<PAGE> 1
As filed with the Securities and Exchange Commission on May 11, 1998
Registration No. 333-47333
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
DAEDALUS ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 3812 38-1873250
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
300 Parkland Plaza
Ann Arbor, Michigan 48103
(313) 769-5649
(Address, including zip code, and telephone number, including area
code, of registrants' principal executive offices)
----------------------
Thomas R. Ory
300 Parkland Plaza
Ann Arbor, Michigan 48103
(313) 769-5649
(Name, Address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
copies to:
Mark A. Metz Mark J. Wishner
Dykema Gossett PLLC Michaels, Wishner & Bonner, P.C.
400 Renaissance Center 1140 Connecticut Avenue, N.W.
Detroit, Michigan 48243 Washington, D.C. 20036
----------------------
Approximate date of commencement of proposed sale to public: At the
effective time of the merger of a wholly-owned subsidiary of Daedalus
Enterprises, Inc. with and into S. T. Research Corporation as described in the
enclosed Joint Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
DAEDALUS ENTERPRISES, INC.
May 11, 1998
Dear Stockholders:
You are cordially invited to attend the Annual Meeting of Stockholders
of Daedalus Enterprises, Inc. ("DEI"), which will be held on June 9, 1998 at
DEI's principal office, 300 Parkland Plaza, Ann Arbor, Michigan, commencing at
9:00 a.m., local time.
At this important meeting you will be asked to consider and vote to
approve an amendment to DEI's certificate of incorporation (the "Charter
Amendment") to change DEI's name to "Sensys Technologies Inc." and increase the
number of authorized shares of DEI common stock, par value $.01 per share ("DEI
Common Stock"), to 5,000,000 pursuant to the Agreement and Plan of Merger, dated
as of December 23, 1997 (the "Merger Agreement"), by and among DEI, DEI Merger
Sub, Inc., a wholly owned subsidiary of DEI ("Merger Sub"), and S. T. Research
Corporation ("STR"). Upon consummation of the transactions contemplated by the
Merger Agreement, Merger Sub will be merged with and into STR, STR will become a
wholly owned subsidiary of DEI (the "Merger") and the stockholders of STR (other
than stockholders of STR who perfect their dissenters' rights in the manner
described in the enclosed Joint Proxy Statement/Prospectus) will receive 2.58
shares of DEI Common Stock for each outstanding share of STR common stock
(expected to total approximately 3.4 million shares), which will represent
approximately 86.5% of the outstanding shares of DEI Common Stock immediately
following the Merger. Based on the average of the bid and ask prices of DEI
Common Stock of $3.19 on November 11, 1997 (the date on which the Merger was
announced), the aggregate consideration paid to STR stockholders would have a
market value of approximately $8.23 per share and would total approximately
$28.2 million (subject to change based on market price fluctuations of DEI
Common Stock at the closing of the Merger). Using the average of the bid and ask
price on May 8, 1998, such consideration would have a value of $14.84 per share
or $50.8 million in the aggregate. Immediately following the Merger,
persons who currently serve as directors or executive officers of DEI or STR
will beneficially own approximately 56.7% of the outstanding shares of DEI
Common Stock. DEI stockholders do not have dissenters' rights in connection
with the Merger.
You will also be asked to consider and vote upon the election of
directors to the DEI Board of Directors and an amendment to DEI's Long-Term
Incentive Plan to increase the number of shares issuable under the Plan and to
increase the limit on the number of shares that may be subject to options
granted to any salaried employee in any three consecutive fiscal years. Although
approval of the Merger by DEI's stockholders is not required under applicable
law, the consummation of the Merger is conditioned on approval of the Charter
Amendment by the DEI stockholders. A vote against the Charter Amendment will
have the effect of a vote against the Merger. If the Merger Agreement is
terminated, the amendment to the certificate of incorporation and the amendment
to the Long-Term Incentive Plan will not become effective. Approval of the
amendment to the Long-Term Incentive Plan is not a condition to consummation of
the Merger. The accompanying Joint Proxy Statement/Prospectus provides details
of the proposed Merger and information related to the matters to be acted upon
at the Annual Meeting. You are urged to read the Joint Proxy
Statement/Prospectus carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AS BEING FAIR TO, AND
IN THE BEST INTERESTS OF DEI AND ITS STOCKHOLDERS. IN ORDER TO ENABLE THE MERGER
TO OCCUR, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION. IN ADDITION, THE BOARD RECOMMENDS A VOTE
FOR APPROVAL OF THE DIRECTORS NOMINATED FOR ELECTION TO THE BOARD OF DIRECTORS
AND THE AMENDMENT TO THE LONG-TERM INCENTIVE PLAN.
It is important that your shares be represented at the Annual Meeting
whether or not you are personally able to attend. In order to ensure that you
will be represented, we encourage you to complete and return the enclosed proxy
card promptly, even if you currently plan to attend the Annual Meeting. If you
are a record owner, attend the Annual Meeting and vote in person, your vote will
supersede your proxy.
Sincerely,
Thomas R. Ory
President and Chief Executive Officer
<PAGE> 3
DAEDALUS ENTERPRISES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 9, 1998
To the Stockholders of
Daedalus Enterprises, Inc.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Daedalus Enterprises, Inc., a Delaware corporation ("DEI"), will be
held on June 9, 1998 at DEI's principal office, 300 Parkland Plaza, Ann Arbor,
Michigan, commencing at 9:00 a.m., local time, for the following purposes:
(1) to consider and vote upon a proposal to amend and
restate DEI's certificate of incorporation (the "Charter
Amendment") to change DEI's name to "Sensys Technologies Inc."
and increase the number of authorized shares of DEI common
stock, par value $.01 per share (the "DEI Common Stock"), to
5,000,000 pursuant to the Agreement and Plan of Merger, dated
as of December 23, 1997 (the "Merger Agreement"), by and among
DEI, DEI Merger Sub, Inc., a wholly owned subsidiary of DEI
("Merger Sub"), and S. T. Research Corporation ("STR"),
pursuant to which, among other things; (a) Merger Sub will be
merged with and into STR (the "Merger"), and (b) each share of
STR common stock outstanding immediately prior to the
consummation of the Merger (other than shares held by
stockholders of STR who perfect their dissenters' rights in
the manner described in the enclosed Joint Proxy
Statement/Prospectus), will be converted into the right to
receive 2.58 shares of DEI Common Stock;
(2) to elect a board of directors;
(3) to approve an amendment to DEI's Long-Term
Incentive Plan to increase the number of shares issuable under
the Plan and to increase the limit on the number of shares
that may be subject to options granted to any salaried
employee in any three consecutive fiscal years; and
(4) to transact such other business as may properly
come before the meeting or any adjournment thereof;
Only holders of record of DEI Common Stock at the close of business on
April 20, 1998 are entitled to notice of, and to vote at, the Annual Meeting or
any adjournments thereof.
The matters to be voted upon at the Meeting are more completely
described in the accompanying Joint Proxy Statement/Prospectus and the Annexes
thereto. Although approval of the Merger by DEI's stockholders is not required
under applicable law, the consummation of the Merger is conditioned on approval
of the Charter Amendment by the DEI stockholders. A vote against the Charter
Amendment will have the effect of a vote against the Merger. Approval of the
amendment to the Long-Term Incentive Plan is not a condition to consummation of
the Merger. The Joint Proxy Statement/Prospectus and the Annexes thereto from
a part of this Notice. All stockholders, whether or not they expect to attend
the meeting in person, are requested to complete, sign, date and return the
enclosed form of proxy in the accompanying envelope (which requires no
additional postage if mailed in the United States). Your proxy will be
revocable by filing with the Secretary a written revocation or a proxy bearing
a later date at any time prior to the time it is voted, or by attending the
meeting and voting there.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. RETURNING THE
ENCLOSED PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON OR ATTEND THE ANNUAL
MEETING. THE BOARD OF DIRECTORS OF DEI UNANIMOUSLY RECOMMENDS THAT THE HOLDERS
OF DEI COMMON STOCK VOTE FOR APPROVAL OF EACH OF THE MATTERS LISTED ABOVE AND
FOR THE ELECTION OF EACH OF THE DIRECTORS NOMINATED.
By order of the Board of Directors,
Lloyd A. Semple, Secretary
Ann Arbor, Michigan
May 11, 1998
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S.T. RESEARCH CORPORATION
May 11, 1998
Dear Stockholders:
A Special Meeting of Stockholders of S. T. Research Corporation ("STR")
will be held at the principal offices of STR at 8419 Terminal Road, Newington,
Virginia on June 9, 1998 at 9:00 a.m., local time.
At this important meeting, you will be asked to consider, and vote to
approve the Agreement and Plan of Merger, dated as of December 23, 1997 (the
"Merger Agreement"), by and among Daedalus Enterprises, Inc., a Delaware
corporation ("DEI"), DEI Merger Sub, Inc., a Virginia corporation and a wholly
owned subsidiary of DEI ("Merger Sub") and STR, pursuant to which Merger Sub
will be merged with and into STR (the "Merger").
Upon consummation of the Merger, STR will be the surviving corporation,
the separate existence of Merger Sub will cease and STR will become a wholly
owned subsidiary of DEI. Each share of STR common stock ("STR Common Stock")
outstanding immediately prior to the consummation of the Merger (other than
shares held by stockholders of STR who perfect their dissenters' rights in the
manner described in the enclosed Joint Proxy Statement/Prospectus), will be
converted into the right to receive 2.58 shares of DEI common stock, $.01 par
value ("DEI Common Stock") (or a total of approximately 3.4 million shares).
Immediately following the Merger, STR stockholders will own approximately 86.5%
of the outstanding shares of DEI Common Stock. Based on the average of the bid
and ask prices of DEI Common Stock of $3.19 on November 11, 1997 (the date on
which the Merger was announced), the aggregate consideration received by STR
stockholders would have a market value of approximately $8.23 per share and
would total approximately $28.2 million (subject to change based on
market price fluctuations of DEI Common Stock at the closing of the Merger).
Using the average of the bid and ask price on May 8, 1998, such consideration
would have a value of $14.84 per share or $50.8 million in the aggregate. The
Merger has been structured as a tax-free transaction for federal income tax
purposes, although any cash received in lieu of a fractional share of DEI
Common Stock will be taxable income to the recipient. Immediately following the
Merger, persons who currently serve as directors or executive officers of DEI
or STR will beneficially own approximately 56.7% of the outstanding shares of
DEI Common Stock.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS ADVISABLE AND IN
THE BEST INTERESTS OF STR AND ITS STOCKHOLDERS AND, BY UNANIMOUS VOTE, HAS
RECOMMENDED THAT THE STOCKHOLDERS OF STR VOTE FOR APPROVAL OF THE MERGER.
In the material accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by STR stockholders at the Special Meeting, and a proxy.
The Joint Proxy Statement/Prospectus more fully describes the Merger and
includes information about STR and DEI and the reasons for the Merger.
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Special Meeting, you may withdraw your proxy and vote in person if
you wish. It is important that your shares be represented and voted at the
Special Meeting.
Sincerely,
S. R. Perrino, President
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S. T. RESEARCH CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD June 9, 1998
To the Stockholders of S. T. Research Corporation:
A Special Meeting of Stockholders of S. T. Research Corporation ("STR")
will be held on June 9, 1998 at 9:00 a.m. at the principal offices of STR at
8419 Terminal Road, Newington, Virginia, to approve an Agreement and Plan of
Merger between STR, Daedalus Enterprises, Inc., a Delaware corporation ("DEI"),
and DEI Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of
DEI ("Merger Sub"), dated as of December 23, 1997 (the "Merger Agreement"),
pursuant to which, among other things, (i) Merger Sub will be merged with and
into STR and STR will be the surviving corporation (the "Merger"); (ii) the
separate existence of Merger Sub will cease; and (iii) each outstanding share of
STR common stock ("STR Common Stock") (other than shares held by stockholders of
STR who perfect their dissenters' rights in the manner described in the enclosed
Joint Proxy Statement/Prospectus) will be converted into 2.58 shares of DEI
common stock.
The Board of STR has fixed the close of business on April 20, 1998 as
the record date for determination of the holders of STR Common Stock entitled to
vote at the Special Meeting. Approval of the Merger requires the affirmative
vote of the holders of at least two-thirds of the outstanding shares of STR
Common Stock at the close of business on the record date.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS ADVISABLE AND IN
THE BEST INTERESTS OF STR AND ITS STOCKHOLDERS AND, BY UNANIMOUS VOTE OF THE
DIRECTORS, HAS RECOMMENDED THAT THE STOCKHOLDERS OF STR VOTE FOR THE APPROVAL OF
THE MERGER.
The Merger and related matters are more fully described in the Merger
Agreement attached to the accompanying Joint Proxy Statement/Prospectus.
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Special Meeting, you may withdraw your proxy and vote in person if
you wish. It is important that your shares be represented and voted at the
Special Meeting.
By order of the Board of Directors
Robert R. Bower, Secretary
<PAGE> 6
DAEDALUS ENTERPRISES, INC. AND S.T. RESEARCH CORPORATION
JOINT PROXY STATEMENT
DAEDALUS ENTERPRISES, INC. PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
shares of common stock of Daedalus Enterprises, Inc., a Delaware corporation
("DEI"), in connection with the solicitation of proxies by the Board of
Directors of DEI for use at the annual meeting of stockholders of DEI to be held
on June 9, 1998 at DEI's principal offices, 300 Parkland Plaza, Ann Arbor,
Michigan, commencing at 9:00 a.m., local time, and at any adjournments or
postponements thereof (the "DEI Annual Meeting"). At the DEI Annual Meeting,
stockholders of record of DEI, as of the close of business on April 20, 1998,
will consider and vote upon (i) a proposal to amend and restate DEI's
certificate of incorporation (the "Charter Amendment") to increase the number of
authorized shares of DEI common stock, $.01 par value ("DEI Common Stock"), and
change the name of DEI to "Sensys Technologies Inc." pursuant to an Agreement
and Plan of Merger, dated as of December 23, 1997, among DEI, DEI Merger Sub,
Inc., a Virginia corporation and a wholly owned subsidiary of DEI ("Merger
Sub"), and S.T. Research Corporation, a Virginia corporation ("STR") (the
"Merger Agreement"); (ii) the election of directors; and (iii) the approval of
an amendment to DEI's Long-Term Incentive Plan. The approval of the Charter
Amendment is required to consummate the merger under the Merger Agreement.
This Joint Proxy Statement/Prospectus is also being furnished to
holders of shares of common stock of STR in connection with the solicitation of
proxies by the Board of Directors of STR for use at the special meeting of
stockholders of STR to be held on June 9, 1998 at STR's headquarters, located at
8419 Terminal Road, Newington, Virginia, commencing at 9:00 a.m., local time,
and at any adjournments or postponements thereof (the "STR Special Meeting"). At
the STR Special Meeting, stockholders of record of common stock, $.10 par value
per share ("STR Common Stock"), as of the close of business on April 20, 1998,
will consider and vote upon the approval and adoption of the Merger Agreement
and the transactions contemplated thereby. Pursuant to the Merger Agreement,
Merger Sub will be merged with and into STR and STR will be the surviving
corporation (the "Merger"). Upon consummation of the Merger, each outstanding
share of STR Common Stock (other than shares held by stockholders of STR who
perfect their dissenters' rights in the manner described in this Joint Proxy
Statement/Prospectus) will be converted into the right to receive 2.58 fully
paid and nonassessable shares of DEI Common Stock. No fractional shares will be
issued in connection with the Merger. Assuming no STR stockholder exercises
dissenters' rights, immediately following the Merger, STR stockholders will hold
approximately 86.5% of the outstanding shares of DEI Common Stock. See "The
Merger Agreement -- Conversion and Exchange of STR Common Stock."
The Boards of Directors of DEI and STR know of no business that will be
presented for consideration at the meetings of stockholders of DEI and STR,
respectively, other than the matters described in this Joint Proxy
Statement/Prospectus. If any other matters are presented at either of such
meetings, the proxies will be voted in accordance with the best judgment of the
proxy holders.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
DEI with respect to up to 3,420,527 shares of DEI Common Stock to be issued in
the Merger in exchange for outstanding shares of STR Common Stock. All
information contained in this Joint Proxy Statement/Prospectus relating to DEI
has been supplied by DEI and all information relating to STR has been supplied
by STR. THE OFFERING OF DEI COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" COMMENCING ON PAGE 14.
This Joint Proxy Statement/Prospectus is first being mailed to
stockholders of DEI and stockholders of STR on or about May 14, 1998.
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS MAY 11, 1998.
<PAGE> 7
AVAILABLE INFORMATION
DEI is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by DEI with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street NW, Judiciary Plaza, Washington, D.C. 20549, and
at the Commission's Regional Offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, at prescribed rates. In addition,
the Commission maintains a Website (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
(such as DEI) that file electronically with the Commission. Whether or not the
Merger is consummated, DEI will continue to be required to file periodic
reports, proxy statements and other information with the Commission pursuant to
the Exchange Act.
DEI has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities to be issued to STR stockholders pursuant to the Merger Agreement.
This Joint Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement. The Registration Statement may be obtained
from the Commission's principal office in Washington, D.C. Statements contained
in this Joint Proxy Statement/Prospectus or in any document incorporated by
reference in this Joint Proxy Statement/Prospectus as to the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed or incorporated by reference as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
THIS JOINT PROXY STATEMENT/PROSPECTUS MAY INCLUDE OR INCORPORATE BY
REFERENCE INFORMATION FROM DOCUMENTS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL REQUEST, WITHOUT
CHARGE, IN THE CASE OF DOCUMENTS RELATING TO DEI, DIRECTED TO DAEDALUS
ENTERPRISES, INC., 300 PARKLAND PLAZA, ANN ARBOR, MICHIGAN 48103 (TELEPHONE
NUMBER 313-769-5649), ATTENTION: TREASURER; OR IN THE CASE OF DOCUMENTS RELATING
TO STR, DIRECTED TO S. T. RESEARCH CORPORATION, 8419 TERMINAL ROAD, NEWINGTON,
VIRGINIA 22122-1430 (TELEPHONE NUMBER: 703-550-7000). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER THAN FIVE
BUSINESS DAYS PRIOR TO THE DEI ANNUAL MEETING OR THE STR SPECIAL MEETING, AS
APPLICABLE.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DEI, STR OR
ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DEI OR STR
SINCE THE
2
<PAGE> 8
DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
Available Information......................................................................................... 2
Table of Contents............................................................................................. 3
Summary....................................................................................................... 4
Cautionary Statement Regarding Forward-Looking Statements................................................... 14
Risk Factors.................................................................................................. 14
Introduction.................................................................................................. 20
The Merger and Related Matters................................................................................ 23
The Merger Agreement.......................................................................................... 34
The Employment Agreements..................................................................................... 38
The Voting Agreement.......................................................................................... 39
Unaudited Pro Forma Combined Financial Statements............................................................. 39
Proposal to Amend the DEI Certificate of Incorporation........................................................ 46
Proposal to Amend the DEI Long-Term Incentive Plan............................................................ 47
Information about DEI......................................................................................... 51
Election of DEI Directors..................................................................................... 64
Principal Stockholders of DEI and Security Ownership of DEI Management........................................ 68
Information About STR......................................................................................... 70
Principal Stockholders of STR and Security Ownership of STR Management........................................ 83
Information About Merger Sub.................................................................................. 84
Description of DEI Capital Stock.............................................................................. 84
Comparison of Rights of STR Stockholders with Rights of DEI Stockholders...................................... 85
Legal Matters................................................................................................. 88
Experts....................................................................................................... 88
Accountants' Representatives.................................................................................. 88
Stockholder Proposals for DEI's 1998 Annual Meeting........................................................... 88
Index to Financial Statements................................................................................. 89
Annex A Agreement and Plan of Merger.......................................................................... A-1
Annex B Opinion of Roney & Co................................................................................. B-1
Annex C Full Text of Sections 13.1-729 through 13.1-741....................................................... C-1
Annex D Form of Amended and Restated Certificate of Incorporation of DEI...................................... D-1
Annex E Opinion of Corporate Finance of Washington, Inc....................................................... E-1
</TABLE>
3
<PAGE> 9
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained
elsewhere in this Joint Proxy Statement/Prospectus and in the Annexes hereto and
the documents referred to herein. Stockholders are urged to read this Joint
Proxy Statement/Prospectus and the Annexes hereto in their entirety.
BUSINESS OF DEI AND MERGER SUB
DEI manufacturers products for, and performs development projects in,
the field broadly described as "remote sensing." Remote sensing is the detection
or measurement of various physical parameters of an object or system without
making direct contact with the observed object. DEI's customers use these remote
sensing products to detect and measure either the emitted or reflected radiation
of objects or systems.
The principal products manufactured by DEI are airborne imaging
systems. DEI's customers install these systems in aircraft and use them to
acquire radiation data from objects on the earth's surface and in the
atmosphere. This data is then processed into a useful form by data handling and
data processing equipment which, in some cases, is also manufactured by DEI. A
principal application of DEI's remote sensing products has been the measurement
of environmental parameters in support of pollution control programs and
environmental impact studies.
Merger Sub is a recently formed Virginia corporation which was
organized for the sole purpose of effecting the Merger.
DEI's and Merger Sub's principal executive offices are located
at 300 Parkland Plaza, Ann Arbor, Michigan 48103 (telephone: 313-769-5649). See
"Information About DEI" and "Information About Merger Sub."
