.........................................16 3.6 Litigation..................................................16 3.7 Compliance with Law.........................................16 3.8 Title to Assets.............................................17 3.9 MSSC Interest and Joint Venture Agreement...................17 3.10 Equipment and Property......................................17 3.11 Inventories.................................................18 3.12 Business Contracts..........................................18 3.13 Transferred Permits.........................................18 3.14 Intellectual Property.......................................18 3.15 Taxes.......................................................20 3.16 Employee Benefit Plans......................................21 3.17 Employees...................................................23 (i) 3.18 Environmental Matters.......................................24 3.19 Government Contracts........................................25 3.20 Financial Information.......................................28 3.21 Customers...................................................28 3.22 Disclosure..................................................28 3.23 Finders or Brokers..........................................29 3.24 Insurance...................................................29 3.25 Access and Sophistication...................................29 3.26 Investment Representation...................................29 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER............................30 4.1 Organization and Qualification..............................30 4.2 Authority Relative to this Agreement........................30 4.3 Capitalization..............................................31 4.4 Subsidiaries................................................31 4.5 Valid Issuance of Securities................................31 4.6 No Violations, etc..........................................31 4.7 Litigation..................................................32 4.8 Absence of Changes or Events................................33 4.9 Disclosure..................................................33 4.10 Finders or Brokers..........................................33 ARTICLE V CONDUCT OF BUSINESS OF SELLER.......................................33 5.1 Conduct of Defense Business and Business of MSSC Pending the Acquisition.....................................33 5.2 Permitted Actions...........................................35 ARTICLE VI COVENANTS AND AGREEMENTS...........................................35 6.1 Additional Agreements; Cooperation..........................35 6.2 Third Party Consents........................................36 6.3 Novation of United States Government Contracts..............36 6.4 Patent, Trademark and Copyright Filings.....................37 6.5 Schedules...................................................37 6.6 Full Access.................................................37 6.7 No Shopping.................................................38 6.8 Notification of Certain Matters.............................38 (ii) 6.9 Publicity...................................................38 6.10 Fees and Expenses...........................................38 6.11 Tax Matters.................................................39 6.12 Interim Operating...........................................39 6.13 Lease of Property...........................................40 6.14 Environmental Matters.......................................40 ARTICLE VII POST-CLOSING COVENANTS............................................40 7.1 Non-Compete.................................................40 7.2 Non-Solicitation............................................40 7.3 Access to Files.............................................41 7.4 Further Assurances..........................................41 ARTICLE VIII EMPLOYEES AND EMPLOYEE BENEFITS..................................41 8.1 Employees and Employee Benefits.............................41 8.2 Designated and Accepting Employees..........................42 8.3 Benefits of Accepting Employees.............................42 8.4 Retention of Employees......................................44 8.5 Cooperation.................................................44 ARTICLE IX CONDITIONS TO CLOSING..............................................44 9.1 Conditions to Each Party's Obligation.......................44 9.2 Conditions to Obligations of Buyer..........................45 9.3 Conditions to Obligations of Seller.........................46 ARTICLE X INDEMNIFICATION.....................................................47 10.1 Indemnification by Seller...................................47 10.2 Indemnification by Buyer....................................47 10.3 Limitations.................................................47 10.4 Indemnification Procedure...................................48 10.5 Magnavox Asset Purchase Agreement and Subrogation...........49 ARTICLE XI TERMINATION........................................................50 11.1 Termination.................................................50 11.2 Effect of Termination.......................................50 (iii) ARTICLE XII MISCELLANEOUS.....................................................50 12.1 Survival of Representations and Warranties..................50 12.2 