BUSINESS OF STR
STR designs, develops, manufacturers and markets intelligence
sensory and electronic reconnaissance systems for defense and commercial
markets. Various agencies of the U. S. Government are the principal customers
for these systems.
STR's principal executive offices are located at 8419 Terminal Road,
Newington, Virginia 22122-1430 (telephone: 703-550-7000). See "Information
About STR."
THE MERGER
DEI, Merger Sub and STR have entered into the Merger Agreement pursuant
to which Merger Sub will be merged with and into STR. Immediately following the
Merger, DEI will remain in existence as a Delaware corporation and STR will be a
wholly owned subsidiary of DEI. Each share of STR Common Stock (other than
shares held by stockholders of STR who perfect their dissenters' rights in the
manner described in this Joint Proxy Statement/Prospectus) which is issued and
outstanding at the Effective Time (as defined below) of the Merger, will be
converted into the right to receive 2.58 shares of DEI Common Stock. Based on
the 1,325,786 shares of STR Common Stock outstanding at April 20, 1998 and
assuming no STR stockholders perfect their dissenters' rights, approximately
3,420,527 shares of DEI Common Stock will be issued in the Merger, representing
approximately 86.5% of the outstanding shares of DEI Common Stock immediately
following the Merger. See "The Merger and Related Matters."
4
<PAGE> 10
TIME, PLACE AND DATE OF ANNUAL MEETING OF STOCKHOLDERS OF DEI
The annual meeting of the stockholders of DEI (the "DEI Annual
Meeting") will be held on June 9, 1998 at 9:00 a.m., local time, at DEI's
principal offices. Only holders of record of DEI Common Stock at the close of
business on April 20, 1998 (the "DEI Record Date") will be entitled to notice
of, and to vote at, the DEI Annual Meeting. At such date, there were 534,574
shares of DEI Common Stock outstanding and entitled to vote. The purpose of the
DEI Annual Meeting is to consider and approve (a) the Charter Amendment, a copy
of which is attached to this Joint Proxy Statement/Prospectus as Annex D; (b)
the election of directors; (c) Long-Term Incentive Plan amendment; and (d) the
transaction of such other business as may properly come before the DEI Annual
Meeting or any adjournments thereof. See "Introduction."
TIME, PLACE AND DATE OF SPECIAL MEETING OF STOCKHOLDERS OF STR
The special meeting of the stockholders of STR (the "STR Special
Meeting") will be held on June 9, 1998 at 9:00 a.m., local time, at STR's
principal offices. Only holders of record of STR Common Stock at the close of
business on April 20, 1998 (the "STR Record Date"), will be entitled to notice
of, and to vote at, the STR Special Meeting. At such date, there were 1,325,786
shares of STR Common Stock outstanding and entitled to vote. The purpose of the
STR Special Meeting is to consider and approve the Merger Agreement and the
Merger. See "Introduction."
DEI VOTE REQUIRED; QUORUM
The approval of the Charter Amendment requires the affirmative vote of
the holders of a majority of the shares of DEI Common Stock outstanding. Because
the number of shares of DEI Common Stock to be issued in the Merger exceeds the
number of shares which are currently authorized for issuance under DEI's
certificate of incorporation, approval by the DEI stockholders of the Charter
Amendment is a condition to the consummation of the Merger. A vote against the
Charter Amendment will have the effect of a vote against the Merger. The
election of the directors requires the approval of a plurality of the votes cast
at the Annual Meeting. Approval of the Long-Term Incentive Plan amendment
requires the affirmative vote of the holders of a majority of the shares of DEI
Common Stock voting on the matter. For purposes of determining the number of
votes cast with respect to the election of directors, only those cast "for" are
included. Abstentions and withheld votes are counted only for purposes of
determining whether a quorum is present at the Annual Meeting and broker
non-votes are not counted. Abstentions and broker non-votes will have the effect
of a vote against the Charter Amendment but will have no effect on the vote on
the Long-Term Incentive Plan amendment. As of April 20, 1998, the executive
officers and directors of DEI beneficially own approximately 16.6% of the
outstanding shares of DEI Common Stock. Such persons have advised DEI that they
intend to vote all of the shares over which they hold voting power in favor of
the foregoing proposals and certain of such persons are contractually bound to
do so. See "The Voting Agreement." A majority of the issued and outstanding
shares of DEI Common Stock entitled to vote, represented in person or by proxy,
shall constitute a quorum at the DEI Annual Meeting. See "Introduction -- DEI
Record Date; Voting Quorum."
STR VOTE REQUIRED; QUORUM
The affirmative vote of at least two-thirds of the outstanding shares
of STR Common Stock is required to approve the Merger Agreement and Merger.
Abstentions will have the effect of a vote against the Merger Agreement and the
Merger. As of April 20, 1998, the principal stockholders, executive officers
and directors of STR beneficially own approximately 62.5% of STR Common Stock
and have informed STR that all such shares over which they hold voting power
will be voted for approval of the Merger and certain of such persons are
contractually bound to do so. See "The Voting Agreement." A majority of the
issued and outstanding shares of STR Common Stock entitled to vote, represented
in person or by proxy, shall constitute a quorum at the STR Special Meeting. See
"Introduction -- STR Record Date; Voting Quorum."
5
<PAGE> 11
CERTAIN EFFECTS OF THE MERGER
The Merger will become effective when Articles of Merger are filed with
the Virginia State Corporation Commission ("Effective Time"). At the Effective
Time, each issued and outstanding share of STR Common Stock (other than shares
held by stockholders of STR who perfect their dissenters' rights in the manner
described in this Joint Proxy Statement/Prospectus) will be converted into the
right to receive 2.58 newly issued shares of DEI Common Stock (the "Exchange
Ratio"). STR stockholders will receive cash in lieu of any fractional share to
which they are otherwise entitled. Promptly after the Effective Time, DEI will
forward a letter of transmittal to stockholders of STR containing detailed
instructions for the surrender of certificates representing STR Common Stock.
The Merger will result in a change of control of DEI due to the issuance of an
additional 3.4 million shares of DEI Common Stock to STR's stockholders and the
appointment of STR's directors to fill a majority of the positions on DEI's
Board of Directors. See "The Merger and Related Matters -- Certain Effects of
the Merger" and "The Merger Agreement."
DILUTION
As of the DEI Record Date, there were 534,574 shares of DEI Common
Stock outstanding. As of the STR Record Date, there were 1,325,786 shares of STR
Common Stock outstanding. It is anticipated that approximately 3,420,527 shares
of DEI Common Stock will be issued in the Merger. The following table
illustrates the dilution of voting interests resulting from the Merger based on
the tables included under "Principal Stockholders of DEI and Security Ownership
of DEI Management" and "Principal Stockholders of STR and Security Ownership of
STR Management."
<TABLE>
<CAPTION>
Before the Merger
------------------------------------------------ After the Merger
DEI Common Stock STR Common Stock ---------------------------
Number of Shares(1)% Number of Shares(1)% Number of Shares(1)%
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEI Directors and Executive
officers as a Group 88,866 16.6 4,000(4) 0.3 99,186(4) 2.5
All other DEI stockholders 443,208 82.9 - (3) - (3) 443,208 11.2
STR Directors and Executive
Officers as a Group 2,500(2) 0.5 829,220(2) 62.5 2,141,887(2) 54.2
All other STR stockholders - (3) - (3) 492,566 37.2 1,270,820 32.1
------- ----- --------- ----- --------- -----
534,574 100.0 1,325,786 100.0 3,955,101 100.0
======= ===== ========= ===== ========= =====
</TABLE>
- --------------
(1) Does not include shares which may be acquired upon exercise of
outstanding stock options. There are currently 108,975 outstanding
options to purchase DEI Common Stock and 34,000 outstanding options to
purchase STR Common Stock. Immediately following the Merger there will
be a total of 196,695 outstanding options which, if fully exercised,
would represent 4.5% of the then outstanding DEI Common Stock.
(2) To avoid double counting, does not include the 5,876 shares of STR
Common Stock owned by Dr. Sanders, a director of STR and a director of
DEI, which will convert into 15,160 shares of DEI Common Stock pursuant
to the Merger.
(3) Cross-ownership is assumed to be zero unless otherwise disclosed in the
table.
(4) To avoid double counting, does not include the 26,250 shares of DEI
Common Stock owned by Dr. Sanders, who is a director of STR and a
director of DEI.
6
<PAGE> 12
RECOMMENDATION OF THE DEI BOARD
THE BOARD OF DIRECTORS OF DEI BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF DEI AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF DEI VOTE FOR APPROVAL OF THE
CHARTER AMENDMENT, THE LONG-TERM INCENTIVE PLAN AMENDMENT AND THE ELECTION OF
EACH OF THE DIRECTOR-NOMINEES. In making this determination, the Board of
Directors of DEI has considered the factors described under the caption, "The
Merger and Related Matters -- DEI's Reasons for the Merger; Recommendation of
DEI's Board of Directors; Fairness to DEI's Stockholders." In connection with
such recommendation, stockholders should consider the matters discussed in "The
Merger and Related Matters -- Conflicts of Interest."
OPINION OF DEI'S FINANCIAL ADVISOR
On December 23, 1997, Roney and Co. ("Roney"), DEI's financial advisor
in connection with the transactions contemplated by the Merger Agreement, gave
an opinion to the Board of Directors of DEI that the terms of the Merger are
fair to the stockholders of DEI from a financial point of view. See "The Merger
and Related Matters -- Opinion of DEI's Financial Advisor." The full text of the
written opinion of Roney, which contains information as to the assumptions made,
matters considered and the scope of and limitations on the review undertaken by
Roney, is set forth as Annex B to this Joint Proxy Statement/Prospectus and
should be read in its entirety. See "The Merger and Related Matters -- Opinion
of DEI's Financial Advisor."
RECOMMENDATION OF THE STR BOARD
THE BOARD OF DIRECTORS OF STR BELIEVES THAT THE TERMS OF THE MERGER ARE
FAIR TO AND IN THE BEST INTERESTS OF STR AND ITS STOCKHOLDERS, HAS APPROVED THE
MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF STR VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER. In making this
determination, the Board of Directors of STR has considered the factors
described under the caption, "The Merger and Related Matters -- STR's Reasons
for the Merger; Recommendation of STR's Board of Directors; Fairness to STR's
Stockholders." In connection with such recommendation, stockholders should
consider the matters discussed in "The Merger and Related Matters -- Conflicts
of Interest."
OPINION OF STR'S FINANCIAL ADVISOR
On December 23, 1997, Corporate Finance of Washington, Inc. ("Corporate
Finance"), STR's financial advisor in connection with the transactions
contemplated by the Merger Agreement, gave an opinion to the Board of Directors
of STR that the terms of the Merger are fair to the stockholders of STR from a
financial point of view. See "The Merger and Related Matters -- Opinion of STR's
Financial Advisor." The full text of the written opinion of Corporate Finance
which contains information as to the matters considered, and the scope and
limitations of the review undertaken by Corporate Finance, is set forth as Annex
E to this Joint Proxy Statement/Prospectus and should be read in its entirety.
See "The Merger and Related Matters -- Opinion of STR's Financial Advisor."
PRIVATE PLACEMENT
The shares of STR Common Stock being converted include 582,000
shares which STR issued at $6.50 per share in a private placement completed on
January 30, 1998. Based upon the average of the bid and ask price of DEI
Common Stock on November 11, 1997 (the date on which the Merger was
announced), these shares, along with all of the other shares of STR Common
Stock, had an equivalent value of approximately $8.23 per share. The private
placement occurred after the respective Boards of Directors had approved the
Merger and had received the opinions of their financial advisors.
CONDITIONS TO THE MERGER; TERMINATION OF THE MERGER AGREEMENT
The obligations of DEI and STR are subject to the satisfaction of
certain conditions, including obtaining the approval of the STR stockholders of
the Merger Agreement and the approval of the DEI stockholders of the Charter
Amendment. See "The Merger Agreement -- Conditions to Consummation of the
Merger." The Board of Directors of either STR or DEI has the right to waive
certain conditions precedent to the consummation of the Merger other than those
conditions which are a legal necessity for the Merger to occur such as STR
stockholder approval of the Merger or DEI stockholder approval of the Charter
Amendment. In the event either Board waives any condition, each company intends
to resolicit shareholder approval unless in the opinion of such company's
Board, the delay associated with the resolicitation process is likely to have a
material adverse effect on the business or financial condition of such company.
If the Board waiving the condition deems such condition to have been
material to the decision of the stockholders to approve the Merger (in the case
of STR) or the Charter Amendment (in the case of DEI), such Board intends to
resolicit stockholder approval.
7
<PAGE> 13
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of DEI or
STR, by either DEI or STR if the Merger has not been consummated by May 31, 1998
and prior to such time upon the occurrence of certain events. If the Merger is
not completed under certain circumstances, DEI or STR may be entitled to have
its expenses paid by the other. See "The Merger Agreement -- Termination;
Amendment; Waiver."
CONFLICTS OF INTEREST
In considering the recommendation of STR's Board of Directors with
respect to the Merger and the Merger Agreement and the recommendation of DEI's
Board of Directors with respect to the Charter Amendment, stockholders should be
aware that certain members of STR's Board of Directors and DEI's Board of
Directors have interests in the Merger that are in addition to and potentially
in conflict with the interests of stockholders of STR and DEI generally. The
Boards of Directors of STR and DEI were aware of these interests and considered
them, among other matters, in approving the Merger Agreement.
As a condition to the parties' obligations to consummate the Merger,
Thomas Ory, the President, Chief Executive Officer and a Director of DEI, and
Charles Stanich, the Vice President - Research and Development, Chief Operating
Officer and a Director of DEI, have entered into employment agreements with DEI
which will become effective upon consummation of the Merger. See "The Employment
Agreements."
John D. Sanders is the Chairman of DEI's Board of Directors and
is also a member of STR's Board of Directors. Dr. Sanders also acted as a
consultant to DEI to assist management in seeking potential financing
transactions and identifying joint venture and merger partners. Dr. Sanders
received a fee of $1,500 per month from DEI from January 1997 to December 1997
but will not receive any fee which is contingent on consummation of the Merger.
See "The Merger and Related Matters -- Background of the Merger."
Certain directors and principal stockholders of STR have indicated they
will vote to approve the Merger. These same persons will be nominated or
appointed to serve on DEI's Board of Directors. Effective upon consummation of
the Merger, DEI will increase the size of its Board of Directors to seven and S.
R. Perrino, James Busey, Charles Bernard and S. Kent Rockwell will be appointed
as directors of DEI. Charles Stanich and William Panschar will resign from the
DEI Board upon consummation of the Merger. See "Election of DEI Directors --
Possible Changes and Appointments to DEI'S Board of Directors and Executive
Officers."
In addition, in connection with the Merger, Thomas Ory, Charles
Stanich, John Sanders and Philip Power (the "DEI VA Stockholders"), S. R.
Perrino, John Sanders, Robert Bower and Donald Reiser (the "STR VA
Stockholders"), and DEI have entered into a Voting Agreement, dated as of
December 23, 1997 (the "Voting Agreement"). The Voting Agreement provides that
if the Merger Agreement has not been terminated in accordance with its terms,
(i) the DEI VA Stockholders will vote their shares of DEI Common Stock for the
approval of the Charter Amendment and the DEI Long-Term Incentive Plan at the
DEI Annual Meeting and will not sell their shares of DEI Common Stock prior to
the earlier of the Effective Time, the termination of the Merger Agreement or
July 1, 1998; and (ii) the STR VA Stockholders will vote their shares of STR
Common Stock for approval of the Merger Agreement at the STR Special Meeting and
will not sell their shares of STR Common Stock prior to the earlier of the
Effective Time, the termination of the Merger Agreement or July 1, 1998. DEI has
agreed to reconstitute its Board of Directors and to nominate certain persons
for two years after the Merger. See "The Voting Agreement."
At the Effective Time, outstanding options to purchase STR Common Stock
will be converted into options to purchase the same number of shares of DEI
Common Stock as the holders of such options would have been entitled to receive
pursuant to the Merger had such holders exercised such options in full
immediately prior to the consummation of the Merger (without taking into account
whether such option was in fact exercisable at such time). See "The Merger and
Related Matters -- Conflicts of Interest."
8
<PAGE> 14
DEI COMMON STOCK
DEI Common Stock is the only authorized and issued class of capital
stock of DEI. Each share of DEI Common Stock is entitled to one vote and
cumulative voting is not permitted. See "Description of DEI Capital Stock -- DEI
Capital Stock."
FEDERAL INCOME TAX CONSEQUENCES
Based upon the opinion of Michaels, Wishner & Bonner P.C., counsel to
STR, the Merger will be a tax-free reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"), assuming certain non-statutory requirements with
respect to continuity of business enterprise and interest are met subsequent to
the Merger. If such requirements are met, the holders of STR Common Stock who
exchange STR Common Stock for DEI Common Stock in the Merger will recognize no
gain or loss upon the exchange of shares of STR Common Stock for shares of DEI
Common Stock, except that any realized gain or loss will be recognized with
respect to the receipt of cash exchanged for fractional shares. See "The Merger
and Related Matters -- Federal Income Tax Consequences." The opinion of
Michaels, Wishner & Bonner, P.C. is attached as an exhibit to the Registration
Statement. The rendering of such opinion is not a condition to consummation of
the Merger.
ACCOUNTING TREATMENT
The Merger will be treated as a reverse acquisition purchase by
STR of DEI for financial reporting purposes. See "The Merger and Related Matters
- -- Accounting Treatment."
COMPARISON OF STOCKHOLDER RIGHTS
Since STR is organized under the Virginia Stock Corporation Act
("VSCA") and DEI is organized under the Delaware General Corporation Law
("DGCL"), certain differences between the rights of holders of STR Common Stock
and the rights of holders of DEI Common Stock arise from various provisions of
the corporate laws of those states as well as from various differences in the
provisions of the respective charters and bylaws of STR and DEI. Such
differences include differences with respect to the ability of directors to
declare dividends, the protection available against unsolicited takeovers, the
general standards of conduct of directors, the rights of dissenting stockholders
to seek an appraisal of their shares in connection with certain corporate
transactions, the ability of stockholders to act without a meeting, the
voidability of certain conflict of interest transactions, the permissibility and
limitations regarding indemnification by a corporation of its directors and
officers, and the limitations on liability of directors and officers to the
corporation and to the stockholders. See "Comparison of Rights of STR
Stockholders with Rights of DEI Stockholders."
APPRAISAL/DISSENTERS' RIGHTS
Holders of DEI Common Stock are not entitled to appraisal rights under
the DGCL in connection with the Merger because DEI is not a constituent
corporation in the Merger. DEI Common Stock is currently thinly traded.
See "Risk Factors -- No Active Market For the DEI Common Stock."
Holders of STR Common Stock are entitled to dissenters' rights under
the VSCA in connection with the Merger. Certain provisions of the VSCA regarding
dissenters' rights are reproduced in full as Annex C. Failure to follow any of
the statutory procedures may result in a termination or waiver of dissenters'
rights. See "The Merger and Related Matters -- Dissenters' Rights."
APPROVALS
DEI and STR are not aware of any federal or state regulatory
requirements or approvals which must be complied with or obtained in order to
consummate the Merger. The Merger is subject to the approval of DEI's and
9
<PAGE> 15
STR's principal lenders. DEI's lender has indicated its intention to allow the
current mortgage to remain in effect. STR intends to use funds available under
its line of credit to satisfy DEI's line of credit borrowings.
STR's lender has given its consent to the Merger.
AMENDMENT OF THE DEI CERTIFICATE OF INCORPORATION
At the DEI Annual Meeting, the stockholders of DEI will be requested to
approve the Charter Amendment, which will increase the number of authorized
shares of DEI Common Stock from 2,000,000 to 5,000,000 shares and to change
DEI's name to "Sensys Technologies Inc." The primary purpose of the increase in
the number of shares is to authorize the shares of DEI Common Stock being issued
to STR stockholders upon consummation of the Merger. Stockholder approval of the
Charter Amendment is a condition to consummation of the Merger. The affirmative
vote of the holders of a majority of the outstanding shares of DEI Common Stock
is required for the approval of the Charter Amendment. The Charter Amendment
will not become effective unless the Merger is consummated. See "Proposal to
Amend the DEI Certificate of Incorporation."
ELECTION OF DIRECTORS AND AMENDMENT OF DEI'S LONG-TERM INCENTIVE PLAN
Stockholders of DEI will also be asked, at the Annual Meeting, to vote
on the election of directors to DEI's Board of Directors and to approve an
amendment to DEI's Long-Term Incentive Plan. See "Election of Directors" and
"Proposal to Amend the DEI Long-Term Incentive Plan."
RISK FACTORS
In deciding how to vote their shares at the STR Special Meeting and DEI
Annual Meeting, the following factors relating to DEI and STR, among others,
should be considered by holders of STR Common Stock and DEI Common Stock: (i)
DEI's substantial dependence on its line of credit and DEI's going concern
considerations; (ii) STR's substantial dependence on its line of credit; (iii)
DEI's urgent need for additional capital; (iv) potential unprofitability and
variability of DEI's operating results; (v) the potential inability to integrate
DEI and STR; (vi) DEI's and STR's substantial dependence on government funding
and government contracts; (vii) DEI's significant revenues from international
customers; (viii) intense competition; (ix) STR's substantial dependence on
major suppliers; (x) potential inability to implement DEI's growth plan; (xi)
DEI's and STR's dependence on key management; (xii) the potential inability of
DEI and STR to attract and retain qualified personnel; (xiii) the lack of an
active market for the DEI Common Stock; (xiv) the fixed exchange ratio; (xv)
the potential waiver of conditions to the Merger; (xvi) the potential failure
of future acquisitions; and (xvii) conflicts of interest. See "Risk Factors."
DEI MARKET PRICES
DEI Common Stock is traded over the counter. The information presented
in the table below represents the average of the high and low sale prices quoted
by the National Quotation Bureau, Inc. for DEI Common Stock on December 22,
1997, the last full trading day prior to the public announcement that the Merger
Agreement had been executed, and on May 8, 1998, the last full trading
day for which quotations were available at the time of the printing of this
Joint Proxy Statement/Prospectus, as well as the "equivalent per share price" of
STR Common Stock on such dates. There is no public trading market for STR Common
Stock. The "equivalent per share price" of STR Common Stock at each specified
date represents the average of the high and low sale prices quoted by the
National Quotation Bureau, Inc. for DEI Common Stock at such specified date
multiplied by the Exchange Ratio.
DEI Common STR Equivalent
Stock Price Per Share Price
----------- ---------------
December 22, 1997 $3.00 $7.74
May 8, 1998 $5.75 $14.84
10
<PAGE> 16
For information relating to market prices of DEI Common Stock during
the current fiscal year and the past two fiscal years, see "Information About
DEI -- Market Price and Dividend Information." Because the market price of DEI
Common Stock is subject to fluctuation, the value of the consideration that
holders of STR Common Stock will receive in the Merger may increase or decrease
prior to consummation of the Merger. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT
QUOTATIONS FOR DEI COMMON STOCK.
SELECTED FINANCIAL INFORMATION
The following selected consolidated financial data for DEI as of and
for each of the five years ended July 31, 1997, and the selected financial data
for STR as of and for each of the five years ended September 30, 1997, are
derived from the audited financial statements of DEI and STR, respectively. The
selected consolidated financial data of DEI as of and for the six months ended
January 31, 1998 and 1997 and the selected financial data of STR as of and for
the three months ended December 31, 1997 and 1996 are derived from unaudited
financial statements of DEI and STR, respectively. The unaudited financial
statements of DEI and STR included all adjustments, consisting solely of normal
recurring accruals, which the management of DEI and STR, respectively,
considered necessary for a fair presentation of the financial position and the
results of operations for such periods. Operating results for the three months
ended January 31, 1998 and 1997 for DEI and for the three months ended December
31, 1997 and 1996 for STR are not necessarily indicative of the results that may
be expected for future periods. The data should be read in conjunction with the
DEI and STR financial statements, related notes and other financial information
included in this Joint Proxy Statement/Prospectus.
DEI SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
For the six months ended
January 31, For the year ended July 31,
------------------------ -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA
Total revenues $ 852 $1,511 $3,001 $2,090 $3,624 $2,453 $6,305
Net income (loss)(1) (306) (18) (64) (967) (362) (631) 454
Net income (loss) per share-basic(2) (0.57) (0.03) (0.12) (1.85) (0.70) (1.24) 0.78
Net income (loss) per share-diluted(2) (0.57) (0.03) (0.12) (1.85) (0.70) (1.24) 0.78
Dividends per share -- -- -- -- 0.17 0.15 0.13
BALANCE SHEET DATA
(as of end of period)
Total assets $2,197 $2,070 $2,070 $2,769 $3,930 $4,041 $4,762
Working capital (88) 268 268 213 801 1,562 2,144
Long-term debt -- -- -- -- -- 278 314
Stockholders' equity 1,106 1,411 1,411 1,473 2,390 2,830 3,516
</TABLE>
(1) Effective August 1, 1993, DEI changed from completed component to cost
incurred as a percentage of the total estimated cost as the method for
determining percentage completion for revenue recognition on standard product
contracts. The cumulative effect of this accounting change reduced the loss by
$22, or $.04 per share, for fiscal 1994.
(2) Net income per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
11
<PAGE> 17
STR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the three months ended
December 31, For the year ended September 30,
-------------------------- -------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA
Total revenues $ 5,837 $5,606 $23,953 $21,655 $16,652 $10,601 $12,198
Net income before cumulative effect
of a change in accounting principle(1) (69) (18) 120 327 317 63 54
Net income (69) (18) 120 327 317 63 264
Net income per share-basic(2) (0.09) (0.02) 0.17 0.45 0.44 0.09 0.39
Net income per share-diluted(2) (0.09) (0.02) 0.16 0.42 0.42 0.09 0.39
BALANCE SHEET DATA
(as of end of period)
Current assets $10,299 $7,111 $ 9,812 $ 7,267 $ 4,898 $ 4,068 $ 4,825
Total assets 11,259 8,158 10,804 8,145 5,642 4,376 5,213
Current liabilities 8,782 5,698 8,254 5,635 3,398 2,635 3,571
Working capital 1,517 1,413 1,558 1,632 1,500 1,433 1,254
Long-term obligations 9 61 14 90 151 15 19
Redeemable preferred stock -- -- -- -- -- -- 105
Stockholders' equity(3) 2,467 2,398 2,536 2,420 2,093 1,726 1,623
</TABLE>
(1) Effective October 1, 1992, STR adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The cumulative effect of this
accounting change increased net income by approximately $210 or $0.31 per share.
(2) Net income per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
(3) STR has not declared any dividends during the periods presented. On January
30, 1998, STR issued 582,000 shares of its common stock for cash of $6.50 per
share for aggregate proceeds of $3,783.
UNAUDITED PRO FORMA SELECTED COMBINED FINANCIAL DATA
The following sets forth certain selected financial information of DEI
and STR on an unaudited pro forma basis after giving effect to the Merger on a
Areverse acquisition purchase" basis (as if STR had acquired DEI) and to the
private placement of 582,000 shares of STR Common Stock on January 30, 1998
(Stock Issuance). The unaudited pro forma selected combined results of
operations data include the results of operations of DEI and STR for the
respective periods presented and gives effect to pro forma adjustments as if the
Merger and the Stock Issuance had occurred at the beginning of the period. The
unaudited pro forma selected combined balance sheet data includes the historical
balance sheet data of DEI and STR as of December 31, 1997 and gives effect to
the pro forma adjustments as if the Merger and Stock Issuance had occurred on
that date. This data should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements, the Selected Financial Information, the
Comparative Per Share Data and the separate historical financial statements of
DEI and STR and the notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. The unaudited pro forma combined financial data are not
necessarily indicative of the operating results or financial position that would
have been achieved had the Merger been consummated at the beginning of the
periods presented and should not be construed as representative of future
operations.
12
<PAGE> 18
<TABLE>
<CAPTION>
Three months ended Fiscal year ended
December 31, September 30,
1997 1997
------------------ -------------------
(in thousands except for per share data)
<S> <C> <C>
RESULTS OF OPERATIONS DATA
Total revenues $6,321 $26,955
Net income (loss) (70) 313
Net income (loss) per share-basic (0.02) 0.08
Net income (loss) per share-diluted (0.02) 0.08
Dividends per share -- --
<CAPTION>
BALANCE SHEET DATA December 31,
(as of end of period) 1997
------------
<S> <C>
Total assets $13,939
Working capital 5,472
Long-term obligations 9
Stockholders' equity 8,138
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of DEI
and STR and combined per share data on an unaudited pro forma basis after giving
effect to the Merger on a "reverse acquisition purchase" basis (as if STR has
acquired DEI). This data should be read in conjunction with the Selected
Financial Information, the Unaudited Pro Forma Combined Financial Statements and
the separate historical financial statements and the notes thereto of DEI and of
STR included elsewhere in this Joint Proxy Statement/Prospectus. The unaudited
pro forma combined financial data are not necessarily indicative of the
operating results or financial position that would have been achieved had the
Merger been consummated at the beginning of the periods presented and should not
be construed as representative of future operations.
<TABLE>
<CAPTION>
As of and for the As of and for the
six months ended fiscal year ended
January 31, 1998 July 31, 1997
------------------- ------------------
<S> <C> <C>
Historical - DEI
Net loss per share-basic $(0.57) $(0.12)
Net loss per share-diluted (0.57) (0.12)
Book value per share 2.46 2.64
Cash dividends per share -- --
<CAPTION>
As of and for the As of and for the
three months ended fiscal year ended
December 31, 1997 September 30, 1997
------------------- ------------------
<S> <C> <C>
Historical - STR
Net income (loss) per share-basic $(0.09) $0.17
Net income (loss) per share-diluted (0.09) 0.16
Book value per share 3.41 3.50
Cash dividends per share -- --
</TABLE>
13
<PAGE> 19
<TABLE>
<S> <C> <C>
Pro forma combined - DEI and STR
Net income (loss) per share-basic (0.02) 0.08
Net income (loss) per share-diluted (0.02) 0.08
Book value per share 2.08 2.10
Cash dividends per share -- --
Equivalent pro forma - STR
Net income (loss) per share-basic (0.05) 0.21
Net income (loss) per share-diluted (0.05) 0.21
Book value per share 5.37 5.42
Cash dividends per share -- --
</TABLE>
(1) Equivalent pro forma per share amounts are calculated by multiplying the pro
forma combined per share data amounts by the exchange ratio of 2.58 shares of
DEI Common Stock for each share of STR Common Stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Joint Proxy Statement/Prospectus contains
forward-looking statements that are based on certain assumptions and involve
risks and uncertainties. Actual future results may vary materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors," "Information
About DEI -- Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Information About STR -- Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Information About
DEI -- Business," and "Information About STR -- Business," as well as those
discussed elsewhere in this Joint Proxy Statement/Prospectus. Statements
contained in this Joint Proxy Statement/Prospectus regarding DEI that are not
historical facts are forward-looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements regarding STR are not subject to the safe harbor.
DEI and STR do not undertake any obligation to publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
RISK FACTORS
In deciding how to vote their shares at the DEI Annual Meeting and the
STR Special Meeting, respectively, holders of shares of DEI Common Stock and
shares of STR Common Stock should carefully consider all of the information
contained in this Joint Proxy Statement/Prospectus and, in particular, the
following factors.
DEI'S SUBSTANTIAL DEPENDENCE ON ITS LINE OF CREDIT AND GOING CONCERN
CONSIDERATIONS
DEI incurred losses of $631,000, $362,000, $967,000, $64,000 and
$306,000 during fiscal 1994, 1995, 1996 and 1997 and in the first six months of
fiscal 1998, respectively. Due to these losses, DEI has experienced severe
liquidity problems and has depended primarily on its bank line of credit to
maintain operations. The bank line of credit is due on demand and is secured by
substantially all of DEI's assets, including real estate. Borrowing availability
under the line of credit is subject to a formula. As of January 31, 1998, the
formula was $950,000 based on the value of the real estate, with the remaining
available borrowings based on 50% of the value of certain receivables specified
in the line credit agreement. As of January 31, 1998, total remaining
availability was approximately $401,000 based on the formula. At that date, DEI
had an outstanding balance of $490,000 under the line of credit with an
additional $59,000 of the line reserved for a standby letter of credit. DEI's
mortgage indebtedness is cross-collateralized and cross-defaulted with the line
of credit. See "Summary -- Selected Financial Information" and "Information
About DEI -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
There can be no assurance that the lending bank will continue to permit
DEI to borrow and will not demand payment at a time at which DEI is unable to
repay or refinance such indebtedness. If the lending bank believes that the
14
<PAGE> 20
prospect of payment of DEI's indebtedness under the line of credit is impaired,
the lending bank is permitted under the agreement governing the line of credit
to declare such indebtedness due and payable or to limit DEI's ability to borrow
additional funds thereunder. Although the Merger is expected to have a positive
impact on DEI's consolidated results of operations and liquidity and
substantially reduce its dependence on its line of credit, there can be no
assurance that DEI will be profitable following the Merger or that it will
generate cash flow at a rate sufficient to operate the business. If the Merger
is consummated, the borrowing capacity under STR's line of credit is expected to
be sufficient to support the operations of both DEI and STR, although there can
be no assurance to that effect. See "Information About STR -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DEI's financial statements have been prepared on the basis that DEI
will continue operating as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. DEI's
ability to continue as a going concern is dependent upon several factors,
including DEI's ability to generate sufficient cash flow to meet its obligations
on a timely basis. DEI's financial statements were audited by its independent
certified public accountants, whose report includes an explanatory paragraph
stating that the financial statements have been prepared assuming DEI will
continue as a going concern and that DEI has incurred losses from operations
that raise substantial doubt about its ability to continue as a going concern.
If the Merger is not consummated, DEI will need additional financing to fund
expected operating losses and other working capital needs. See "Information
About DEI -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and DEI's Financial Statements included in this Joint
Proxy Statement/Prospectus.
STR'S SUBSTANTIAL DEPENDENCE ON ITS LINE OF CREDIT
Until STR completed a $3,783,000 private placement in January 1998, STR
historically depended upon its line of credit from its bank and extended payment
terms from its vendors to operate its business. The proceeds from the private
placement were used to pay down the line of credit. At March 31, 1998, STR was
able to borrow up to $2.8 million pursuant to the borrowing base provisions of
its $4.5 million line of credit and had outstanding borrowings of $125,000
thereunder. If STR's operating performance does not improve or if DEI and STR
cannot be effectively integrated, STR will again become reliant on its line of
credit. The withdrawal of this line of credit could have a material adverse
effect on STR's business. See "Information About STR -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEI'S URGENT NEED FOR ADDITIONAL CAPITAL
DEI had a working capital deficit of approximately ($88,000) at
January 31, 1998. In order to provide additional working capital and
retire current debt, DEI is attempting to sell its building and lease back a
portion of the facility from the new owner. There can be no assurance that the
building can be sold at a price acceptable to DEI or that an acceptable
lease-back agreement can be negotiated. If DEI must relocate, management
believes that a suitable facility can be found and that DEI's business will not
be materially disrupted. The building is listed for sale with a real estate
agency and DEI expects to continue efforts to sell its building whether or not
the Merger is consummated. The building was first listed for sale in February
1996 at an asking price of $2.2 million and is currently listed at a price of
$1.95 million. An offer to lease the building for two years for approximately
$236,000 per year with an option to buy at a price of $1.8 million is currently
pending and is being considered by DEI. See "Information About DEI --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The sale of the building is expected to result in the termination of
DEI's existing line of credit. Management believes that a new line of credit
supported by receivables, irrevocable letters of credit and other assets of DEI
can be negotiated with the current bank lender or a substitute bank which will
be adequate to support DEI's working capital needs provided that DEI's backlog
increases significantly over the current level. In the absence of a significant
increase in DEI's backlog, it is unlikely that DEI would have sufficient
operating cash flow to induce a bank to establish a new line of credit. There
can be no assurance that DEI will be able to acquire a replacement line of
credit at all or that the level of borrowing permitted under any replacement
line of credit will be adequate for DEI's working capital needs if the Merger is
not consummated or on a consolidated basis with STR if the Merger is
consummated. Absent a new line
15
<PAGE> 21
of credit, STR believes the current borrowing capacity available under its lines
of credit would be sufficient for both companies, although there can be no
assurance to that effect. The failure to obtain an adequate line of credit may
have a material adverse effect on DEI's financial condition and results of
operations. See "Information About DEI -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
If the Merger is not consummated, DEI will continue to pursue
additional equity financing through discussions with potential investors
possessing related technological and/or marketing capabilities. DEI will also
continue to operate supported by its line of credit, but the lending bank has
indicated that it may limit the amount which DEI is permitted to borrow under
the line of credit in the absence of continued improvement in DEI's business
prospects or progress toward the acquisition of a significant amount of equity
capital. If the Merger is not consummated and DEI is unable to borrow amounts
necessary to fund its operations, its financial position would be materially and
adversely affected and DEI may have no choice but to cease operations if other
sources of capital are not available. See "Information About DEI -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
POTENTIAL UNPROFITABILITY AND VARIABILITY OF OPERATING RESULTS
STR's historical profit margins have been very low and DEI has operated
at a loss over the past several fiscal years. Unless the combined companies are
able to achieve the cost efficiencies and increased revenues anticipated as a
result of the Merger, the combined companies may not be able to operate at a
profit. Although STR's management believes that the January 1998 infusion of
equity will significantly reduce interest expense and will provide for an
improved operating environment with other reduced costs, there can be no
assurance that the anticipated cost efficiencies and revenue increases will
occur. See "Information About STR -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DEI's results of operations are affected by certain factors which can
cause its results of operations to vary significantly from period to period and
have led to losses in recent periods. DEI currently receives the majority of
its revenue from a small number of relatively large contracts. Standard product
contracts are generally of higher dollar value than customer-funded product
development contracts, with each contract representing a substantial portion of
total revenue each year. Therefore, the timing of the receipt of a standard
product sales contract as well as the related manufacturing endeavor can have a
material impact on a quarter-to-quarter or year-to-year comparison of DEI's
results of operations. DEI experienced delays in the receipt of certain U.S.
Government contracts in fiscal 1996 and has failed to receive expected
contracts due to funding constraints resulting from pressures to balance the
federal budget and delays in congressional budget approval. DEI also failed to
receive certain contracts from Asian customers due to the well-publicized
adverse economic conditions in Asia and the resulting funding constraints,
which contracts DEI expected to be awarded in late 1997 or early 1998. These
delays and failures to receive contracts have had, and continue to have, a
material adverse effect on DEI's revenue base. The small number of customers
and large percentage of total revenues in a given year represented by any
particular customer also contribute to the variability in DEI's operating
results. For example, during fiscal 1997, out of 18 total customers, the
National Aeronautics and Space Administration accounted for $1,563,000 or 52%
of DEI's revenue, the U.S. Department of Agriculture accounted for $62,000
or 2% of DEI's revenue and the Royal Thai Air Force accounted for $1,144,000
or 38% of DEI's revenue. During fiscal 1996, the National Aeronautics and
Space Administration accounted for $480,000 or 23% of DEI's revenue, the U.S.
Department of Agriculture accounted for $60,000 or 3% of DEI's revenue, the
U.S. Department of the Air Force accounted for $64,000 or 3% of DEI's revenue,
Bechtel Nevada accounted for $14,000 or 1% of revenue, Asia Air Survey Co.,
Ltd. accounted for $562,000 or 27% of revenue and the Instituto de Meteorologia
of Portugal accounted for $436,000 or 21% of revenue. As a result of these
factors and others, there can be no assurance that DEI will be profitable in
the future on a quarterly or annual basis, whether or not the Merger is
consummated. If operating results are below the expectations of public market
analysts and investors as expected, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to DEI's
business, the price of the DEI Common Stock may be materially adversely
affected. DEI's ability to continue operations if the Merger is not
consummated depends upon the receipt of additional significant orders in fiscal
1998 and the success of DEI's growth strategy. See "Summary -- Selected
Financial Information," "Information About DEI -- Business -- Growth Plan" and
"Information About DEI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
<PAGE> 22
POTENTIAL INABILITY TO INTEGRATE DEI AND STR
Achieving the anticipated benefits of the Merger will depend in part
upon whether the integration of the businesses of DEI and STR can be achieved in
an efficient and effective manner. The combination of the two businesses will
require, among other things, partial integration of the companies' respective
marketing and research and development efforts. Furthermore, the combined
companies will have a new board of directors consisting of certain members of
the current DEI and STR boards of directors and will have a new management team
combining managers from DEI and STR. There can be no assurance that integration
of the companies and their management will be accomplished successfully. Failure
to effectively accomplish the integration of the two companies could have a
material adverse effect on the combined companies' results of operations and
financial condition. See "The Merger and Related Matters -- STR's Reasons for
the Merger; Recommendation of STR's Board of Directors; Fairness to STR's
Stockholders."
SUBSTANTIAL DEPENDENCE ON GOVERNMENT FUNDING AND GOVERNMENT CONTRACTS
A substantial portion of DEI's revenue is generated from the U.S.
Government or from customers who depend, at least in part, upon government
appropriations for funding to purchase DEI's products. Because many of its
customers are involved in programs aimed at improving man's impact on the
environment, the ability or willingness of such customers to purchase DEI's
products are often subject to political, economic and social factors outside the
control of the customers and DEI. As a result of these factors, certain sales of
DEI's products may not occur despite excellent sales efforts, competitive
pricing and the customer's willingness to purchase. See "Information About DEI
- -- Business -- Customers."
STR's historical market (accounting for approximately 95% of its total
revenue during fiscal 1996 and 1997) has been U.S. Government contracts,
primarily prime contracts. See "Information About STR -- General Description of
Business -- Marketing and Customers." The award of such contracts is dependent
on government funding and there is currently a downward trend in funding for
defense and intelligence programs. In fiscal 1997, 45% of STR's total revenue
was derived from contracts with the United States Navy and 23% of total revenue
was derived from contracts with agencies related to the intelligence community.
The Navy Sea Systems Command accounted for 31.1% of STR's revenue in 1997 and
57.8% in 1996. One customer in the intelligence community accounted for 10.8% of
STR's revenue in 1997. All other customers individually accounted for less than
10% of STR's revenue during 1997 and 1996. Although the markets in which STR
participates are expected to grow, there can be no assurance that the U.S.
Government funding will continue to be available to purchase STR's products or
that the U.S. Government will wish to continue doing business with STR. The
loss of all or a material part of STR's revenues from the U.S. Government
could have a material adverse effect on STR's results of operation and
financial position.