Waiver......................................................51 12.3 Notices.....................................................51 12.4 Counterparts................................................52 12.5 Interpretation..............................................52 12.6 Amendment...................................................52 12.7 No Third Party Beneficiaries................................52 12.8 Successors and Assigns......................................52 12.9 Governing Law...............................................52 12.10 Entire Agreement............................................52 12.11 Validity....................................................53 12.12 Arbitration.................................................53 Exhibits Exhibit 2.6 Escrow Agreement Exhibit 6.13 Lease Exhibit 9.2(g) Opinion of McCausland, Keen & Buckman Exhibit 9.2(h) Lock-up Agreement Exhibit 9.3(g) Opinion of Buyer's General Counsel Seller's Schedules Schedule I Permitted Encumbrances Schedule 2.1 Equipment Schedule 2.1(e) Business Contracts Schedule 2.1(h) Intellectual Property Schedule 2.1(i) Transferred Permits Schedule 2.1(m) Non-transferable claims Schedule 3.3 Violations Schedule 3.4 Material Changes Schedule 3.5 Accounts Receivable Schedule 3.6 Litigation Schedule 3.7 Violations Schedule 3.8 Assets other than Acquired Assets used in Defense Business Schedule 3.11 Location of Inventory Schedule 3.12(d) Defaults under Business Contracts Schedule 3.12(e) Notices of Termination of Business Contracts Schedule 3.12(f) Consents to Sell, Assign, etc. Schedule 3.14(j) Trade Names Schedule 3.15 Tax Matters Schedule 3.16 Employee Benefit Plans (iv) Schedule 3.16(j) Plans Providing Benefits after Retirement or Termination of Service Schedule 3.16(k) Plans Entitling Participants to Severance Pay, etc. Schedule 3.17 Employees Schedule 3.17(b) Employees not "at will" Schedule 3.17(c) Employees under Investigation Schedule 3.17 (e) Employee Contracts Schedule 3.18 Environmental Matters Schedule 3.19 Government Contracts Schedule 3.19(i) Show Cause, Cure or Deficiency Notice Relating to Outstanding Government Contracts Schedule 3.19(j) Outstanding Disputes or Claims under Government Contracts Schedule 3.19(k) Outstanding Disputes or Claims and Foreseeable Expenditures Materially Increasing Cost of Completes Schedule 3.19(r) Government Contract Set-Offs Schedule 3.19(t) Government Contract Disputes or Disallowances Schedule 3.19(u) Assignments/Financings Arrangements Schedule 3.19(v) Government Property Schedule 3.19(w) Non-compliance with Government Contracts Schedule 3.21 Customers Schedule 3.24 Insurance Policies Schedule 5.2 Permitted Actions Schedule 6.11(b) Allocation of Purchase Price Schedule 9.2(d) Consents Buyer's Schedules Schedule 4.1 Violations of Organizational Documents Schedule 4.3 Agreements Relating to Buyer's Capital Stock Schedule 4.4 Subsidiaries Schedule 4.6(a) Required Filings, Permits, Authorizations, etc. Schedule 4.6(c) Violations or Defaults Schedule 4.7 Litigation Schedule 4.8 Absence of Changes or Events Schedule 9.3(d) Consents (v) EX-10.35 3 ex10-35.txt EMPLOYMENT AGREEMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 9th day of August, 2000, by and between DRS TECHNOLOGIES, INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan Way, Parsippany, New Jersey and Paul G. Casner, Jr. (the "Executive"), currently residing at 629 Quail Keep Drive, Safety Harbour, FL 34695 WHEREAS, the Executive desires to enter into an agreement of employment with the Company in accordance with the terms and conditions set forth herein; and WHEREAS, the Company desires to employ the Executive as its Executive Vice President, Chief Operating Officer in accordance with the terms and conditions set forth herein; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Term of Employment. The initial term of employment shall begin on the date set forth above (the "Effective Date") and shall continue in effect until the second anniversary of the Effective Date (such period being the "Initial Term"). On the first anniversary of the Effective Date and on subsequent anniversaries, this Agreement shall automatically be renewed for successive one year periods, unless at least ninety (90) days prior to the end of each renewal date either party hereto gives written notice to the other party of its intention not to renew this Agreement and, as provided below, shall remain in effect following a Change in Control. This Agreement may be terminated at any time during its initial term or during any renewal term solely in accordance with the terms and conditions of Section 5 hereof. 2. Duties. 2.1 Position. The Company hereby employs the Executive in an executive capacity with the title of Executive Vice President, Chief Operating Officer, and the Executive hereby accepts such employment and undertakes and agrees to serve in such capacity. In such capacity, the Executive shall have such powers, perform such duties and fulfill such responsibilities typically associated with such positions in other publicly held companies. Performance of his duties hereunder shall in no event require that the Executive work on a regular basis at any location other 1 than within twenty (20) miles of the Company's present office location. The Executive shall devote substantially all of his working time and efforts to the performance of his duties hereunder. The Executive shall report directly to the Chief Executive Officer ("CEO") of the Company and have the authority to hire and discharge any employee within his area of responsibility. 