There are several risks inherent in doing business with agencies of the
U. S. Government. The major risk is that U.S. government agencies are
essentially one customer and their funding comes from the budget approved by
Congress which is influenced by various political and economic factors outside
the control of any particular agency with which DEI or STR is doing business. In
addition, government contracts generally provide that the agency has the right
to cancel a contract at its convenience.
Contracts with U.S. Government agencies can provide for reimbursement
of costs plus a fee. Costs under such contracts (including overhead and general
and administrative expenses) are generally subject to audit and adjustment by
negotiation between DEI and STR, as the case may be, and U.S. government
representatives. DEI has not been involved in a reimbursable contract during any
of the periods for which financial statements are included in this Joint Proxy
Statement/Prospectus, but has been awarded fixed fee contracts which are not
subject to audit. From time to time, STR enters into contracts which are subject
to audit. See "Information About STR -- General Description of Business --
Marketing and Customers."
17
<PAGE> 23
SIGNIFICANT REVENUES DERIVED FROM INTERNATIONAL CUSTOMERS
A significant portion of DEI's revenues are derived from the
international market. See "Information About DEI -- Business -- Customers."
Deriving revenues from the international market involves certain risks in
addition to those involved in doing business with domestic customers. For
example, foreign customers may be adversely affected by a more volatile economy
or political system that may prevent them from making payment in a timely
manner or at all. In addition, contracts with foreign governmental agencies may
be delayed by the need for U.S. Governmental or foreign administrative
approvals which are in addition to those which would be obtained in connection
with a domestic contract. The current economic crisis in several Asian
countries has delayed several programs that DEI expected to be awarded in
fiscal 1998. Foreign contracts also subject DEI and STR to additional U. S.
Government regulation requiring export licensing which could result in
difficulties making delivery and receiving final payment. Foreign contracts
could also result in the risk of currency fluctuation. To mitigate foreign
currency transaction losses, DEI denominates international contracts in U.S.
dollars and secures large standard product contracts with irrevocable letters
of credit. DEI may continue to derive a significant portion of its revenues
from the international market whether or not the Merger is consummated due to
its marketing efforts and the perceived demand for its products, although
international revenues are expected to be a much smaller percentage of total
revenues if the Merger is consummated.
INTENSE COMPETITION
There are several competitors that compete with individual products
produced by DEI. During the past few years, one of these competitors has begun
offering to build products that compete with more of DEI's standard remote
sensing systems. In addition, many companies selling similar instruments for
military purposes are now beginning to pursue non-military customers as
governments worldwide continue to reduce military spending. There can be no
assurance that such competition will not, in the future, have a material adverse
effect on DEI's financial condition and results of operations. See "Information
About DEI -- Business -- Competition."
In addition, if DEI implements its growth plan, competition in the new
areas of business addressed by the growth plan will be different than that faced
by DEI in its core business and competitors will be more numerous since there
are many more companies offering products and services in each of these areas of
new business. Competition will include conventional aerial survey firms using
film cameras and commercial remote sensing satellite data. There can be no
assurance that DEI will be able to compete successfully in each of these market
areas. See "Information About DEI -- Business -- Growth Plan."
STR relies upon state of the art technological solutions to obtain its
contracts, many of which are sole source contracts. There is substantial
competition in both the domestic and foreign threat warning and communications
intercept business. The size and reputation of these competitors can give them a
significant advantage in competing for contracts. STR can maintain its
competitive position only if its products remain highly regarded. Other
companies may develop innovative products which the market regards as superior
to those of STR. If this occurs, STR's market position could erode. See
"Information About STR -- General Description of Business -- Competition."
STR'S SUBSTANTIAL DEPENDENCE ON MAJOR SUPPLIERS
STR relies upon certain sources to supply several component parts which
are used in the STR manufacturing process. Certain subassemblies utilized in
STR's products are manufactured by specialty vendors to STR specifications
upon receipt of purchase orders issued by STR, which include standard commercial
terms. While these subassemblies can be manufactured by others, and STR has not
encountered difficulties in obtaining such subassemblies in the past, there
would be a significant schedule impact while the new company purchased material,
developed its manufacturing capability, and qualified its products. Such items
are Digital Frequency Discriminators manufactured by MA-Com, Division of AMP,
Inc., Successive Detection Log Video Amplifiers manufactured by Veritech
Microwave, Inc., and Yig notch filters manufactured by Stellex Microwave
Systems. The necessity to change any of these sources could have a material
adverse effect on STR's results of operation and financial position.
18
<PAGE> 24
POTENTIAL INABILITY TO IMPLEMENT DEI'S GROWTH PLAN
In 1995, DEI developed a growth plan to reduce fluctuations in its
revenue and earnings which involves the use and sale of airborne digital cameras
developed by DEI and performing domestic environmental surveys with DEI's
airborne multispectral scanners. The successful implementation of DEI's growth
plan involves a number of risks, including, without limitation, the potential
inability to compete with larger and more numerous competitors, the potential
inability to alter its sales and marketing strategies as necessary to
participate in these new markets and the potential continued lack of available
financing. As a result of these risks, there can be no assurance that the growth
plan can be successfully implemented. DEI's inability to implement its growth
plan could have a material adverse effect on its results of operations and
financial position. See "Information About DEI -- Business -- Growth Plan."
DEPENDENCE ON KEY MANAGEMENT
The operations of DEI have been largely dependent on the skills,
experience and efforts of its senior management and especially its President and
Chief Executive Officer, Thomas Ory and its Vice President and Chief Operating
Officer, Charles Stanich. See "Information About DEI -- Business -- Executive
Officers of DEI." The loss of the services of Mr. Ory or Mr. Stanich could have
a material adverse effect on DEI's business and prospects. DEI has entered into
employment agreements with Mr. Ory and Mr. Stanich which will become effective
at the Effective Time. See "The Employment Agreements."
The operations of STR have been largely dependent on the
skills, experience and efforts of senior management and especially its
President and Chief Executive Officer, S. R. Perrino and its Senior Vice
President, Donald Reiser. See "Information About STR -- Management." The loss
of the services of Mr. Perrino and Mr. Reiser could have a material adverse
effect on STR's business and prospects.
POTENTIAL INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The success of STR and DEI depends in large part upon their ability to
attract, develop, motivate and retain qualified employees. Many of these
employees are required in the information technology field. Today, especially in
the geographic areas in which STR and DEI are located, employees with
information technology backgrounds are in great demand and likely to remain so
for the foreseeable future. There can be no assurance that STR and DEI will be
able to continue to attract and retain a sufficient number of qualified
personnel in the future. The inability of STR and DEI to hire sufficient
qualified personnel could have a material adverse effect on their business,
financial condition and results of operations.
Engineers and key technical employees of DEI and STR are bound by
confidentiality agreements to protect the companies from loss of trade secrets
and know-how in the event such persons leave the employ of DEI or STR.
NO ACTIVE MARKET FOR THE DEI COMMON STOCK
The DEI Common Stock does not qualify for listing on Nasdaq nor is the
DEI Common Stock listed on any stock exchange. As a result, there is currently
no active trading market for the DEI Common Stock. Following the Merger, the DEI
Common Stock is expected to qualify for listing on the Nasdaq SmallCap Market
and DEI intends to seek authorization to list the DEI Common Stock thereon.
The listing requirements for the Nasdaq SmallCap Market are as
follows: the applicant must have (a) either (i) net tangible assets in excess
of $4 million, (ii) a $50 million market capitalization or (iii) net income of
$750,000 in the latest fiscal year or in two of the last three fiscal years,
(b) at least one million shares of public float, (c) at least $5 million market
value of the public float, (d) at least a $4 minimum bid price, (e) at least
three market makers, (f) at least 300 shareholders each holding at least 100
shares, (g) an operating history of at least one year and (h) must satisfy
certain corporate governance requirements, which include having at least two
independent directors and having an audit committee, a majority of whose
members are independent directors. DEI believes that it will satisfy all of
these requirements immediately following consummation of the Merger. Even if
Nasdaq accepts DEI's application for the SmallCap Market, there can be no
assurance that an active public trading market for the DEI Common Stock will
develop following the Merger. Accordingly, STR stockholders who receive DEI
Common Stock in the Merger may experience substantial difficulty selling such
securities and the price of such securities may be subject to volatility.
19
<PAGE> 25
FIXED EXCHANGE RATIO
Under the terms of the Merger Agreement, each share of STR Common Stock
issued and outstanding at the Effective Time (other than shares held by
stockholders of STR who perfect their dissenters' rights) will be converted into
the right to receive 2.58 shares of DEI Common Stock. See "The Merger Agreement
- -- Conversion and Exchange of STR Common Stock." The Merger Agreement does not
contain any provisions for adjustment of the Exchange Ratio based on
fluctuations in the market price of shares of DEI Common Stock. Accordingly, the
value of the shares of DEI Common Stock to be received by the STR stockholders
upon completion of the Merger may differ from the value of the shares of DEI
Common Stock on December 23, 1997, the date on which the Merger Agreement was
executed (when the average of the quoted bid and asked prices was approximately
$3 7/16 per share). There can be no assurance that the market price of shares of
DEI Common Stock on and after the Effective Time will not be lower than such
price. The shares of STR Common Stock being converted include 582,000 shares,
which STR issued at $6.50 per share in a private placement completed on January
30, 1998. Based upon the average of the bid and ask price of DEI Common Stock on
November 11, 1997 (the date on which the Merger was announced), these shares,
along with all of the other shares of STR Common Stock, had an equivalent value
of approximately $8.23 per share. Using the average of the bid and ask price
on May 8, 1998, these shares had an equivalent value of approximately $14.84
per share. The private placement occurred after the respective Boards
of Directors had approved the Merger and had received the opinions of their
financial advisors. See "Risk Factors -- No Active Market for the DEI Shares"
and "Information about DEI -- Market Price and Dividend Information."
POTENTIAL WAIVER OF CONDITIONS TO MERGER
The Board of Directors of either STR or DEI has the right to waive
certain conditions precedent to the consummation of the Merger other than those
conditions which are a legal necessity for the Merger to occur such as STR
stockholder approval of the Merger or DEI stockholder approval of the Charter
Amendment. In the event either Board waives any condition, each company intends
to resolicit shareholder approval unless in the opinion of such company's
Board, the delay associated with the resolicitation process is likely to have a
material adverse effect on the business or financial condition of such company.
If the Board waiving the condition deems such condition to have been material
to the decision of the stockholders to approve the Merger (in the case of STR)
or the Charter Amendment (in the case of DEI), such Board intends to resolicit
stockholder approval.
POTENTIAL FAILURE OF FUTURE ACQUISITIONS
Following the Merger, DEI and STR intend to increase the size of their
consolidated business in part through acquisitions. Acquisitions can fail to
achieve their objectives as a result of a number of factors, including (a) the
time and expense involved with integrating operations of those acquisitions for
which integration is required, (b) the devotion of senior management time to the
acquisition process as opposed to other operations, (c) the financial risks
associated with any acquisition including the inability to achieve projected
financial results and (d) the dilutive impact which shareholders may sustain if
shares of DEI Common Stock are issued as consideration for the acquisition. No
assurance can be provided that such acquisitions will occur or that, if they do
occur, the acquisitions will be successful.
CONFLICTS OF INTEREST
Certain members of DEI's management and STR's board of directors have
interests in the Merger that are in addition to and potentially in conflict with
the interests of stockholders of DEI and STR generally. Messrs. Ory and Stanich
have become parties to employment agreements with DEI, which are contingent on
the consummation of the Merger, and Messrs. Perrino, Rockwell, Busey and Bernard
will become directors of DEI. Dr. Sanders is currently a member of the DEI board
of directors and the STR board of directors. The boards of directors of DEI and
STR were aware of these interests and considered them, among other things, in
approving the Merger Agreement and the transactions contemplated thereby. See
"The Merger and Related Matters -- Background of the Merger" and "-- Conflicts
of Interest."
INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished to stockholders of
DEI in connection with the solicitation of proxies by the Board of Directors of
DEI for use at the DEI Annual Meeting to be held at 9:00 a.m. local time, on
June 9, 1998 at DEI's headquarters located at 300 Parkland Plaza, Ann Arbor,
Michigan 48103, for the purpose of considering and voting upon (a) the approval
of the Charter Amendment to increase the number of authorized shares of DEI
Common Stock and change the name of DEI to "Sensys Technologies Inc." as
required by the Merger Agreement; (b) the election of directors; and (c) the
approval of an amendment to DEI's Long-Term Incentive Plan. It is also furnished
to stockholders of STR in connection with the solicitation of proxies by the
Board of Directors of STR for use at the STR Special Meeting to be held at 9:00
a.m. local time, on June 9, 1998 at STR's headquarters located at 8419 Terminal
Road, Newington, Virginia 22122-1430, for the purpose of considering and voting
upon a proposal to approve the Merger Agreement and the Merger. This Joint Proxy
Statement/Prospectus also constitutes the Prospectus of DEI with respect to up
to approximately 3,420,527 shares of DEI Common Stock to be issued in connection
with the Merger.
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Pursuant to the Merger Agreement, among other things, Merger Sub, a
wholly owned subsidiary of DEI, will be merged with and into STR, which will be
the surviving corporation. The separate existence of Merger Sub will cease. Each
share of STR Common Stock (other than shares held by stockholders of STR who
perfect their dissenters' rights in the manner described in this Joint Proxy
Statement/Prospectus) which is issued and outstanding at the Effective Time of
the Merger, will be converted into the right to receive 2.58 shares of DEI
Common Stock. A copy of the Merger Agreement is attached hereto as Annex A.
Based on the 1,325,786 shares of STR Common Stock outstanding at April 20,
1998 and assuming no STR stockholders perfect their dissenters' rights,
approximately 3,420,527 shares of DEI Common Stock will be issued in the Merger.
This Joint Proxy Statement/Prospectus contains certain information set
forth more fully in Annexes A through E, and is qualified in its entirety by
reference to such documents. In deciding how to vote on the proposals included
herein, each stockholder of DEI and STR should carefully read all of these
documents.
DEI RECORD DATE; VOTING QUORUM
The Board of Directors of DEI has fixed the close of business on April
20, 1998 for determination of holders of DEI Common Stock entitled to notice of,
and to vote at, the DEI Annual Meeting. On the DEI Record Date, 534,574 shares
of DEI Common Stock were issued and outstanding and entitled to vote. Each share
of DEI Common Stock is entitled to one vote on all matters that properly come
before the DEI Annual Meeting. The presence, in person or by proxy, of a
majority of the issued and outstanding shares of DEI Common Stock entitled to
vote constitutes a quorum at the DEI Annual Meeting.
On April 20, 1998, 88,866 of the outstanding shares of DEI Common
Stock (16.6% of the DEI Common Stock outstanding) were beneficially owned by the
directors and executive officers of DEI. All such persons have indicated to DEI
that they intend to vote all shares of DEI Common Stock over which they have
voting power in favor of the Charter Amendment, the election of each of the
director-nominees and the Long-Term Incentive Plan amendment, and certain of
such persons are contractually bound to do so. See "The Voting Agreement."
STR RECORD DATE; VOTING QUORUM
The Board of Directors of STR has fixed the close of business on April
20, 1998 for determination of holders of STR Common Stock entitled to notice of,
and to vote at, the STR Special Meeting. On the STR Record Date, 1,325,786
shares of STR Common Stock were issued and outstanding and entitled to vote.
Each share of STR Common Stock is entitled to one vote on all matters that
properly come before the STR Special Meeting. The presence, in person or by
proxy, of a majority of the issued and outstanding shares of STR Common Stock
entitled to vote constitutes a quorum at the STR Special Meeting.
On April 20, 1998, 829,220 shares of STR Common Stock (62.5% of the
STR Common Stock outstanding) were beneficially owned by the directors,
executive officers and principal stockholders of STR. All such persons have
indicated to STR that they intend to vote all shares of STR Common Stock over
which they have voting power in favor of the Merger Agreement and certain of
such persons are contractually bound to do so. See "The Voting Agreement."
DEI PROXIES; VOTE REQUIRED
Stockholders of DEI are requested to complete, sign, date and return
promptly the enclosed proxy in the postage paid envelope provided for this
purpose in order to assure that their shares are voted. Shares of DEI Common
Stock represented by proxies received by DEI prior to or at the DEI Annual
Meeting will be voted in accordance with the instructions contained thereon.
SHARES OF DEI COMMON STOCK REPRESENTED BY PROXIES FOR WHICH NO INSTRUCTION IS
GIVEN WILL BE VOTED FOR THE CHARTER AMENDMENT, FOR THE ELECTION OF EACH OF THE
DIRECTOR-NOMINEES AND FOR THE LONG-TERM INCENTIVE PLAN AMENDMENT.
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The approval of the Charter Amendment requires the affirmative vote of
the holders of a majority of the shares of DEI Common Stock outstanding. Because
the number of shares of DEI Common Stock to be issued in the Merger exceeds the
number of shares which are currently authorized for issuance under DEI's
certificate of incorporation, approval by the DEI stockholders of the Charter
Amendment has been made a condition to the consummation of the Merger. A VOTE
AGAINST THE CHARTER AMENDMENT WILL HAVE THE EFFECT OF A VOTE AGAINST THE MERGER.
The election of directors requires a plurality of the votes cast at the Annual
Meeting. Approval of the Long-Term Incentive Plan amendment requires the
affirmative vote of the holders of a majority of the shares of DEI Common Stock
voted on such matter. For purposes of determining the number of votes cast with
respect to the election of directors, only those cast Afor" are included.
Abstentions and withheld votes are counted only for purposes of determining
whether a quorum is present at the Annual Meeting and broker non-votes are not
counted. Abstentions and broker non-votes will have the effect of a vote against
approval of the Charter Amendment but will have no effect on the vote on the
Long-Term Incentive Plan amendment.
A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by the granting of
a later proxy with respect to the same shares or by written notice to the
Secretary of DEI at any time prior to the vote at the DEI Annual Meeting. Mere
attendance at the DEI Annual Meeting will not in itself revoke a proxy.
The DEI Board of Directors knows of no matters to be presented at the
Annual Meeting other than those described in this Joint Proxy
Statement/Prospectus. If other matters are properly brought before the DEI
Annual Meeting, it is the intention of the persons named in the proxies to vote
the shares to which such proxies relate in accordance with their best judgment.
DEI will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by mail, directors, officers and
employees of DEI, who will receive no compensation other than their regular
salaries or fees, may solicit proxies by telephone, telegram or otherwise.
Brokerage firms, fiduciaries and other custodians who forward soliciting
material to the beneficial owners of shares of DEI Common Stock held of record
by them will be reimbursed for their reasonable expenses incurred in forwarding
such material.
DEI'S BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF DEI AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER AGREEMENT, THE
CHARTER AMENDMENT AND THE LONG-TERM INCENTIVE PLAN AMENDMENT, AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF DEI VOTE FOR THE CHARTER AMENDMENT, FOR THE
LONG-TERM INCENTIVE PLAN AMENDMENT AND FOR THE ELECTION OF EACH OF THE
DIRECTOR-NOMINEES.
STR PROXIES; VOTE REQUIRED
Stockholders of STR are requested to complete, sign, date and return
promptly the enclosed proxy in the postage paid envelope provided for this
purpose in order to assure that their shares are voted. Shares of STR Common
Stock represented by proxies received by STR prior to or at the STR Special
Meeting will be voted in accordance with the instructions contained thereon.
SHARES OF STR COMMON STOCK REPRESENTED BY PROXIES FOR WHICH NO INSTRUCTION IS
GIVEN WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
The affirmative vote of at least two-thirds of the outstanding shares
of STR Common Stock is required to approve the Merger Agreement and Merger. An
abstention will have the effect of a vote against the Merger Agreement.
The STR Board of Directors knows of no matters to be presented at the
STR Special Meeting other than those described in this Joint Proxy
Statement/Prospectus. If other matters are properly brought before the STR
Special Meeting, it is the intention of the persons named in the proxies to vote
the shares to which such proxies relate in accordance with their best judgment.
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STR will bear the cost of solicitation of proxies from its
stockholders. In addition to solicitation by mail, officers and employees of
STR, who will receive no compensation other than their regular salaries, may
solicit proxies in person, by telephone or otherwise.
A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by the granting of
a later proxy with respect to the same shares or by written notice to the
Secretary of STR at any time prior to the vote at the STR Special Meeting. Mere
attendance at the STR Special Meeting will not in itself revoke a proxy.
STR'S BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT ARE FAIR TO AND IN THE BEST INTERESTS OF STR AND ITS STOCKHOLDERS, HAS
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF STR VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
SPECIAL INSTRUCTIONS TO PARTICIPANTS IN STR'S EMPLOYEE STOCK OWNERSHIP PLAN
Under the S.T. Research Corporation 401(k)/Employee Stock Ownership
Plan (the "STR ESOP"), participants in the STR ESOP have the right to vote the
shares of STR Common Stock allocated to their stock accounts on major corporate
events such as mergers. Therefore, participants will have the opportunity to
vote the shares of STR Common Stock they beneficially hold in the STR ESOP in
connection with the Merger, provided that they comply with the applicable
procedures described below.
The STR ESOP's trustees ("Trustees") will mail to each participant a
Confidential Participant Voting Instruction Form. Participants can vote their
STR ESOP shares by properly completing this form and returning the form to Blue
Ridge ESOP Associates, Inc., the company which assists STR in the administration
of the STR ESOP. A proxy form will not be effective to vote shares of STR Common
Stock allocated to a participant's STR ESOP account. Blue Ridge ESOP Associates,
Inc. will tabulate all forms and advise the Trustees of the manner in which all
STR ESOP shares covered by the voting instruction forms should be voted. The
Trustees will not vote any shares on behalf of an STR ESOP participant from whom
a voting instruction form has not been received. If the Merger is approved, all
of STR Common Stock shares held in the STR ESOP will be converted into shares of
DEI Common Stock.