2.2 Limitation on Other Employment. During the term of his employment hereunder, the Executive will not engage in any other occupation for gain, profit or pecuniary advantage, without the consent of the CEO of the Company; provided, however, that this limitation shall not be construed as preventing him from (a) serving on the board of directors of any corporation not directly competitive with the Company (provided that the Executive has obtained the approval of the CEO), and (b) investing or trading in securities or other forms of investment, in each case so long as such activities do not materially interfere with the performance of his duties hereunder and such investments do not represent the ownership of 5% or more of the capital stock of publicly traded entities. 3. Compensation. 3.1 Base Salary. In consideration of the services rendered hereunder, the Company shall pay the Executive during the Initial Term of this Agreement a base salary at the rate of THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000) per annum or such higher rate as the CEO may reasonably determine ("Base Salary"), which amount will be payable to him in bi-weekly installments (or at such intervals as other salaried employees of the Company are paid). The amount of the Executive's Base Salary shall be reviewed annually by the CEO but shall not be reduced without written consent of the Executive. 3.2 Incentive Compensation. (a) The Executive will be eligible to participate in the DRS Incentive Compensation Plan ("ICP") at a grade level commensurate with his position. The current grade level for the Executive is M77. Specific annual entitlements to bonus awards shall be predicated on the Executive's performance and subject to the Company achieving its operating targets, consistent with the rules set forth in the ICP. (b) The Executive shall participate in all other Bonus, Long-Term Capital Accumulation and/or Stock-Based Programs that the Company may adopt from time to time. 2 (c) Deferred Compensation. In addition to the above compensation, the Executive shall be entitled to deferred compensation of Thirty Thousand Dollars ($30,000.00) per year for each full year of the first five years of employment of the Executive by the Company beginning on the Commencement Date of employment (the "Deferred Compensation"). On the first day of January following the earlier to occur of (i) Executive's retirement from the Company, or (ii) Executive's 65th birthday, the Company shall pay to the Executive the first quarterly installment of Seven Thousand Five Hundred Dollars ($7,500) of the Deferred Compensation. On the first day of each April, July, October and January thereafter, the Company shall pay to the Executive an installment of Seven Thousand Five Hundred Dollars ($7,500) until the amount of the Deferred Compensation is exhausted. No interest shall be paid on any Deferred Compensation. 4. Benefits. 4.1 Benefit Programs. The Executive will be included in all group insurance plans ("Insurance Plans"), retirement plans, and other benefits plans and arrangements (such retirement and other benefit plans and arrangements, together with the Insurance Plans, the "Benefit Program") available to executives of the Company, as such plans may be or have been adopted from time to time. The Company will provide to the Executive the specific benefits listed on Schedule A hereto. The Executive shall be a Class B Participant in the Company's SERP. For purposes of the SERP, the Executive shall be deemed to have commenced employment of June 1, 1991. 4.2 Vacation. The Executive shall be entitled to five (5) weeks of vacation with pay during each twelve (12) month period of employment under this Agreement. 4.3 Automobile and Other Expenses. In accordance with Company policy as established from time to time, the Company will provide the Executive with an automobile of a type mutually agreed upon and the Company will pay, or reimburse him for, all business related operating expenses of such automobile (including, without limitation, insurance, service, repairs, gasoline and oil). The Company will also reimburse the Executive for his ordinary and customary business expenses incurred in the performance of his duties hereunder. 5. Termination. 5.1 Termination by the Company for Cause. 3 (a) Definition. The Company may terminate the Executive's employment hereunder for "Cause" which shall be limited to: (i) Gross neglect or dereliction in the performance of the Executive's duties or other grave misconduct by him and the failure to cure such situation within twenty days after receipt of a notice thereof from the Board of Directors, (ii) The Executive's engaging in conduct which has caused demonstrable and serious injury to the Company, monetary or otherwise, as evidenced by a written determination authorized by the Board of Directors of the Company, or (iii) The Executive's conviction for or plea to a felony or for any lesser crime which involves the property of the Company. (b) Compensation upon Termination for Cause. Upon the termination of the Executive's employment for Cause, the Company shall pay the Executive his Base Salary, prorated incentive compensation and continued participation in the Benefit Program through the effective date of such termination. 5.2 Termination For Disability or Death. (a) Disability. The Company may terminate the Executive's employment hereunder in the event of the Executive's permanent disability. For the purposes of this Agreement, permanent disability shall mean the Executive's inability, whether mental or physical, to perform the regular duties of his employment on a full-time continuous basis for six (6) consecutive months (the "Disability Period"). If a policy of disability insurance is in effect insuring the Executive, then in no event shall Executive be deemed to be disabled until he is determined to be entitled to receive disability income payments pursuant to such disability policy. During the Disability Period the Company shall (i) pay the Executive his full Base Salary then in effect, as well as any ICP benefit to which he would otherwise be entitled, reduced by any amounts which he actually received under any disability plan maintained by the Company during the Disability Period, and (ii) shall continue his participation in the Benefit Program. The Company shall notify the Executive in writing of any such finding on its part at the end of the Disability Period. If the Company and Executive are unable to agree whether he is so disabled the question shall be decided by a panel of three physicians, one to be designated by the Company, one by the Executive and one by the 4 first two so designated. The determination of the panel shall be final and binding upon the parties with costs of the panel to be paid by the Company. (b) Death. The Executive's employment hereunder will terminate upon the Executive's death. (c) Compensation Upon Termination For Disability or Death. (i) If the Company terminates the Executive's employment due to permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall pay the Executive his monthly Base Salary then in effect for one (1) year after his termination, reduced by any amounts to which he actually receives under any disability plan maintained by the Company and shall pay the Executive when due, a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his active employment during the termination year. (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2 (b) herein, the Company shall pay the Executive's estate or designated beneficiary (A) the Executive's Base Salary and any other amounts due or earned through the date of death, (B) until the end of the fiscal year in which the date of death occurred or, if greater, for three months following the date of death, the Executive's Base Salary as in effect, and (C) a pro-rata portion of the bonus determined pursuant to (iii) below corresponding to the period of his employment during the termination year. (iii) For purposes of determining the bonus payable in the year of termination, the Company shall pay a bonus equal to the amount of the current year's bonus which could have been paid to Executive for the year of termination, pro-rated for the period of his employment during the termination year. (d) Benefits upon Termination for Death or Disability. (i) If the Company terminates the Executive's employment due to his permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall continue to provide him and his dependents coverage under insurance Plans, at his option, for the longer of one year or the period required by applicable law. The Company shall provide such coverage 5 at its expense (except with respect to those costs for which the Executive was responsible prior to the termination of employment). (ii) If the Executive's employment is terminated due to his death, pursuant to Subsection 5.2(b) herein, the Company shall continue to provide the Executive's dependents medical insurance coverage, at their option, for the longer of one (1) year after his death or the period required by applicable law. The Company shall provide such coverage at its expense (except for those costs for which the Executive was responsible prior to his death). 5.3 Termination By The Executive. (a) Good Reason. The Executive may terminate his employment during the Employment Period hereunder for "Good Reason" (i) upon the failure by the Company (or its stockholders as the case may be) to elect or reelect or to appoint or reappoint the Executive to the offices of Executive Vice President, Operations, or (ii) after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within twenty (20) days after written notice thereof has been given by the Executive to the Company, or (iii) upon the occurrence of any action taken by the Company which would constitute a constructive termination; provided, that, in addition to and without limiting the generality of the foregoing, on and after a Change in Control (as defined in Section 5.3(c)) herein), any one of the following events shall be deemed a material breach of this Agreement: (i) the assignment to the Executive of any duties inconsistent with the Executive's then status as an executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; (iii) a reduction in the aggregate percentage upon which the Executive's Incentive Compensation is determined following the Change of Control unless equivalent reductions are made generally