DISSENTERS' RIGHTS
Stockholders of DEI Common Stock are not entitled to appraisal rights
under the DGCL in connection with the Merger because DEI is not a constituent
corporation in the Merger. DEI, as sole stockholder of Merger Sub, has approved
the Merger pursuant to applicable law.
Stockholders of STR who do not vote in favor of the Merger are entitled
to dissenters' rights under the VSCA in connection with the Merger in accordance
with the procedures prescribed by the VSCA. Certain provisions of the VSCA
regarding dissenters' rights are reproduced in full as Annex C. The failure of a
dissenting stockholder of STR to follow the appropriate procedures may result in
the termination or waiver of such rights. See "The Merger and Related
Matters -- Dissenters' Rights."
THE MERGER AND RELATED MATTERS
BACKGROUND OF THE MERGER
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of DEI and STR. The following is a brief
discussion of the background of the negotiations between DEI and STR.
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For nearly two years prior to signing the Merger Agreement, DEI's
management had unsuccessfully sought additional equity financing through
discussions with potential investors possessing related technological or
marketing capabilities to permit DEI to pursue its growth plan. The additional
equity was also intended to address the liquidity problems resulting from its
recent operating losses.
In September 1996, STR developed a strategic plan pursuant to which STR
intended to substantially increase revenues and raise additional equity capital.
The plan contemplated achieving 50% of its revenue growth through acquisitions
of companies with complementary technologies. Consistent with this plan, in
January 1997, STR purchased the assets and assumed certain liabilities of a
division of Computer Sciences Corporation, including certain complementary
technologies to STR.
Discussions between DEI and STR regarding a possible business
combination began in early October 1996 with a series of telephone conversations
initiated by STR and the exchange of basic financial information between Thomas
Ory, President and Chief Executive Officer of DEI, and S. R. Perrino, President
and Chief Executive Officer of STR, and Robert Bower, Chief Financial Officer of
STR. STR contacted DEI because STR sought acquisition candidates with similar or
complementary technology, customers or markets. As a result of these initial
contacts, Mr. Perrino and Mr. Bower visited DEI on October 28, 1996. During this
visit, Messrs. Perrino and Bower met with Thomas Ory and Charles Stanich, Vice
President and Chief Operating Officer of DEI, signed a nondisclosure agreement
and exchanged information about the respective capabilities, customers, products
and financial status of DEI and STR. Several areas of mutual business interest
were identified, including the integration of multiple sensors on various
platforms to better support the companies' existing business base and expand
their market area, and the companies' complementary marketing expertise and
technologies, but no specific plans for a business combination or other
transaction resulted from the meeting.
In December 1996, as a means of intensifying its search for a strategic
business partner to infuse equity capital, the DEI Board approved a consulting
arrangement with John D. Sanders, the Chairman of DEI's Board of Directors,
pursuant to which Dr. Sanders would be paid a monthly fee, beginning in January
1997, to assist DEI's management in seeking potential financing transactions and
identifying joint venture or merger partners. See "Election of DEI Directors --
Nominees" for a description of Dr. Sanders' business experience.
STR's discussions with DEI ceased because of STR's discussions with
several other companies in late 1996 and early 1997. STR made acquisition
proposals to three companies, each of which was rejected by the proposed target
for various reasons. In one case, the target desired to reorganize to better
posture itself prior to any merger or acquisition. In another case, the owner
was able to obtain needed financing and did not want to give up control of his
business, and in the third instance there was a disagreement relating to the
displacement of the chief executive officer and relocation of the executive
offices. In June 1997, Dr. Sanders, who is also a member of STR's Board of
Directors, suggested to the STR Board that DEI should be re-evaluated as a
potential merger candidate in view of STR's internal growth and expanded
customer base, which had expanded its opportunities to utilize the technologies
possessed by DEI, and the demise of the other potential acquisitions discussed
above. After further discussion and evaluation of DEI by STR, in early August
1997, Dr. Sanders notified Mr. Ory that STR's management was interested in
discussing a possible merger and outlined proposed terms based upon discussions
with STR management, including a proposed exchange ratio of 3 to 1 and the
conversion of the existing senior officer severance agreements into employment
agreements. On August 21, 1997, Dr. Sanders met with DEI management to discuss
the tentative proposal in more detail and to provide additional information
about STR's reasons for seeking a merger, including DEI's complementary
customers and complementary technologies and the expressed interest of STR
customers in DEI's airborne sensor technology. Mr. Ory and Mr. Stanich visited
STR on August 27, 1997 to further discuss a possible merger, negotiate certain
terms and conditions, and to inspect STR's facilities and capabilities.
On September 9, 1997, Mr. Perrino and Mr. Bower met with Mr. Ory
and Mr. Stanich at DEI for further discussion and negotiation of the proposed
merger. On September 15, 1997, Mr. Ory sent a letter to the DEI directors which
outlined the proposed merger discussions and included details on STR's financial
performance and business
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description. Discussions continued through September and October 1997, during
which time DEI and STR reviewed business projections for both corporations as
well as technical synergistic capabilities that could be exploited utilizing
the capabilities of the two companies. For example, DEI has recognized
capabilities in infrared systems which could be used for the detection of land
mines. STR has been providing complementary systems for radar detection and the
customer base of the combined companies could easily be expanded by offering a
single system integrating DEI's infrared capabilities and STR's radar detection
capabilities. Discussions consisted of present and anticipated customers,
current product capabilities of the individual companies and potential new
products as a result of the integration of the technology and markets of the
two companies. Discussions also occurred regarding organizational structure,
how the companies could work together to best pursue the market areas, and the
relative values of the individual companies and combined company. STR was also
conducting due diligence on DEI during this period, and the Acquisition
Committee of STR's Board, comprised of S. Kent Rockwell and Dr. Sanders, was
kept fully apprised of the results of the due diligence.
On October 20, 1997, STR's Board of Directors met and instructed
management to continue to pursue the merger with DEI. DEI's Board of Directors
met informally on October 23 and formally on October 24, 1997 for detailed
consideration of the proposed merger. The DEI Board instructed DEI management to
continue discussions with STR, to conduct due diligence and to engage an
independent financial advisor to perform a fairness analysis of the proposed
merger on behalf of DEI stockholders. On October 31, 1997, Mr. Ory, Mr. Stanich
and Philip Power, a director of DEI, visited STR for further discussions about
post-merger operations and to conduct preliminary due diligence on STR
operations.
In early November, DEI and STR reached an agreement in principle on the
terms of the Merger and issued a press release announcing such agreement on
November 11, 1997. The Merger was structured as a reverse acquisition in order
to allow DEI to survive as a publicly traded company. Due diligence and
negotiations of the terms of the definitive Merger Agreement, Employment
Agreements and Voting Agreement, primarily through the exchange of draft
agreements, continued throughout November and December by STR, DEI and their
representatives, with the respective Boards of Directors of DEI and STR being
kept apprised of the progress of the negotiations through informal
communications from management.
The parties reached agreement on the terms of the definitive agreements
(including the Exchange Ratio and the proposed name change of DEI) in
mid-December 1997. Because of the losses incurred since 1994 by DEI, STR's
initial offer of an exchange ratio of 3:1 was based on the appraised value of
STR Common Stock of $8.07 and STR's belief that the realizable asset value of
the DEI Common Stock was approximately $1.5 million based upon the STR Board's
belief that the net proceeds from the sale of the real estate would yield
approximately such amount and that DEI's remaining assets would be at least
sufficient to satisfy its remaining liabilities as reflected on the then most
recent available balance sheet. Management of STR and DEI then engaged in a
number of discussions with respect to the value of STR Common Stock, which
centered on the appropriate multiples and discount percentage for
a non-public company, and the value of DEI Common Stock, which centered on the
value of DEI's real estate, tax loss carryforwards, inventory and other fixed
assets. The parties eventually agreed that the relative values of the two
companies yielded an exchange ratio of 2.58:1, but agreed to renegotiate the
Exchange Ratio if DEI was awarded either of two multi-million dollar contracts
prior to the signing of the Merger Agreement. Such contracts were not awarded
(and have not yet been awarded) and the Exchange Ratio was not further
negotiated. In view of the cash positions of both companies, all discussions
assumed a stock for stock transaction. On December 23, 1997, the STR Board of
Directors met and approved the Merger Agreement and the DEI Board of Directors
met and approved the Merger Agreement, Charter Amendment, the Long-Term
Incentive Plan amendment, the issuance of shares of DEI Common Stock pursuant
to the Merger and various other related matters. At these meetings, each Board
of Directors received the advice of its respective financial advisor. The DEI
Board also discussed Dr. Sanders' status as a director of STR and the facts and
circumstances with respect to his involvement in the Merger. Based upon all of
the facts known to it, the DEI Board determined that Dr. Sanders had no
conflict of interest substantial enough to cause him to be unable to fulfill his
fiduciary duty as a director of DEI and had acted in the best interests of DEI
and its stockholders in all respects. The STR Board made a similar
determination with respect to Dr. Sanders ability to fulfill his duty as an STR
director. The STR Board of Directors determined that since all material
negotiations regarding the Merger were being conducted through STR's
management, as opposed to STR's Acquisition Committee of which Dr. Sanders is a
member, the potential of Dr. Sanders' conflict was of no concern to the STR
Board of Directors. In addition, management was reporting to the entire Board
as opposed to the Acquisition Committee, thereby further insulating the entire
process from any conflict associated with Dr. Sanders. Dr. Sanders had no role
in the negotiation of the terms of the Merger and had no interest in the Merger
other than as a shareholder and director. See "The Merger and Related Matters
- -- Opinion of DEI's Financial Advisor" and "The Merger and Related Matters --
Opinion of STR's Financial Advisor." Following such approvals, the Merger
Agreement, the employment agreements with Messrs. Ory and Stanich and the
Voting Agreement were executed by the respective parties to those agreements.
There are no contracts or arrangements between DEI and STR other than those
disclosed in this Joint Proxy Statement/Prospectus.
CERTAIN EFFECTS OF THE MERGER
The Merger will become effective when Articles of Merger are filed with
the Virginia State Corporation Commission. It is anticipated that such filing
will be made as promptly as practicable after the required stockholder approvals
have been obtained and the other conditions to the consummation of the Merger
have been satisfied or waived.
Upon consummation of the Merger, Merger Sub will be merged with and
into STR, which will be the surviving corporation. The separate existence of
Merger Sub will cease. At the Effective Time, each issued and outstanding share
of STR Common Stock (other than shares held by stockholders of STR who perfect
their dissenters' rights in the manner described in this Joint Proxy
Statement/Prospectus) will be converted into the right to receive 2.58 newly
issued shares
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of DEI Common Stock. On January 31, 1998, there were 1,325,786 shares of STR
Common Stock outstanding. Except for options to purchase 34,000 shares, there
are no outstanding warrants or options to purchase, or securities convertible
into, STR Common Stock. The Merger will result in a change of control of DEI
due to the issuance of an additional 3.4 million shares of DEI Common Stock to
STR's stockholders and the appointment of STR's directors to fill a majority
of the positions on DEI's Board of Directors.
No fractional shares of DEI Common Stock will be issued in the Merger.
In lieu of fractional shares of DEI Common Stock, each person entitled thereto
will receive a cash payment (from working capital) equal to the product of (i)
the fractional interest of a share of DEI Common Stock to which such holder
would have been entitled (computed based upon the aggregate number of shares of
STR Common Stock owned by such holder and the aggregate number of shares of DEI
Common Stock to which such holder is entitled) and (ii) the average of the
published bid and asked prices per share of DEI Common Stock for the trading day
immediately prior to the Effective Time. Promptly after the Effective Time, DEI
will forward a letter of transmittal to stockholders of STR containing detailed
instructions for the surrender of certificates representing STR Common Stock.
See "The Merger Agreement -- Effective Time," "-- Conversion and Exchange of STR
Common Stock" and "-- Conditions to Consummation of the Merger."
Based upon the capitalization of DEI and STR at January 31, 1998 and
the Exchange Ratio, the number of shares of DEI Common Stock outstanding after
giving effect to the Merger will be approximately 3,955,102 and the holders of
STR Common Stock immediately prior to consummation of the Merger will own
approximately 86.5% of the outstanding shares of DEI Common Stock immediately
following consummation of the Merger (assuming no STR stockholders perfect their
dissenters' rights). The principal stockholders, executive officers and
directors of DEI beneficially own 88,866 outstanding shares or approximately
16.6% of the outstanding shares of DEI Common Stock on the Record Date and will
beneficially own 114,346 outstanding shares or approximately 2.9% of the
outstanding shares of DEI Common Stock immediately following the consummation of
the Merger. The principal stockholders, executive officers and directors of STR
will beneficially own 2,141,887 outstanding shares or approximately 54.2% of the
outstanding shares of DEI Common Stock immediately following the consummation of
the Merger.
DEI'S REASONS FOR THE MERGER; RECOMMENDATION OF DEI'S BOARD OF DIRECTORS;
FAIRNESS TO DEI'S STOCKHOLDERS
DEI's Board of Directors has unanimously approved the Merger and
authorized the execution and delivery of the Merger Agreement and believes that
the Merger is in the best interests of DEI and its stockholders. Accordingly,
the Board of Directors of DEI unanimously recommends that the DEI stockholders
vote to approve the Charter Amendment, which is a condition to the Merger.
In making its determination with respect to the Merger, the Board of
Directors of DEI considered a number of factors, including, but not limited to,
the following factors.
- The financial condition and results of operations of DEI and
STR, including the positive trend in STR's financial results,
the continuing deterioration of DEI's financial results and
the information disclosed under "Risk Factors -- DEI's
Substantial Dependence on Its Line of Credit and Going Concern
Considerations", "-- DEI's Urgent Need For Additional
Capital", "-- Potential Unprofitability and Variability of
Operating Results" and "Information About DEI -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations";
- The business and financial prospects of DEI and STR on a
combined basis, the opportunity to expand into new markets
afforded by the Merger and the negative prospects of DEI if it
were to continue doing business without combining with STR;
- The historical market prices and trading of DEI Common Stock,
including the fact that the trading market was very inactive
and required a greater public float to create greater
liquidity for DEI's stockholders and that recent trading
values were less than DEI's book value per share (see "Risk
Factors -- No Active Market for the DEI Common Stock");
- The $8.07 per share appraised value of STR Common Stock as of
December 31, 1996, determined by Corporate Finance of
Washington, Inc. for purposes of STR's ESOP, which was the
most recent valuation available with respect to such shares,
along with interim financial statements of STR reflecting an
increase in STR's assets and stockholders' equity since
December 31, 1996 and indicating that STR had been profitable
since such date;
- DEI's inability to find any more attractive business partner
or combination and its inability to find needed equity
capital;
- Information relating to the historical operation of DEI's
business, including the information disclosed under "Risk
Factors -- Intense Competition", "-- Potential Inability to
Implement DEI's Growth Plan" and "Information About DEI --
Business";
- The December 1997 appraisal of DEI's real estate which
disclosed that the appraised value was appreciating and was
substantially consistent with the prior 1995 valuation (see
"The Merger and Related Matters -- Report of Appraiser");
- The terms of the Merger Agreement, including, without
limitation, the type of consideration to be given to STR
stockholders, the Exchange Ratio and the ability to have board
representation following the Merger, the employment agreements
which were to be executed by DEI with Messrs. Ory and Stanich
in order to provide continuity of management, and the Voting
Agreement; and
- The opinion of Roney that the terms of the Merger are fair to
the stockholders of DEI from a financial point of view. In
this regard, the Board took into account the fact that due to
the small size of the Merger and the relatively small fee
being paid to Roney in connection with the rendering of its
opinion, a detailed quantitative written analysis of the terms
of the Merger was unwarranted and was not prepared or
presented to the Board. Roney did not discuss its
quantitative analyses in detail with the Board other than to
note, in general terms, the methodology employed.
DEI had been seeking a strategic business partner to provide additional
equity and marketing assistance since early 1995. Although DEI had discussions
with several companies in this regard, and exchanged financial information and
proposed terms with three companies, none of the companies were found to be
suitable partners after further investigation other than STR due to issues
related to geographic locations of the companies in one instance and because of
terms perceived by the DEI Board of Directors to be unfair to DEI's
stockholders in the other. The factors that the DEI Board perceived to be
unfair to DEI's stockholders in the second case included the fact that the
price offered was less than the book value of DEI, that the transaction would
result in a change of control, the other party's lack of sufficient equity
capital to permit the combined companies to grow following the proposed
transaction, and the DEI Board's anticipation of a more favorable offer.
The DEI Board of Directors views the Merger as a means of accomplishing
its goal of acquiring a significant amount of additional equity capital to
permit DEI to continue to operate its business and to move forward with its
growth
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plan, while also diversifying its sources of revenues. The DEI Board believes
that the addition of STR's complementary technologies through the Merger will
provide access to new markets for DEI's products and technology and may result
in certain synergies in sales, marketing and administrative costs by eliminating
duplicative expenses and enabling personnel to offer a broader set of products
to customers to increase the likelihood of fulfilling any particular customer's
needs. See "-- STR's Reasons for the Merger; Recommendation of STR's Board of
Directors; Fairness to STR's Stockholders." Finally, as a result of the Merger,
the number of shares of DEI Common Stock will increase significantly, which the
Board hopes will generate better liquidity in the market for the DEI Common
Stock and improved returns for its stockholders. Although the voting power of
the current DEI stockholders will be significantly diluted as a result of the
Merger, the DEI Board of Directors believes that the benefits discussed above
far outweigh the dilution of voting power.
The Board was aware that the Merger, like other business combinations,
would result in restructuring charges to the combined companies following
consummation of the Merger. Such charges were not considered material to the
Board's decision to approve the Merger in light of the significant benefits to
DEI of the Merger and such charges were not specifically identified or
quantified until after the Merger was approved by the Board and management began
preparation of post-Merger financial plans and the unaudited pro forma financial
statements contained in this Joint Proxy Statement/Prospectus. The Board was
also aware of the prospect of STR's private placement and the Merger Agreement
included a provision permitting the proposed private placement to occur. Roney
was also aware of the prospect of the private placement and had reviewed the
Merger Agreement. Although the private placement will result in the issuance of
additional shares of DEI Common Stock in the Merger, the consummation of the
private placement in January 1998 was viewed by the Board as favorable overall
to DEI in view of the additional working capital it would provide to DEI if the
Merger is consummated. See "Risk Factors -- DEI's Urgent Need for Additional
Capital". In view of the importance of the Merger to DEI's short and long term
prospects and the other factors described above, the DEI Board of Directors does
not consider it necessary to obtain an updated fairness opinion from Roney as a
result of STR's private placement of stock. See "Summary -- Private Placement".
The Board of Directors of DEI did not undertake a separate analysis of
each of these factors nor did the Board reach a separate conclusion with
respect to each such factor in its determination as to the fairness of the
terms of the Merger. The consideration of such factors resulted from
information relating to such factors being added to the collective business
knowledge, experience and understanding of the Board of Directors of DEI so as
to enable the Board of Directors to consider such information in its
deliberative process. In view of the above and the variety of factors
considered by the Board of Directors of DEI in reaching its conclusion as to
the fairness of the Merger, the Board of Directors of DEI did not find it
practical to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination as to the fairness of
the terms of the Merger. While the foregoing discussion is not intended to be
exhaustive, DEI believes it includes all of the material factors considered by
its Board of Directors in connection with its approval of the Merger.
OPINION OF DEI'S FINANCIAL ADVISOR
On December 23, 1997, Roney & Co. ("Roney"), DEI's financial advisor in
connection with the transactions contemplated by the Merger Agreement, gave an
opinion to the Board of Directors of DEI that the financial terms of the Merger
are fair to the stockholders of DEI from a financial point of view. In arriving
at its opinion, Roney performed the following procedures: (i) reviewed the
Annual Reports and related financial information for the fiscal years ended
1993 to 1997 for DEI; (ii) reviewed the audited financial statements for the
fiscal years ended 1992 to 1997 for STR; (iii) reviewed the 1998 budgets for
both DEI and STR; (iv) reviewed the Merger Agreement; (v) reviewed the
appraisal of DEI's facility prepared by Gerald Alcock Company, L.L.C. as of
June 30, 1995 and was informed of the results of the December 1997 appraisal;
(vi) reviewed the fair market value of ESOP shares of STR prepared by Corporate
Finance of Washington, as of December 31, 1996 (which was the most recent
valuation available with respect to such shares and served as an additional
indicia of the value of STR Common Stock); (vii) researched current industry
conditions and trends concerning the valuation of recent mergers and
acquisitions as it deemed relevant; and (viii) conducted discussions with
members of senior management of DEI and STR concerning their respective
business and prospects and the benefits of the Merger Agreement.
In arriving at its opinion, in addition to the review described above,
Roney analyzed the transaction by comparing DEI's earnings before interest and
taxes with comparable companies, analyzing estimated future cash flows
discounted to present value, analyzing DEI's estimated internal rate of return
and determining a liquidation value (utilizing DEI's balance sheet and the
aforementioned appraisal). Such analyses indicated that the Merger consideration
was within an acceptable range. Roney also examined the expected financial
position and business prospects of the combined companies on a pro forma basis,
based upon the financial statements of DEI and STR furnished to it, and compared
these expectations with DEI's prospects if the Merger were not consummated, and
determined that DEI's prospects were more favorable if the Merger was
consummated. See "Risk Factors -- DEI's Substantial Dependence on Its Line of
Credit and Going Concern Considerations", "-- DEI's Urgent Need For Additional
Capital", "-- Potential Unprofitability and Variability of Operating Results"
and "Information About DEI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations".
In its opinion, Roney noted that (i) its opinion necessarily was
based on assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of DEI and
STR; (ii) any estimates contained in its analyses were not necessarily
indicative of future results or value, which could be significantly more or less
favorable than such estimates; (iii) estimates of values of companies did not
purport to be appraisals or necessarily reflect the price at which companies or
their securities actually could be sold; and (iv) no company or transaction
utilized in its analysis was identical to DEI or the Merger Agreement.
Accordingly, such analyses were not based solely on arithmetic calculations.
Rather, the analyses involved complex considerations and judgments concerning
differences in financial and operating characteristics of DEI and STR, the
timing of the relevant transactions and prospective buyer interests, as well as
other factors that could affect companies to which DEI and STR were compared.
None of the analyses performed by Roney was assigned a greater significance than
any other.
Roney also noted, among other things, that its opinion necessarily
was based upon the accuracy and completeness of all financial and other
information provided by others and made available to it that was not
independently verified. With respect to the financial forecasts, Roney assumed,
without any further independent investigations and analysis by it, that they
had been reasonably prepared and reflect the best currently available estimates
and judgments of DEI's and STR's management as to their respective expected
future financial performance.
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<PAGE> 33
Finally, Roney noted that its opinion necessarily was based on the
economic and market conditions and other circumstances existing on, and
information made available to it as of the date of its written opinion.
While the foregoing discussion is not intended to be exhaustive, DEI believes
it includes all of the material factors considered by Roney in connection with
its opinion. The full text of the written opinion of Roney, which contains
information as to the assumptions made, matters considered and the scope of and
limitations on the review undertaken by Roney, is set forth as Annex B to this
Joint Proxy Statement/Prospectus and should be read in its entirety.
The consideration to be paid to the stockholders of STR by DEI in
connection with the Merger was determined through negotiations between the
parties, and was not determined by Roney. No limitations were placed on Roney by
the Board of Directors of DEI with respect to the investigations made or the
procedures followed by Roney in preparing and rendering its opinion. DEI
selected Roney as its financial advisor on the basis of Roney's expertise and
reputation and the amount of the fee it proposed to charge for its services.
Roney is an investment banking firm with experience in evaluating
transactions similar to the Merger and is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions.
DEI's management selected Roney as its financial advisor primarily because of
Roney's reputation, expertise and the amount of the fee it proposed to charge
for its services. Roney was retained as financial adviser to DEI pursuant to the
terms of an engagement letter dated October 20, 1997. In connection with such
engagement, DEI has agreed to pay Roney a fee of $20,000. Roney is also being
reimbursed for reasonable expenses incurred by it in its role as financial
adviser and in connection with its fairness opinion. DEI has agreed to indemnify
Roney for certain liabilities, including liabilities under federal securities
laws.
REPORT OF APPRAISER
On December 15, 1997, Gerald Alcock Company, L.L.C. ("GAC") issued an
appraisal report of DEI's facility, which stated that the current "as is" market
value of DEI's property, as of December 8, 1997, was $1,840,000. The appraisal
report states that it is intended for use by DEI for assistance in determining
asset value of DEI's facility in connection with the Merger, and the scope of
the appraisal encompasses the necessary research and analysis to prepare a
report in accordance with such intended use and with the Uniform Standards of
Professional Appraisal practice of the Appraisal Foundation. In addition, the
appraisal report notes that GAC employed the following data sources: (i)
physical inspection of the subject property and the surrounding neighborhood;
(ii) interview of Ms. Jane E. Barrett regarding various aspects of the property,
including ownership history and building layout; (iii) review of government
records, including records of Washtenaw County and Scio Township, Michigan; (iv)
research regarding information pertaining to such things as adequacy of
infrastructure, availability of utilities, employment statistics, zoning, flood
hazards, environmental hazards, and anticipated development trends; (v) contact
of government officials and real estate brokers regarding supply, demand and
market trends; and (vi) research of general market data.
In arriving at its valuation of the subject property, GAC employed a
two-step valuation procedure. First, GAC estimated the "highest and best use" of
the property. Second, GAC considered the three traditional valuation methods as
applicable to the subject property: the cost approach, the sales comparison
approach and the income approach and selected the sales comparison and income
approaches. GAC determined that the cost approach was inappropriate because of
the difficulty in accurately measuring depreciation in buildings over five years
old.
The appraisal report also noted that the appraisal necessarily was
based on certain assumptions and limitations, including that (i) the subject
building and site are free and clear of any toxic or hazardous substances; (ii)
the appraisal is not a survey, legal opinion, engineering or property inspection
report, or an environmental issues or hazardous materials reports; and (iii) the
appraisal has been performed with a limited amount of data because of the
inherent limitations of relying upon information provided by others and budget
limitations.
GAC is an appraisal firm with over twenty years of experience in
appraising real property located in Washtenaw County, Michigan. GAC was retained
by DEI to perform a complete appraisal and was selected to perform the appraisal
because it had performed an appraisal of the subject property in June 1995 for
DEI and therefore was familiar with the property, and because of its expertise
and reputation in the area in which the property is located. DEI imposed no
limitations on GAC.
STR'S REASONS FOR THE MERGER; RECOMMENDATION OF STR'S BOARD OF DIRECTORS;
FAIRNESS TO STR'S STOCKHOLDERS
STR's Board of Directors has unanimously approved the Merger and the
Merger Agreement and believes that the terms of the Merger are fair to and in
the best interests of STR and its stockholders. Accordingly, the Board of
Directors of STR unanimously recommends that the STR stockholders vote to
approve the Merger and the Merger Agreement.
In making its determination with respect to the Merger, the Board of
Directors of STR considered a number of factors, including, but not limited to,
the following factors.
- Historical information relating to the business, financial
condition and results of operations of STR and DEI, including
the information disclosed under "Risk Factors" (see also the
discussion below);
- The market prices and trading of DEI Common Stock, including
the fact that the trading market was currently very inactive
and that an increase in public float could be expected to
create a more active market and greater liquidity for STR's
stockholders, and the information disclosed under "Risk
Factors -- No Active Market for the DEI Common Stock";
- The business and financial prospects of STR and DEI, the
opportunity to expand into new markets afforded by the Merger
and the prospects of STR if it were to continue doing business
without combining with DEI (see the discussion below);
- The terms of the Merger Agreement, including, without
limitation, the fact that STR stockholders will receive shares
of a publicly traded company, the Exchange Ratio, the fact
that STR will control the DEI board of directors following the
Merger and the fact that the Employment Agreements to be
entered into in connection with the Merger Agreement provide
for continuity of DEI's management;
- The December 1997 appraisal of DEI's real estate which
disclosed that the appraised value was appreciating and was
substantially consistent with the prior 1995 valuation (see
"The Merger and Related Matters -- Report of Appraiser" and
the discussion below);
- The $8.07 per share appraised value of STR Common Stock as of
December 31, 1996, determined by Corporate Finance for
purposes of STR's ESOP, which was the most recent valuation
available with respect to such shares;
- The greater liquidity available to STR stockholders as a
result of holding shares of DEI Common Stock following the
Merger (see the discussion below); and
- The opinion of Corporate Finance that the financial terms of
the Merger are fair to the stockholders of STR from a
financial point of view. In this regard, the Board took into
account the fact that due to the small size of the Merger and
the relatively small fee being paid to Corporate Finance in
connection with the rendering of its opinion, a detailed
quantitative written analysis of the terms of the Merger was
unwarranted and was not prepared or presented to the Board.
The STR Board of Directors recognized that DEI had little, if any,
value to STR as a stand alone company. The Board believed that the resources
available to DEI through STR, primarily marketing support, would better enable
DEI to achieve its potential and justify STR's acquisition. The Board of
Directors understood the various risks inherent in DEI (see "Risk Factors"),
especially in view of DEI's recent financial performance. Therefore, the STR
Board desired to limit the amount of the consideration devoted to the Merger,
measured by the dilution the STR stockholders would sustain in the Merger, to
the projected realizable value of the DEI assets. In determining this realizable
value, the Board primarily relied upon the most recent appraisal of DEI's real
property. The Board also considered the impact that the Merger would have on the
outstanding shares of STR Common Stock and, for this purpose, primarily
utilized the factors which Corporate Finance of Washington, STR's financial
advisor, set forth in the analysis it presented to the STR Board of Directors.
The Board was aware that the Merger, like other business combinations,
would result in restructuring charges to the combined companies following
consummation of the Merger. Such charges were not considered material to the
Board's decision to approve the Merger in light of the significant benefits to
STR of the Merger and such charges were not specifically identified or
quantified until after the Merger was approved by the Board and management
began preparation of post-Merger financial plans and the unaudited pro forma
financial statements contained in this Joint Proxy Statement/Prospectus. See
"The Merger and Related Matters -- Opinion of STR's Financial Advisor." No
further financial analysis was performed at the time the STR Board of Directors
considered the Merger.
In September 1996, STR adopted a strategic plan to substantially expand
the size of STR's business. A significant part of this growth was premised on
acquisitions. These acquisitions would require capital, liquid securities or a
combination of both. STR reasoned that if it became a public company through its
own public offering or merged with an already-public company preferably with
excess liquidity, it would derive the capital and liquid securities necessary to
undertake acquisitions.
The STR Board of Directors believes that the Merger will accomplish
many of the goals of its strategic plan by enhancing STR's growth and providing
STR with a more liquid security that can be issued in connection with future
acquisitions. The complementary technologies possessed by DEI are expected to
improve the prospects of STR by enhancing the capabilities of STR's existing
products and expanding the applications of DEI's products to the markets served
by STR. By combining the resources inherent in DEI and STR, the STR Board
believes that new state of the art equipment can be developed to receive and
intelligently process data from multiple sensors covering communications, radar,
infrared and optical frequency spectra.
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<PAGE> 34
In addition, as a result of the Merger, STR believes it will be better
able to introduce and market the DEI products to its customers and market place
and will be able to more fully utilize certain technical employees of DEI. DEI
will be able to utilize STR's European based marketing representative in working
with its European customers. Material savings will also be achieved from a
reduction in total professional service expenses and other administrative costs,
such as insurance premiums and line of credit fees.
Because DEI's Common Stock is publicly traded and registered under the
Exchange Act, STR will be in a position to achieve additional growth through
acquisitions accomplished in whole or in part with shares of DEI Common Stock.
The fact that the public markets will be available for recipients of DEI Common
Stock to sell their shares, subject to applicable securities laws, should
provide a greater incentive for acquisition candidates to accept acquisition
proposals.
Finally, STR has been a private company since its inception. Many
current STR employees are stockholders of STR through the STR ESOP. By receiving
publicly traded shares of DEI Common Stock, STR stockholders, including STR ESOP
participants, are expected to derive greater liquidity in their investments. In
addition, absent the Merger, STR would need to contribute cash to the STR ESOP
to repurchase shares of former STR employees. Because employees are expected to
be able to sell their shares in open market transactions, the contributions
which would otherwise be required for the STR ESOP can be redirected to other
retirement programs to allow employees to gain more diversification of their
retirement funds.
The Board was also aware of the prospect of STR's private placement and
the Merger Agreement included a provision permitting the proposed private
placement to occur. Corporate Finance was also aware of the prospect of the
private placement and had reviewed the Merger Agreement. The consummation of the
private placement in January 1998 was viewed by the Board as favorable overall
to STR in view of the additional working capital it provided for the operation
of the combined company if the Merger is consummated and therefore made the
Merger more desirable for STR. As a result of these factors, the STR Board of
Directors does not consider it necessary to obtain an updated fairness opinion
from Corporate Finance as a result of STR's private placement of stock. See
"Summary -- Private Placement".
The Board of Directors of STR did not undertake a separate analysis of
each of these factors nor did the Board reach a separate conclusion with respect
to each such factor in its determination as to the fairness of the terms of the
Merger. The consideration of such factors resulted from information relating to
such factors being added to the collective business knowledge, experience and
understanding of the Board of Directors of STR so as to enable the Board of
Directors to consider such information in its deliberative process. In view of
the above and the variety of factors considered by the Board of Directors of STR
in reaching its conclusion as to the fairness of the Merger, the Board of
Directors of STR did not find it practical to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination as to the fairness of the terms of the Merger. While the
foregoing discussion is not intended to be exhaustive, STR believes it
includes all of the material factors considered by its Board of Directors in
connection with its approval of the Merger.
OPINION OF STR'S FINANCIAL ADVISOR
On December 23, 1997, Corporate Finance of Washington, Inc., STR's
financial advisor in connection with the transactions contemplated by the Merger
Agreement, rendered its opinion to the Board of Directors of STR that the terms
of the Merger are fair to the stockholders of STR from a financial point of
view. In arriving at its opinion, Corporate Finance performed the following
procedures: (i) reviewed the financial information for the fiscal years ended
1993 to 1997 for STR; (ii) reviewed the audited financial statements and Form
10-Ks for the fiscal years ended 1992 to 1997 for DEI; (iii) reviewed 1998
forecasts for both STR and DEI; (iv) reviewed the Merger Agreement; (v) reviewed
the appraisal of DEI's facility prepared by Gerald Alcock Company, LLC as of
December 1997; (vi) reviewed the 1997 stock transfer and bid and ask quotations
for DEI stock; (vii) researched current industry conditions and trends
concerning the valuation of recent mergers and acquisitions as well as the
valuation of similar companies' common stock; (viii) conducted discussions with
members of senior management of STR concerning its business and prospects and
the benefits of the Merger Agreement; and (ix) the pro forma financial effects
of the Merger upon shares of STR Common Stock.
Corporate Finance, in an analysis presented to the STR Board of
Directors, determined that (a) STR's per share net assets and working capital
would be enhanced by virtue of the Merger, (b) the Merger would cause a minor
diminution in revenue pre-Merger per share from $6.83 to $6.30 and (c) if STR
and DEI were able to achieve consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") matching the median EBITDA margin
(11.9%) and multiple of debt free price to EBITDA (7.3%) of 22 other defense
electronics manufacturers (Base Ten Systems, Dunn Computer Corp., Aerosonic
Corp., Symetries Industries, DBA Systems, Inc., Microlog Corp., Herley
Industries, Inc., Westwood Corp., Simula, Inc., Flir Systems, Inc., Edo Corp.,
Aeroflex, Inc., ECC International Corp., Signal Technology Corp., Ducommon,
Inc., DRS Technologies, Stanford Telecommunications, United Industrial Corp.,
Esco Electronics Corp., Moog, Inc., Orbital Sciences Corp., and Alliant
Techsystems, Inc.) set forth in an analysis which Houlihan, Lokey, Howard &
Zuikin published, the indicated pre-Merger market price for an STR share,
considering revenue and net assets alone, would be $6.50 per share ($2.52
post-Merger). In undertaking the above analysis, Corporate Finance recognized
the prospective private placement anticipated by STR. Therefore, for purposes of
its per share analysis, Corporate Finance considered the impact the Merger would
have on the holder of an STR share both before and after the private placement.
The results of Corporate Finance's analysis also served to support STR's
valuation for purposes of its private placement.
Corporate Finance noted, among other things, that its opinion
necessarily was based upon the accuracy and completeness of information provided
by others that was not independently verified. With respect to the financial
forecasts, Corporate Finance assumed that they had been reasonably prepared and
reflect the best currently available estimates and judgments of DEI's and STR's
management as to their respective expected future financial performance. In its
opinion, Corporate Finance also noted that its opinion necessarily was based on
economic and market conditions and other circumstances existing on, and
information made available as of the date of its written opinion. While the
foregoing discussion is not intended to be exhaustive, STR believes it includes
all of the material factors considered by Corporate Finance in connection with
its opinion. The full text of the written opinion of Corporate Finance, which
contains information as to the assumptions made, matters considered
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<PAGE> 35
and the scope of and limitations on the review undertaken by Corporate Finance,
is set forth as Annex E to this Joint Proxy Statement/Prospectus and should be
read in its entirety.
The consideration to be paid to the stockholders of STR by DEI in
connection with the Merger was determined through negotiations between the
parties, and was not determined by Corporate Finance. No limitations were placed
on Corporate Finance by the Board of Directors of STR with respect to the
investigations made or the procedures followed by Corporate Finance in preparing
and rendering its opinion.
Corporate Finance is a firm with experience in evaluating transactions
similar to the Merger and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions. STR's
management selected Corporate Finance as its financial advisor primarily because
of Corporate Finance's reputation, expertise and familiarity with STR's business
as the annual appraiser of STR Common Stock for the STR ESOP, and the amount of
the fee it proposed to charge for its services. Corporate Finance was retained
as financial adviser to STR pursuant to the terms of an engagement letter dated
October 24, 1997. In connection with such engagement, STR has agreed to pay
Corporate Finance a fee of $12,500. STR has agreed to indemnify Corporate
Finance for certain liabilities, including liabilities under federal securities
laws.
CONFLICTS OF INTEREST
In considering the recommendation of STR's Board of Directors with
respect to the Merger and the Merger Agreement and the recommendation of DEI's
Board of Directors with respect to the Charter Amendment, stockholders should be
aware that certain members of STR's Board of Directors and DEI's Board of
Directors have interests in the Merger that are in addition to and potentially
in conflict with the interests of stockholders of STR and DEI generally. The
Boards of Directors of STR and DEI were aware of these interests and considered
them, among other matters, in approving the Merger Agreement.
As a condition to the parties' obligations to consummate the Merger,
Thomas Ory, the President, Chief Executive Officer and a Director of DEI, and
Charles Stanich, the Vice President - Research and Development, Chief Operating
Officer and a Director of DEI, have entered into employment agreements with DEI
effective at the Effective Time. See "The Employment Agreements."
John D. Sanders, a director of both DEI and STR, Philip Power, a
director of DEI and S. R. Perrino, the Chairman, Chief Executive Officer and
President of STR, hold shares in both companies. Dr. Sanders holds 26,250 shares
of DEI Common Stock and 3,000 DEI options along with 5,876 shares of STR Common
Stock and 10,000 STR options. Mr. Perrino holds 314,900 shares of STR Common
Stock and 2,500 shares of DEI Common Stock. Mr. Power owns 12,900 shares of DEI
Common Stock, 3,000 DEI options and 4,000 shares of STR Common Stock. See
"Principal Stockholders of STR and Security Ownership of STR Management" and
"Principal Stockholders of DEI and Security Ownership of DEI Management."
Certain directors and principal stockholders of STR have indicated they
will vote to approve the Merger. These same persons will be nominated or
appointed to serve on DEI's Board of Directors. If the Merger is approved by STR
stockholders, the size of the DEI Board of Directors will be increased to seven,
S. R. Perrino, James Busey, Charles Bernard and S. Kent Rockwell will become
directors of DEI and Messrs. Stanich and Panschar will resign from the DEI
Board.
In addition, in connection with the Merger, DEI, certain stockholders
of DEI and certain stockholders of STR have entered into a Voting Agreement,
dated as of December 23, 1997. The Voting Agreement provides that if the Merger
Agreement has not been terminated in accordance with its terms (or notice of
termination given and not withdrawn), the DEI VA Stockholders (i) will vote all
of the shares of DEI Common Stock with respect to which they have or share
voting power for the approval of the Charter Amendment and the DEI Long-Term
Incentive Plan amendment at the DEI Annual Meeting; and (ii) will not sell,
transfer or assign any of their shares of DEI Common
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<PAGE> 36
Stock prior to the earlier of the Merger, the termination of the Merger
Agreement or July 1, 1998. The Voting Agreement also provides that if the Merger
Agreement has not been terminated in accordance with its terms (or notice of
termination given and not withdrawn), the STR VA Stockholders (i) will vote all
of the shares of STR Common Stock with respect to which they have or share
voting power for approval of the Merger Agreement, the Merger and the
consummation of the transactions contemplated thereunder at the STR Special
Meeting; and (ii) will not sell, transfer or assign any of their shares of STR
Common Stock prior to the earlier of the Merger, the termination of the Merger
Agreement or July 1, 1998. For a period beginning at the Effective Time and
ending on the date following the conclusion of the second annual meeting of the
stockholders of DEI after the Effective Time, DEI has agreed pursuant to the
Voting Agreement that (i) except under certain circumstances, the number of
directors on its Board of Directors shall be fixed at seven and (ii) it will
nominate Thomas R. Ory, John D. Sanders, Philip H. Power, S. R. Perrino, S. Kent
Rockwell, James Busey and Charles Bernard for election as directors at each
meeting of the stockholders of DEI at which directors are elected, subject to
the consent of such persons to serve in such capacity. See "The Voting
Agreement."