for other executives of the Company; 6 (iv) the relocation of Executive's principal place of employment, without his consent, to a location more than twenty (20) miles from the place of such employment immediately prior to the Change in Control; (v) The failure by the company to continue to provide the Executive with benefits substantially similar to those enjoyed by Executive under the Benefit Program, as in effect immediately prior to the Change in Control, the taking of any action by the company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to Change in Control; and (vi) The failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 5.5 herein. (b) Compensation and Benefits upon Termination by The Executive. (i) In the event of a termination of this Agreement by the Executive, without Good Reason, the company shall provide to him his Base Salary, the prorated portion of the bonus determined pursuant to Section 5.2(c)(iii), corresponding to the period of his employment during the termination year and continued participation in the Benefit Program, through the effective date of such termination. (ii) If the Executive terminates his employment hereunder for Good Reason, (A) if there has not occurred a Change in Control, the Company shall also pay him, as liquidated damages under this Agreement, his monthly Base Salary then in effect for twelve months following the notice of termination, plus the pro-rata portion of the bonus determined pursuant to Section 5.2(c)(iii); (B) if there has occurred a Change in Control, the Company shall pay him, as liquidated damages under this Agreement, a lump sum equal to the sum of the bonus earned by him during the immediately preceding fiscal year of the Company plus 7 200% of his annual Base Salary then in effect, and (C) in either case, the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During the period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out-placement assistance utilizing a consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. (c) Definition of Change in Control. A "Change in Control" shall mean the occurrence of an event set forth in any one of the following paragraphs: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below and excluding a transaction whereby a person becomes the Beneficial Owner of 20% or more of the combined voting power of the Company's then outstanding securities, but such transaction does not transfer the power to control the management or the policies of the Company; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two- 8 thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by the stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 5.3(c), the following definitions shall apply: "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Act"), as modified and used in Section 13(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the 9 Company. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act. 5.4 Termination by the Company other than for Cause. (a) Compensation Upon Termination by the Company other than for Cause. If the Company terminates the Executive's employment hereunder without "Cause", the Company shall pay the Executive the amounts described in 5.3(b)(ii). (b) Benefits Upon Termination by the Company other than for Cause. If the company terminates the Executive's employment hereunder without "Cause", the Executive's employment shall be deemed to continue for the balance of the Agreement for purposes of determining his participation in the Benefit Program existing prior to the termination or under any equivalent plan providing the same coverage which may be substituted for any such plan; provided, however, that if such participation by him after termination of employment is not permitted under any such plan, the Company will provide him with the equivalent benefits. The Company will pay the total costs of the Executive's participation in such plans or the equivalent thereof. During this period the Executive will have full use of the Company-supplied automobile. The Executive also will be provided with out-placement assistance utilizing a consultation service designated and paid for by the Company. Furthermore, all stock options granted to Executive shall immediately vest and be exercisable for a period of 12 months following termination. 5.5 Successor. The Company, or any entity which controls the Company, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company by written agreement expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had occurred. Failure of the Company or a controlling entity to obtain such agreement prior to the effective date of any such succession followed by failure of the successor to honor this Agreement shall be a breach of this Agreement and shall entitle the Executive to the rights and benefits hereunder as though he had terminated his employment with the Company for Good Reason pursuant to paragraph 5.3 hereof (including those provisions which concern compensation following a Change in Control), whether or not he terminates his employment with the Company. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to all or substantially all of its business 10 or assets which becomes bound by all of the terms and conditions of this Agreement. 6. Restrictions. 