At the Effective Time, each outstanding option to purchase STR Common
Stock will be assumed by DEI and will be deemed to constitute an option to
acquire, on the same terms and conditions as were applicable under such option,
the same number of shares of DEI Common Stock as the holder of such options
would have been entitled to receive pursuant to the Merger had such holder
exercised such option in full immediately prior to the consummation of the
Merger (not taking into account whether such option was in fact exercisable at
such time). As of April 20, 1998, executive officers and directors of STR had
outstanding options to purchase STR Common Stock as follows:
<TABLE>
<CAPTION>
Pre-Merger Number of DEI shares Post-Merger
exercise subject to option exercise
Number of STR shares price immediately following price
Name and Position subject to option per share the Effective Time per share
- ----------------- -------------------- ----------- --------------------- -----------
<S> <C> <C> <C> <C>
Charles Bernard, Director 10,000 $1.94 25,800 $0.75
John Sanders, Director 10,000 8.69 25,800 3.37
Robert Bower, Senior Vice
President-Finance/CFO 6,000 8.69 15,480 3.37
</TABLE>
DISSENTERS' RIGHTS
The rights of STR's dissenting stockholders are governed by Article 15
(Sections 13.1-729 through 13.1-741) of the VSCA. DEI stockholders are not
entitled to dissent from the Merger because DEI is not a constituent corporation
in the Merger. The following summary of applicable provisions of Sections
13.1-729 through 13.1-741 of the VSCA contains all material information with
respect thereto, but is not intended to be a complete statement of such
provisions and therefore is qualified in its entirety by reference to the full
text of the dissenters' rights provisions of the VSCA, which is included herein
as Annex C.
STR stockholders who comply with the applicable procedures of Article
15 of the VSCA will be entitled to dissent from the Merger. A person having a
beneficial interest in the STR Common Stock held of record in the name of
another person, such as broker of nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect dissenters' rights.
The Merger Agreement provides that notwithstanding the conversion and
exchange provisions of the Merger Agreement, shares of STR Common Stock
outstanding immediately prior to the Effective Time and held by a holder who has
not voted in favor of the Merger or consented thereto in writing and who has
timely and properly exercised dissenters' rights for such shares in accordance
with Virginia law will not be converted into a right to receive DEI Common
Stock. If, after the Effective Time, such holder fails to perfect or withdraws
or loses his, her or its right to
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dissent, such shares will be treated as if they had been converted as of the
Effective Time into a right to receive DEI Common Stock.
The failure of an STR stockholder to vote against the Merger will not,
in and of itself, constitute a waiver of such stockholder's dissenters' rights
under Article 15. Under Virginia law, holders of shares who follow the
procedures set forth in Article 15 will be entitled to demand payment of their
shares for an amount deemed equivalent to the fair value of their shares.
STR stockholders who desire to exercise their dissenters' rights must
deliver to STR, before the vote on the Merger, a written demand for payment of
their shares. This written demand for payment must be in addition to and
separate from any proxy vote abstaining from or voting against the Merger.
Voting against, abstaining from voting, or failing to vote on the Merger will
not constitute a demand for payment within the meaning of Article 15.
STR stockholders who desire to exercise their dissenters' rights under
Article 15 must not vote for approval of the Merger. If a stockholder returns a
signed proxy but does not specify a vote against approval of the Merger or a
direction to abstain, the proxy will be voted for approval of the Merger and
will effectively waive that stockholder's dissenters' rights.
Within ten days following stockholder approval of the Merger, STR will
deliver a dissenters' notice to all STR stockholders from whom an intent to
demand payment has been properly received. The notice shall state where the
payment demand shall be sent and where certificates shall be deposited. The
notice shall also supply a form for demanding payment and set a date, not fewer
than 30 nor more than 60 days after delivery of the dissenters' notice by which
STR must receive a payment demand from a dissenting stockholder. Within the time
frame set forth in STR's notice, a dissenter must demand payment of the
estimated fair value of the shares less the amount received from STR.
If a dissenters' demand for payment remains unsettled, STR shall
commence a proceeding in the Circuit Court of Fairfax County, Virginia to have
the court determine fair value. As part of this proceeding, the court is
authorized to appoint one or more appraisers. The court assesses all costs,
including appraisers appointed by the court, against STR except that the court
shall have the right to make an assessment against any dissenters who did not
act in good faith in demanding payment after receipt of STR's payment. All other
fees and expenses, other than counsel fees, can be equally assessed. Therefore,
dissenters will be responsible for the payment of their own attorney's fees.
Any STR stockholder contemplating the exercise of dissenter's rights is
urged to review carefully the provisions of the VSCA relating to dissenters'
rights, a copy of which is attached hereto as Annex C. Failure by an STR
stockholder to follow precisely all the steps required by such provisions for
perfecting dissenters' rights will result in the loss of those rights.
Dissenters' rights are the exclusive remedy of a dissenting stockholder in the
absence of unlawful or fraudulent action by STR with respect to its
stockholders.
THE ABOVE DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE VSCA AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTIONS 13.1-729 THROUGH 13.1-741 OF THE VSCA, WHICH IS REPRINTED
IN ITS ENTIRETY AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material federal income tax
consequences of the Merger to holders of STR Common Stock who are citizens or
residents of the United States and who hold their shares of STR Common Stock as
capital assets and is based upon the opinion of Michaels, Wishner & Bonner,
P.C. to such effect. The opinion is attached as an exhibit to the Registration
Statement. Neither the summary below nor such opinion discuss all the tax
consequences that may be relevant to STR stockholders who acquired their shares
of STR Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation. In addition, the summary does not discuss the
application of any state, local, foreign or other tax rules to the Merger. The
rendering of the opinion is not a condition to the consummation of the Merger.
Michaels, Wishner & Bonner, P.C., counsel to STR, has opined that the
Merger will constitute a reorganization for federal income tax purposes within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code") assuming certain non-statutory requirements with respect to
continuity of business enterprise and interest are met subsequent to the
Merger, and, accordingly, the tax basis of the DEI Common Stock received by STR
stockholders in the Merger will be the same as the tax basis of the STR Common
Stock surrendered in exchange therefor reduced by any basis allocable to
fractional share interests in DEI Common Stock for which cash is received,
subject to adjustments described below. The holding period of the shares of DEI
Common Stock received in the Merger by STR stockholders will include the period
during which the shares of STR Common Stock surrendered in exchange therefor
were held, provided that such shares of STR Common Stock were held as capital
assets at the Effective Time. Moreover, the Merger will not result in the
recognition of gain or loss by DEI, STR or Merger Sub.
Cash received by a holder of STR Common Stock in lieu of a fractional
share interest in DEI Common Stock will result in the recognition of gain or
loss for federal income tax purposes, measured by the difference between the
amount of cash received and the portion of the basis of the share of STR Common
Stock allocable to such fractional share interest. Such gain or loss will be
capital gain or loss, provided that such share of STR Common Stock was held as a
capital asset at the Effective Time and will be long-term capital gain or loss
if such share of STR Common Stock has been held for more than one year and will
qualify for the lower level of capital gains rates prescribed by the Taxpayer
Relief Act of 1997 if the shares were held for more than 18 months.
THE FOREGOING DISCUSSION CONSTITUTES ONLY A GENERAL DISCUSSION OF THE
FEDERAL TAX CONSEQUENCES OF THE MERGER WITHOUT REGARD TO THE PARTICULAR FACTS
AND CIRCUMSTANCES OF EACH STOCKHOLDER OF STR. NO INFORMATION IS PROVIDED HEREIN
WITH RESPECT TO THE TAX CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE
FOREIGN, STATE AND LOCAL LAWS. STR STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
FEDERAL, FOREIGN, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE POSSIBLE
EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
STR has been advised that the opinion will not be withdrawn,
revoked or changed unless the relevant sections of the Internal Revenue Code or
the related interpretive literature of the Internal Revenue Service is changed
prior to the consummation of the Merger. In such event, STR may seek the advice
of other counsel or interpretive relief from the Internal Revenue Service or
request that DEI amend the structure of the Merger to the extent necessary to
comply with any such revisions in the applicable law. If not successful in any
of these initiatives, STR expects that it would seek to terminate the Merger
Agreement.
ACCOUNTING TREATMENT
Inasmuch as former STR shareholders will own approximately 86.5% of the
outstanding shares of DEI Common Stock immediately following the Merger, STR
will be deemed for accounting purposes to be the "acquiring" corporation and DEI
will be deemed the "acquiree." In accordance with generally accepted accounting
principles, the recorded assets and liabilities of STR will be carried forward
at recorded book values and the purchase price will be allocated to the DEI
assets and liabilities based upon the estimated fair values of such assets and
liabilities. The purchase price was determined by the fair value of the DEI
Common Stock for a reasonable period of time before and after the announcement
of the Merger. Any portion of the purchase price in excess of the fair value of
the identifiable assets and liabilities will be allocated to goodwill. See
"Unaudited Pro Forma Combined Financial Statements."
Subsequent to the Merger, DEI intends to change its fiscal year-end
from July 31 to September 30.
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FEDERAL SECURITIES LAW CONSEQUENCES
All shares of DEI Common Stock received by STR stockholders in the
Merger will be freely transferable, except that shares of DEI Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of STR prior to the Merger may be resold by them only
in transactions permitted by the resale provisions of Rule 145 (or Rule 144 in
the case of such persons who become affiliates of DEI) or as otherwise permitted
under the Securities Act. Persons who may be deemed "affiliates" of STR
generally include individuals or entities that control, are controlled by or are
under common control with STR and may include certain officers and directors of
STR as well as principal stockholders of STR. The Merger Agreement requires STR
to cause each of its affiliates to execute a written agreement to the effect
that such affiliate will not sell, pledge, transfer or otherwise dispose of any
shares of DEI Common Stock issued to such affiliate pursuant to the Merger,
except pursuant to an effective registration statement or in compliance with
Rule 145 or another exemption from the registration requirements of the
Securities Act.
THE MERGER AGREEMENT
GENERAL
The following description of the terms and conditions of the Merger
Agreement contains all of the material information with respect thereto, but
does not purport to be complete and is therefore qualified in its entirety by
reference to the Merger Agreement, a copy of which is attached to this Joint
Proxy Statement/Prospectus as Annex A and incorporated herein by reference. All
DEI and STR stockholders are urged to read the Merger Agreement in its entirety.
The Merger Agreement provides, among other things, for the merger of
Merger Sub with and into STR in accordance with Virginia law, and the conversion
of shares of STR Common Stock into DEI Common Stock as described in "Conversion
and Exchange of STR Common Stock" below. If the Merger is consummated, Merger
Sub's separate existence will cease.
EFFECTIVE TIME
Following approval of the Merger and subject to satisfaction or waiver
of the terms and conditions, including conditions to closing, contained in the
Merger Agreement, the Merger will be effective when Articles of Merger are filed
with the Virginia State Corporation Commission. The filing of the Articles of
Merger will be made as promptly as practicable after the required stockholder
approvals have been obtained and the other conditions to the consummation of the
Merger have been satisfied or waived. It is currently contemplated that the
Effective Time will occur as soon after the DEI Annual Meeting and the STR
Special Meeting as practicable, assuming the conditions set forth in the Merger
Agreement are fully satisfied or waived. See "The Merger Agreement -- Conditions
to Consummation of the Merger."
CONVERSION AND EXCHANGE OF STR COMMON STOCK
As of the Effective Time, by virtue of the Merger and without any
action of the part of any holder of STR Common Stock, each outstanding share of
STR Common Stock (other than dissenters' shares) will be converted into 2.58
shares of DEI Common Stock. As of the Effective Time, until surrendered and
exchanged, each certificate evidencing STR Common Stock will be deemed, for all
purposes, to evidence only the right to receive the number of shares of DEI
Common Stock which the holder of such certificate is entitled to receive
pursuant to the Merger.
Fractional shares of DEI Common Stock will not be issued in connection
with the Merger. Instead, each person entitled thereto will receive a cash
payment equal to the product of (i) the fractional interest of a share of DEI
Common Stock to which such holder would have been entitled (computed based upon
the aggregate number of shares of STR Common Stock owned by such holder and the
aggregate number of shares of DEI Common Stock to which such holder
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is entitled) and (ii) the average of the published bid and asked prices per
share of DEI Common Stock for the trading date immediately prior to the
Effective Time.
Promptly after the Effective Time, DEI will forward a letter of
transmittal to stockholders of record of STR containing detailed instructions
for the surrender of certificates representing STR Common Stock. The letter of
transmittal will contain detailed instructions with respect to surrender of
certificates representing STR Common Stock and the distribution in exchange
therefor of certificates representing DEI Common Stock.
STOCKHOLDERS OF STR SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR
SHARES TO STR OR DEI PRIOR TO RECEIPT OF THE LETTER OF TRANSMITTAL.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of DEI, STR and Merger Sub to consummate the Merger are
subject to the fulfillment prior to the Effective Time of the following
conditions: (i) the Merger shall have been duly approved by the holders of the
requisite number of the shares of STR Common Stock in accordance with applicable
law and STR's Articles of Incorporation and Bylaws, and the Charter Amendment
shall have been duly approved by the holders of requisite number of the shares
of DEI Common Stock in accordance with applicable law and DEI's Certificate of
Incorporation and Bylaws; (ii) all required governmental and regulatory
approvals for the Merger, including any approvals required under federal or
state securities laws, shall have been received; and (iii) the Form S-4
Registration Statement containing this Joint Proxy Statement/Prospectus shall be
effective under the Securities Act and no stop order suspending the
effectiveness of the Form S-4 Registration Statement shall have been issued and
no proceeding for such purpose shall have been initiated and be continuing or
threatened by the Commission.
The respective obligations of DEI and Merger Sub to consummate the
Merger are subject to the fulfillment or waiver at or prior to the Effective
Time of each of the following conditions, among others: (i) the representations
and warranties of STR set forth in the Merger Agreement shall be true and
correct at and as of the closing date; (ii) STR shall have performed and
complied with all of its covenants under the Merger Agreement in all material
respects through the closing; (iii) there shall be no more than 35,000 shares of
STR Common Stock that are held by stockholders of STR who vote against the
Merger Agreement and who comply with all of the relevant provisions of Sections
13.1-729 through 13.1-741 of the VSCA; (iv) no action, suit, or proceeding shall
be pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would (a) prevent consummation of any of the transactions contemplated
by the Merger Agreement, (b) cause any of the transactions as set forth in the
Merger Agreement to be rescinded following consummation, (c) affect adversely
the right of STR to own its assets and to operate its business as it currently
operates, or (d) if determined adversely to STR or any director, officer,
employee or agent of STR, have a material adverse effect on the business,
financial condition or prospects of STR and no such injunction, judgment, order,
decree, ruling, or charge described in (a), (b), (c) or (d) shall be in effect;
(v) all actions to be taken by STR in connection with the consummation of the
Merger and all certificates, opinions, instruments, and other documents
delivered at the Closing or required to effect the Merger shall be satisfactory
in form and substance to DEI and its counsel; (vi) STR shall have made, or
caused to be made, all of the deliveries required to be made under the Merger
Agreement; (vii) there shall not have occurred since the date of the Merger
Agreement any event which has had or with the passage of time, is reasonably
likely to have a material adverse effect on the condition (financial or
otherwise), assets, liabilities, results of operations or prospects of STR; and
(viii) each affiliate of STR shall have executed and delivered to DEI an
agreement regarding the sale, pledge, transfer or other disposition of DEI
Common Stock issued to such affiliate pursuant to the Merger.
The obligation of STR to consummate the Merger is subject to the
fulfillment or waiver at or prior to the Effective Time of each of the following
conditions, among others: (i) the representations and warranties of DEI set
forth in the Merger Agreement shall be true and correct at and as of the closing
date; (ii) DEI and Merger Sub shall have performed and complied with all of
their covenants under the Merger Agreement in all material respects through the
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closing; (iii) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (a)
prevent consummation of any of the transactions contemplated by the Merger
Agreement, or (b) cause any of the transactions as set forth in the Merger
Agreement to be rescinded following consummation, and no such injunction,
judgment, order, decree, ruling, or charge described in (a) and (b) shall be in
effect; and (iv) all actions to be taken by DEI and Merger Sub in connection
with the consummation of the Merger and all certificates, opinions, instruments,
and other documents delivered at the Closing or required to effect the Merger
shall be satisfactory in form and substance to STR and its counsel.
At any time prior to the Effective Time, the parties may waive
compliance with any of the agreements or conditions contained in the Agreement
which may be legally waived.
COVENANTS
Each of DEI and STR has agreed to use its best efforts to take all
action and do all things necessary, proper or advisable in order to consummate
and make effective the transactions contemplated by the Merger Agreement. As
soon as practicable following the date of the Merger Agreement, each of DEI and
STR, acting through its Board of Directors, is required to take all action
necessary in accordance with its Articles of Incorporation or Certificate of
Incorporation, as the case may be, and Bylaws and applicable law to duly call,
give notice of, convene and hold a special meeting of its stockholders for the
purpose of voting, in the case of DEI, upon the approval of the Charter
Amendment and an amendment to the DEI Long-Term Incentive Plan increasing the
number of shares available thereunder to 400,000; and in the case of STR, upon
the approval of the Merger and the transactions contemplated thereby.
Each of DEI and STR have agreed that prior to the Effective Time,
unless the other party otherwise agrees or as otherwise contemplated by the
Merger Agreement, their respective businesses will be conducted only in the
ordinary course and neither will take certain actions not in the ordinary course
of business, without the prior written consent of the other party, including
without limitation: (i) amending its Articles of Incorporation or Certificate of
Incorporation, as the case may be, or its Bylaws; (ii) paying or declaring any
cash dividend, or other dividend or distribution with respect to its capital
stock; (iii) issuing, transferring, selling or committing to issue, transfer,
sell or deliver, any shares of its capital stock (or options, warrants or any
rights thereto including, without limitation, any securities convertible into or
exchangeable, with or without additional consideration, for such capital stock)
except pursuant to the exercise of stock options or warrants existing on the
date of this Agreement or under certain specified conditions; (iv) increasing or
reducing the number of shares of its capital stock by split-up, reverse split,
reclassification or distribution of stock dividends; (v) purchasing or otherwise
acquiring for any consideration any outstanding shares of its capital stock or
securities carrying the right to acquire, or convertible into or exchangeable
for such stock, with or without additional consideration; (vi) acquiring by
merger or consolidation with, or merging or consolidating with, or purchasing
substantially all of the assets of, or otherwise acquiring any business of any
other corporation, partnership, association or other business organization or
division thereof, or making any investment of a capital nature either by
purchase of stock or securities, contributions to capital, property transfer or
otherwise, or by the purchase of any property or assets of any other individual,
partnership, firm or corporation; (vii) incurring additional indebtedness for
borrowed money except pursuant to existing lines of credit; (viii) adopting or
materially modifying any bonus, pension, profit-sharing or other compensation
plan or entering into any contract of employment with any employee which is not
terminable at will without cost or other liability; (ix) adopting, entering into
or amending in any material respect any collective bargaining, employment,
severance or termination agreement or arrangement with any person or making any
change in its key management structure, including, but not limited to, the
hiring of additional employees or the termination of existing employees; (x)
discharging or satisfying any lien or encumbrance or paying any obligation or
liability (whether accrued, absolute, contingent or otherwise), except current
liabilities incurred in the ordinary course of business; (xi) mortgaging,
pledging or subjecting to lien, charge, security interest or any other
encumbrance any of its assets or property; (xii) transferring or leasing any of
its assets or property except in the ordinary course of business; (xiii)
canceling or compromising any debt or claim other than in the ordinary course of
business in an aggregate amount in excess of specified amounts; (xiv) waiving or
releasing any rights, or settling any claim, in an aggregate amount which
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is in excess of specified amounts; (xv) transferring or granting
any rights under any leases, licenses or other agreements, other than in the
ordinary course of business; (xvi) making or granting any general or individual
wage or salary increase to any of its officers; (xvii) failing to pay or
discharging its accounts payable, debts or liabilities when due; (xviii)
suffering any material adverse change in its financial condition, properties or
business; (xix) except in the ordinary course of business, making or entering
into any contract, commitment or transaction which involves an expenditure in
excess of specified amounts, or renewing, extending, amending or modifying any
contract, commitment or transaction involving in excess of a specified amount;
or (xx) entering into or amending any contract, agreement or other transaction
with any of its officers, directors or shareholders, or any affiliate of such an
officer, director or shareholder, on terms that are less favorable than could be
obtained from an unrelated third party on an arm's length basis.
REPRESENTATIONS AND WARRANTIES; ADDITIONAL AGREEMENTS
The Merger Agreement contains various customary representations and
warranties of the parties. DEI and Merger Sub have made representations to STR,
and STR has made representations to DEI and Merger Sub, including, but not
limited to, representations with respect to authority relative to the Merger
Agreement, organization and qualification, noncontravention, absence of certain
changes or events, no undisclosed liabilities, compliance with all applicable
laws, litigation and employee benefits.
DEI has agreed that effective at the Effective Time and conditional
upon the consummation of the Merger, William Panschar and Charles Stanich will
have submitted their resignations as directors to the DEI Board of Directors,
DEI's Board of Directors will increase the number of directors on the DEI Board
of Directors to seven, and DEI's Board of Directors will appoint S. R. Perrino,
S. Kent Rockwell, James Busey and Charles Bernard to fill the resulting
vacancies.
MANAGEMENT OF DEI AFTER THE MERGER
If the Merger is approved, the Board of Directors of DEI will
consist of three directors who are currently members of DEI's Board of Directors
- -- Thomas R. Ory, Philip H. Power and John D. Sanders -- and four persons who
are currently directors of STR -- S. R. Perrino, S. Kent Rockwell, James Busey
and Charles Bernard. Dr. Sanders also serves on STR's Board of Directors. In
addition, Mr. Perrino will become President and Chief Executive Officer, and Mr.