6.1 Confidential Information. The Executive agrees that during and after the period of his employment he will not, without authorization from the Company, divulge, disclose or otherwise communicate to any person or company any information of a confidential nature pertaining to specific details of the Company's business, functions or operations, except in connection with the discharge of his duties hereunder, or pursuant to the order of a court of competent jurisdiction. The Executive further agrees that, upon termination of his employment with the Company for any reason, he will promptly return to the Company all books and records of or pertaining to the Company's business, and all other property belonging to the Company which is in his custody or possession. 6.2 Non-Compete. During his employment by the Company and in the event he is terminated by the Company for Cause or terminates his employment without Good Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the Executive shall not compete with the Company in any activity relating to the Business of the Company as conducted by the Company during the term of this Agreement. For purposes of the preceding sentence, competition shall include, without limitation, direct or indirect competition by the Executive, whether as an owner, officer, director, employer, partner, consultant, advisor, contractor, principal agent, licensor, employee or affiliate of a person firm, venture or corporation that so competes with the Company. Without the prior written approval of the CEO, the Executive further agrees that during the twelve (12) month period following the termination of this Agreement for any reason he will not solicit for employment any employee of the Company. It is further agreed and understood that the Executive shall not engage in any conduct or communication which shall disparage the Company or interfere with its current or prospective business relationships. 6.3 Cause of Action. The parties hereby declare that the rights of the Company are of a unique nature, the loss of which may cause irreparable harm, and that it may be impossible to measure in money the damages which will accrue to the company by reason of the loss of such rights or a failure by the Executive to perform or adhere to any of the obligations under Sections 6.1 and 6.2 hereof. The Executive expressly acknowledges that remedies at law alone will be inadequate to compensate the Company for any breach or violation of any of the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition to all other remedies hereunder or thereunder, shall be entitled, as a matter of right, to 11 seek injunctive relief, including specific performance, with respect to any such breach of violation, in any court of competent jurisdiction. 7. Legal Matters. 7.1 Resolution of Conflict. Other than as provided in Section 6.3 herein with respect to obligations contained in Sections 6.1 and 6.2 herein, any and all disputes, claims and controversies between the parties hereto concerning the validity, interpretation, performance, termination or breach of this Agreement, which cannot be resolved by the parties within ninety (90) days after such dispute, claim or controversy arises shall, at the option of either party, be referred to and finally settled by arbitration. Such arbitration shall be initiated by the initiating party giving notice (the "Arbitration Notice") to the other party (the "Respondent") that it intends to submit such dispute, claim or controversy to arbitration. Each party shall, within thirty (30) days of the date the Arbitration Notices is received by the Respondent, designate a person to act as an arbitrator, if either party fails to designate a person to Act as an arbitrator within the time specified herein the arbitration shall be conducted by the sole designated arbitrator. The two arbitrators appointed by the parties shall, within thirty (30) days after their designation appoint a third arbitrator who shall act as presiding arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by the parties are unable to appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed according to the rules of the American Arbitration Association as in effect on the date the notice of submission to arbitration is given (the "Rules"). Such arbitration shall be held in New Jersey in accordance with the Rules except as otherwise expressly provided herein. The arbitrators shall, by majority vote, render a written decision stating reasons therefor in reasonable detail within three (3) months after the appointment of all the arbitrators. Each party shall bear its own costs and attorneys fees. All other costs and expenses of arbitration shall be apportioned between the parties by the arbitrators. The award of the arbitrators shall be made in United States currency and shall be final and binding, and judgment thereon may be rendered by any court having jurisdiction thereof, or application may be made to such court for the judicial acceptance of the award and an order of enforcement as the case may be. 7.2 Agreement Confidential. Both the Executive and the Company will keep the terms of this Agreement confidential provided that this provision shall not restrict any disclosure by the Company pursuant to any applicable law, regulation or judicial order. 7.3 Notices. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall 12 be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, by registered or certified mail, addressed to either party at the address first written above (or to such other address as either party shall designate by notice in writing to the other party in accordance herewith). 8. Miscellaneous. 8.1 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed within New Jersey, without regard to the principles of conflict of laws. 8.2 Headings. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 8.3 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and from and after the date hereof supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof provided, however, that the benefits conferred under this Agreement are in addition to, and not in lieu of, any and all benefits conferred under plans and arrangements currently in effect for the Executive. 8.4 Assignment. This Agreement is binding upon and shall inure to the benefits of the Executive and his estate, but the Executive's rights and obligations hereunder may not be assigned or pledged by him. 8.5 Modification. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only be written instrument executed by both of the parties hereto or in the case of a waiver, by the party waiving compliance. 8.6 Section 162(m). In the event compensation payable to Executive hereunder in any single tax year would result in the non-deductibility of a portion of such compensation by the Company solely by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended, then, and in such event, the Company shall be permitted to defer payment of such non-deductible amount to the Executive to be paid to him on the first day of the succeeding tax year of the Company. 13 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with legal and binding effect as of the day and year first above written. DRS TECHNOLOGIES, INC. /s/ Mark S. Newman -------------------------- By: Mark S. Newman, Chairman, President and Chief Executive Officer THE EXECUTIVE /s/ Paul G. Casner, Jr. --------------------------- Paul G. Casner, Jr. SCHEDULE A Group Plans Benefit - ----------- ------- DRS Group Medical/Dental Plan Varies DRS Group Life Insurance Plan $50,000 DRS Group AD&D $500,000 (2 X salary to 500K max) DRS Long Term Disability Plan - Class I $10,000 monthly benefit DRS Retirement/Savings Plan (401K) Varies DRS Reimbursement Account Plan (IRC 125) Varies (See below) Executive Plans/Benefits Benefit - ------------------------ ------- Executive Incentive Compensation Plan Varies 1996 Omnibus Plan Varies Life Insurance (Split $) $850,000 Life Insurance (Group Carve-out) $650,000 DRS Reimbursement Account: one time annual $7500 for 1999 Deposit to the reimbursement account (amount may vary from year to year) Supplemental Executive Retirement Plan (SERP) - Determined at time of Class B Participant Retirement 15 EX-21 4 ex21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 DRS TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 2001 Subsidiary Place of Incorporation - ---------- ---------------------- DRS Electronic Systems, Inc. United States of America (Delaware) DRS Technical Services, Inc. United States of America (Delaware) DRS Systems Management Corporation United States of America (Delaware) Laurel Technologies Partnership United States of America (Delaware) DRS Precision Echo, Inc. United States of America (Delaware) DRS Data Systems, Inc. United States of America (Delaware) DRS Photronics, Inc. United States of America (New York) DRS Optronics, Inc. United States of America (Delaware) DRS Technologies Canada, Inc. United States of America (Delaware) DRS Technologies Canada Company Canada (Nova Scotia) DRS Hadland Ltd. United Kingdom DRS Hadland GmbH Federal Republic of Germany DRS Hadland, Inc. United States of America (Delaware) DRS Air, Inc. United States of America (Delaware) DRS Systems, Inc. United States of America (Delaware) DRS International, Inc. United States of America (Delaware) Diagnostic/Retrieval Systems (DRS) Technologies Netherlands Parsippany B.V. NAI Technologies, Inc. United States of America (New York) DRS Rugged Systems (Europe) Ltd. United Kingdom DRS Rugged Systems (Australia) Pty. Ltd. Australia DRS Data Systems (Europe) Ltd. United Kingdom DRS Rugged Systems (Europe) Products Ltd. United Kingdom DRS Advanced Programs, Inc. United States of America (New York) DRS FPA, Inc. United States of America (Delaware) DRS Infrared Technologies, LP United States of America (Delaware) DRS Sensor Systems, Inc. United States of America (Delaware) EX-23.1 5 ex23-1.txt ACCOUNTANT'S CONSENT EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors, DRS Technologies, Inc.: We consent to the incorporation by reference in the registration statements (No. 33-33125, No. 33-42886 and No. 333-69751) on Form S-8 and (No. 33-64641, No. 333-04929 and No. 333-52170) on Form S-3 of DRS Technologies, Inc. of our report dated May 17, 2001, relating to the consolidated balance sheets of DRS Technologies, Inc. and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings, and cash flows and related consolidated financial statement schedule for each of the years in the three-year period ended March 31, 2001, which report appears in the March 31, 2001 Annual Report on Form 10-K of DRS Technologies, Inc. /s/ KPMG LLP Short Hills, New Jersey June 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----