Ory will become a Vice President. See "Election of DEI Directors."
TERMINATION; AMENDMENT; WAIVER
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of DEI or
STR, upon the occurrence of certain events, including without limitation, the
following: (i) by mutual written agreement of DEI and STR; (ii) by either DEI or
STR if the Merger has not been consummated by May 31, 1998; (iii) by DEI or STR
if there is a material adverse change in the business or financial condition of
the other; and (iv) by DEI or STR if there is a material condition precedent
which cannot be satisfied and is not waived. If the Merger is not completed
because: (i) the STR Board of Directors recommended to the stockholders of STR a
proposal with respect to a merger, consolidation, share exchange or similar
transaction or series of transactions involving STR, or any purchase of all or
any significant portion of the assets of STR, or resolved to do any of the
foregoing; (ii) STR entered into a definitive agreement accepting an offer with
respect to all STR Common Stock that is more favorable than the Merger, DEI is
entitled to receive from STR all costs and out-of-pocket expenses which DEI may
have incurred in connection with the negotiation and preparation of the Merger
Agreement and related documentation, due diligence investigations, and the
preparation, filing and mailing of the Form S-4 registration statement and this
Joint Proxy Statement/Prospectus. If the Merger is not completed because: (i)
the DEI Board of Directors recommended to the stockholders of DEI a proposal
with respect to a merger, consolidation, share exchange or similar transaction
or series of transactions involving DEI, or any purchase of all or any
significant portion of the assets of DEI, or resolved to do any of the
foregoing; (ii) DEI entered into a definitive agreement accepting an offer with
respect to all DEI Common Stock that is more favorable than the Merger, STR is
entitled to receive from DEI all costs
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and out-of-pocket expenses which STR may have incurred in connection with the
negotiation and preparation of the Merger Agreement and related documentation,
due diligence investigations, and the preparation, filing and mailing of the
Form S-4 registration statement and this Joint Proxy Statement/Prospectus.
Any term of the Merger Agreement may be amended or waived only in
writing signed by the party to be bound thereby, subject to applicable law.
The Board of Directors of either STR or DEI has the right to waive certain
conditions precedent to the consummation of the Merger other than those
conditions which are a legal necessity for the Merger to occur such as STR
stockholder approval of the Merger or DEI stockholder approval of the Charter
Amendment. In the event either Board waives any condition, each company intends
to resolicit shareholder approval unless in the opinion of such company's Board,
the delay associated with the resolicitation process is likely to have a
material adverse effect on the business or financial condition of such company.
THE EMPLOYMENT AGREEMENTS
DEI has entered into an employment agreement with each of Thomas Ory
and Charles Stanich, effective upon consummation of the Merger and extending for
two years following the Effective Time. The employment agreement with Mr. Ory
provides that he will be employed as a Vice President of DEI and President of
DEI's Sensing and Imaging Systems Division. Mr. Ory's compensation under his
employment agreement provides for an annual salary of $154,800, and fringe
benefits, perquisites and benefits of employment provided to salaried
officer-level executives of DEI serving in a capacity similar to that of Mr.
Ory. In addition, Mr. Ory's employment agreement requires DEI to cause Mr. Ory
to be nominated for election to DEI's Board of Directors.
The employment agreement of Charles Stanich provides that he will be
employed as a Vice President of DEI and Executive Vice President of DEI's
Sensing and Imaging Systems Division. Mr. Stanich's compensation under his
employment agreement provides for an annual salary of $136,800, and fringe
benefits, perquisites and benefits of employment provided to salaried
officer-level executives of DEI serving in a capacity similar to that of Mr.
Stanich.
DEI may terminate either employment agreement for cause or without
cause. If DEI terminates either employment agreement for cause, DEI is liable
only for the compensation set forth in such employment agreement with respect to
periods of time prior to the date of such termination. If DEI terminates either
employment agreement without cause, DEI is required to pay the compensation and
provide the fringe benefits to Mr. Ory or Mr. Stanich, as the case may be, at
the rate or level, as applicable, in effect on the date of such termination
until the date two years from the Effective Time. DEI also may terminate the
employment agreements in the event of the disability of Mr. Ory or Mr. Stanich,
as the case may be. Each employment agreement will terminate automatically upon
the death of Mr. Ory or Mr. Stanich, as the case may be. In the event that an
employment agreement is terminated because of the disability or death of Mr. Ory
or Mr. Stanich, DEI is liable only for the compensation set forth in such
employment agreement with respect to periods of time prior to the date of such
termination.
Each of Mr. Ory and Mr. Stanich may terminate his respective employment
agreement (i) upon the failure of DEI to provide him with the compensation and
fringe benefits described in his agreement; (ii) upon any other material breach
of his employment agreement by DEI; (iii) upon any diminution of his authority,
duties and responsibilities, or a significant change in the nature or scope of
his duties; (iv) any change in his status or title, except for a bona fide
promotion or with his consent; or (v) if DEI moves his office to a location that
is more than 25 miles from its present location in Ann Arbor, Michigan without
his consent. If Mr. Ory or Mr. Stanich terminates his employment for any of the
reasons set forth above, DEI is required to pay the compensation and provide the
fringe benefits to Mr. Ory or Mr. Stanich, as the case may be, at the rate or
level, as applicable, in effect on the date of such termination until the date
two years from the Effective Time. If Mr. Ory or Mr. Stanich terminates his
employment other than for a reason set forth above, DEI is required to pay him,
within ten (10) days following such termination, a lump sum equal to three
months' salary at the higher of the rate being paid to him on the date of such
termination or the rate originally set forth in his employment agreement.
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Under their respective employment agreements, each of Mr. Ory and Mr.
Stanich are prohibited from engaging, directly or indirectly, in any activity
which is in direct competition with the activities of DEI for a period of two
years after the Effective Time.
No other employment agreements will exist for any officers of DEI
and STR following the Merger other than for Mr. Ory and Mr. Stanich. No
severance obligations will arise for any DEI or STR employee solely as a result
of the Merger.
THE VOTING AGREEMENT
In connection with the Merger, Thomas Ory, Charles Stanich, John
Sanders and Philip Power (the "DEI VA Stockholders"), S. R. Perrino, Robert
Bower, John Sanders and Donald Reiser (the "STR VA Stockholders") and DEI have
entered into a Voting Agreement, dated as of December 23, 1997. The Voting
Agreement provides that if the Merger Agreement has not been terminated in
accordance with its terms, the DEI VA Stockholders (i) will vote all of the
shares of DEI Common Stock with respect to which they have or share voting power
for the approval of the Charter Amendment and the DEI Long-Term Incentive Plan
amendment at the DEI Annual Meeting; and (ii) will not sell, transfer or assign
any of their shares of DEI Common Stock prior to the earlier of the Effective
Time, the termination of the Merger Agreement or July 1, 1998.
The Voting Agreement also provides that if the Merger Agreement has
not been terminated in accordance with its terms, the STR VA Stockholders (i)
will vote all of the shares of STR Common Stock with respect to which they have
or share voting power for approval of the Merger Agreement, the Merger and the
consummation of the transactions contemplated thereunder at the STR Special
Meeting; and (ii) will not sell, transfer or assign any of their shares of STR
Common Stock prior to the earlier of the Effective Time, the termination of the
Merger Agreement or July 1, 1998.
For a period beginning at the Effective Time and ending on the date
following the conclusion of the second annual meeting of the stockholders of DEI
after the Effective Time, DEI has agreed pursuant to the Voting Agreement that
(i) except under certain circumstances, the number of directors on its Board of
Directors shall be fixed at seven and (ii) it will nominate Thomas R. Ory, John
D. Sanders, Philip H. Power, S. R. Perrino, S. Kent Rockwell, James Busey and
Charles Bernard for election as directors at each meeting of the stockholders of
DEI at which directors are elected, subject to the consent of such persons to
serve in such capacity.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following sets forth certain historical financial information of
DEI and STR on an unaudited pro forma basis after giving effect to the Merger on
a "reverse acquisition purchase" basis (as if STR had acquired DEI) and the
Stock Issuance. The unaudited pro forma combined statement of operations
includes the results of operations of DEI and STR for the respective periods
presented and gives effect to pro forma adjustments as if the Merger and Stock
Issuance had occurred at the beginning of the period. The unaudited pro forma
combined balance sheet includes the historical balance sheet of DEI and STR as
of December 31, 1997 and gives effect to the pro forma adjustments as if the
Merger and Stock Issuance had occurred on that date. This data should be read in
conjunction with the selected historical information, the comparative per share
data and the separate historical financial statements of DEI and STR and the
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. The
unaudited pro forma combined financial statements are not necessarily indicative
of the operating results or financial position that would have been achieved had
the Merger been consummated at the beginning of the periods presented and should
not be construed as representative of future operations. Management does not
expect significant changes to the preliminary valuation of the transaction.
Changes to the allocation of the purchase price to property and equipment may
occur as a result of profits or losses generated by DEI in the period from the
date of the pro forma balance sheet to the Effective Time.
Subsequent to the Merger, DEI intends to change its fiscal year-end
from July 31 to September 30. As a result, the pro forma combined statements of
operations have been prepared assuming a September 30 fiscal year end.
39
<PAGE> 45
In addition to the pro forma adjustments described below, it is
anticipated that the combined companies will incur a restructuring charge of
approximately $1,000,000 ($620,000, net of taxes). The charge is expected to
relate to costs associated with reengineering the combined companies' processes,
policies and procedures. Costs are expected to be incurred for external
consultants, for personnel terminations and for relocation and moving. Other
costs are expected to be incurred to realign products, services and facilities
around the combined companies' core businesses. The restructuring charge has not
been reflected in the unaudited pro forma combined financial statements. It is
anticipated that the restructuring will commence shortly after the Merger.
40
<PAGE> 46
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
STR ADJUSTED STR DEI
AS OF AS OF AS OF
DECEMBER 31, STOCK DECEMBER 31, OCTOBER 31, PRO FORMA
1997 ISSUANCE(A) 1997 1997 ADJUSTMENTS COMBINED
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 119,524 $ 119,524 $ 7,293 $ 126,817
Accounts receivable 4,045,201 4,045,201 137,279 4,182,480
Unbilled contract costs, net 5,374,597 5,374,597 225,117 5,599,714
Inventories - at cost 203,311 203,311 575,842 779,153
Deferred tax asset 226,737 226,737 - 226,737
Other current assets 174,553 174,553 19,151 193,704
Prepaid income taxes 155,152 155,152 - 155,152
------------ ----------- ---------- -----------
Total current assets 10,299,075 10,299,075 964,682 11,263,757
PROPERTY AND EQUIPMENT 875,532 875,532 1,143,269 (836,952) b 1,140,583
(41,266) d2
OTHER ASSETS
Land and building held
for sale 836,952 b 1,450,000
613,048 d1
Deposits 83,975 83,975 250 84,225
------------ ----------- ---------- ----------- -----------
TOTAL ASSETS $ 11,258,582 $11,258,582 $2,108,201 $ 571,782 $13,938,565
============ =========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Note payable - line of credit $ 4,208,614 $(3,783,000) $ 425,614 $ 310,000 $ 735,614
Accounts payable 3,038,408 3,038,408 71,233 3,109,641
Accrued salaries, benefits
and related expenses 1,370,998 1,370,998 76,817 1,447,815
Other accrued expenses 112,225 112,225 97,235 209,460
Capital leases 52,055 52,055 - 52,055
Mortgage debt - - 237,332 237,332
------------ ----------- ----------- ---------- ----------- -----------
Total current liabilities 8,782,300 (3,783,000) 4,999,300 792,617 -0- 5,791,917
LONG-TERM LIABILITIES
Capital leases 8,993 8,993 - 8,993
------------ ----------- ----------- ---------- ----------- -----------
TOTAL LIABILITIES 8,791,293 (3,783,000) 5,008,293 792,617 -0- 5,800,910
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 72,379 58,200 130,579 5,346 (5,346) e 39,035 f
(96,890) f
5,346 c
Additional paid-in capital 1,232,716 3,724,800 4,957,516 1,165,778 (1,165,778) e 6,936,426
96,890 f
1,882,020 c
Retained earnings 1,162,194 1,162,194 144,460 (144,460) e 1,162,194
------------ ----------- ----------- ---------- ----------- -----------
Total stockholders' equity 2,467,289 3,783,000 6,250,289 1,315,584 571,782 8,137,655
------------ ----------- ----------- ---------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 11,258,582 $ 0 $11,258,582 $2,108,201 $ 571,782 $13,938,565
============ =========== =========== ========== =========== ===========
</TABLE>
41
<PAGE> 47
a. On January 30, 1998, STR issued 582,000 shares of common stock for cash
of $6.50 per share for aggregate cash proceeds of $3,783,000. The cash
was used to repay outstanding bank borrowings under STR's short-term
line of credit.
b. It is anticipated that the land and building currently used by DEI in
the business will not be owned in the future. The property is currently
for sale and as a result has been reclassified as land and building
held for sale.
c. Because the Merger will be accounted for as a reverse acquisition
purchase and STR, which is treated as the acquiror for accounting
purposes, is receiving DEI Common Stock rather than DEI's assets and
liabilities, the fair market value of the DEI Common Stock outstanding
for a reasonable period of time before and after the announcement of
the Merger determines the purchase price for accounting purposes. For
purposes of the pro forma statements, the purchase price of DEI
consists of the following:
<TABLE>
<S> <C>
Stock $ 1,737,366
Direct expenses of the purchase 150,000
-----------
Total purchase price $ 1,887,366
===========
</TABLE>
The average market value of DEI stock for a reasonable period of time
before and after the announcement of the Merger was $3.25 per share and
there were 534,574 shares issued and outstanding. Therefore, the
aggregate value of the stock used to record the purchase for purposes
of the pro forma combined balance sheet is $1,737,366.
The direct expenses of the purchase consist primarily of legal,
accounting and other fees.
d. For purposes of determining the pro forma effect of the acquisition on
the combined financial statements, the fair value of DEI's net assets
has been estimated in accordance with Accounting Principles Board
Opinion No. 16:
<TABLE>
<S> <C>
Net assets of DEI at October 31, 1997 $ 1,315,584
Fair value adjustments:
d1. Adjustment of land and building held for sale to estimated fair value 613,048
d2. Adjustment of machinery and equipment to estimated fair value (41,266)
-----------
$ 1,887,366
===========
</TABLE>
The approximate value of the land and building was determined by
appraisal. The companies anticipated utilizing the DEI net operating
losses available under existing Code provisions to offset any gain on
the sale of the property; therefore, no deferred tax liability has been
recorded for the land and building held for sale fair value adjustment.
Remaining net operating losses of DEI available to offset future income
after the Merger will be significantly limited by provisions of the
Code; therefore, a full valuation allowance has been recorded against
the remaining net operating losses.
e. DEI's stockholders' equity as of October 31, 1997 is eliminated.
f. According to the Merger Agreement, each share of STR Common Stock is
converted into 2.58 shares of DEI Common Stock. At December 31, 1997,
there were 723,792 shares of STR Common Stock outstanding. Therefore,
for purposes of the unaudited pro forma combined balance sheet,
3,368,943 shares of DEI Common Stock will be issued. The following
summarizes the shares to be issued and the determination of par value
of the common stock on a pro forma combined basis:
42
<PAGE> 48
STR shares outstanding at December 31, 1997 723,792
STR stock issuance 582,000
----------
1,305,792
Exchange ratio 2.58
----------
3,368,943
DEI shares outstanding at October 31, 1997 534,574
----------
Pro forma combined shares outstanding 3,903,517
Par value per share $ .01
----------
Pro forma combined par value $ 39,035
==========
43
<PAGE> 49
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
STR ADJUSTED STR DEI
FOR THE FOR THE FOR THE
THREE THREE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, STOCK DECEMBER 31, OCTOBER 31, PRO FORMA
1997 ISSUANCE(A) 1997 1997 ADJUSTMENTS(C) COMBINED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Contract Revenue $ 5,837,376 $ 5,837,376 $ 483,669 $ 6,321,045
COSTS AND EXPENSES
Cost of revenues 5,134,910 5,134,910 365,432 $ (10,000)b1 5,490,342
General and administrative
expenses 710,076 710,076 204,333 914,409
----------- ----------- ----------- ---------- -----------
Total costs and expenses 5,844,986 5,844,986 569,765 (10,000) 6,404,751
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) FROM
OPERATIONS (7,610) (7,610) (86,096) 10,000 (83,706)
OTHER INCOME (EXPENSES)
Interest expense (103,143) 85,118 (18,025) (10,507) (28,532)
----------- ----------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (110,753) 85,118 (25,635) (96,603) 10,000 (112,238)
INCOME TAX BENEFIT
(PROVISION) 42,000 (32,278) 9,722 -- 39,928 b2 $ 42,650
----------- ----------- ----------- ----------- ---------- ----------
NET INCOME (LOSS) $ (68,753) $ 52,840 $ (15,913) $ (96,603) 42,928 $ (69,588)
=========== =========== =========== =========== ========== ==========
PER SHARE AMOUNT
Net income (loss) per
share-basic $ (0.09) $ (0.01) $ (0.18) $ (0.02)
============ =========== =========== ==========
Net income (loss) per $ (0.09) $ (0.01) $ (0.18) $ (0.02)
share-diluted =========== =========== =========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING
Basic 723,792 582,000 1,305,792 534,391 2,063,151 3,903,334
Diluted 744,116 582,000 1,326,116 534,391 2,095,263 3,955,770
</TABLE>
a. On January 30, 1998, STR issued 582,000 shares of common stock for
cash of $6.50 per share for aggregate cash proceeds of $3,783,000.
The cash was used to repay outstanding bank borrowings under
STR's short-term line of credit. Interest at an assumed rate of 10%
($85,118 for the quarter ended December 31, 1997) is eliminated.
The income tax provision is adjusted to reflect the interest savings.
b. Adjustments to the Pro Forma Combined Statement of Operations for the
three months ended December 31, 1997 in connection with the proposed
Merger are presented below:
<TABLE>
<CAPTION>
Increase
in income
-------------
<S> <C> <C>
1. As a result of recording land and building and
machinery and equipment at fair market value
and assigning new useful lives, depreciation
expense is decreased on a
pro forma basis. $10,000
2. Pro forma income tax effect of consolidating the
companies, which includes the tax effect of
pro forma adjustments as well as the tax
benefit of utilizing DEI's current year losses to
reduce taxable income of STR. $32,928
</TABLE>
44
<PAGE> 50
c. The unaudited pro forma combined statement of operations excludes a
one-time restructuring charge of approximately $620,000 (net of related
income tax benefit) relating to reengineering the companies' processes,
policies and procedures.
Note: The results of operations for STR's first quarter ending
December 31, 1997 and DEI's first quarter ending October 31, 1997 were
used for purposes of the interim pro forma combined statement of
operations. For the three months ending January 31, 1998, DEI incurred
a net loss of $209,406 on revenue of $364,750. STR's results of
operations for the three months ending March 31, 1998 are not yet
available.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
STR ADJUSTED STR DEI
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, STOCK SEPTEMBER 30, JULY 31, PRO FORMA
1997 ISSUANCE(a) 1997 1997 ADJUSTMENTS(c) COMBINED
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $23,953,070 $23,953,070 $3,001,458 $26,954,528
Contract revenue
COSTS AND EXPENSES
Cost of revenues 20,761,886 20,761,886 1,971,918 $ (40,000) b1 22,693,804
General and administrative
expenses 2,654,218 2,654,218 1,033,429 3,687,647
----------- ----------- ---------- --------- ----------
Total costs and expenses 23,416,104 23,416,104 3,005,347 (40,000) 26,381,451
----------- ----------- ---------- --------- ----------
INCOME (LOSS) FROM
OPERATIONS 536,966 536,966 (3,889) 40,000 573,077
OTHER INCOME (EXPENSES)
Interest expense (345,086) 340,470 (4,616) (63,800) (68,416)
----------- -------- ----------- ---------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 191,880 340,470 532,350 (67,689) 40,000 504,661
INCOME TAX BENEFIT
(PROVISION) (72,000) (127,756) (199,756) 3,546 4,439 b2 $ (191,771)
----------- -------- ----------- ---------- --------- ----------
NET INCOME (LOSS) $ 119,800 $212,714 $ 332,594 $ (64,143) $ 44,439 $ 312,890
=========== ======== =========== ========== ========= ==========
PER SHARE AMOUNT
Net income (loss)
per share-basic $ 0.17 $ 0.25 $ (0.12) $ 0.08
=========== =========== ========== ==========
Net income (loss)
per share-diluted $ 0.16 $ 0.25 $ (0.12) $ 0.08
=========== =========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING
Basic 723,827 582,000 1,305,827 533,464 2,063,207 3,902,498
Diluted 748,216 582,000 1,330,216 533,464 2,101,741 3,965,421
</TABLE>
45
<PAGE> 51
a. On January 30, 1998, STR issued 582,000 shares of common stock for cash
of $6.50 per share for aggregate cash proceeds of $3,783,000. The cash
was used to repay outstanding bank borrowings under STR's short-term
line of credit. Interest at an assumed rate of 10% ($340,470 for the
year ended September 30, 1997) is eliminated. The income tax provision
is adjusted to reflect the interest savings.
b. Adjustments to the Pro Forma Combined Statement of Operations for the
year ended September 30, 1997 in connection with the proposed merger
are presented below:
<TABLE>
<CAPTION>
Increase
in income
--------------
<S> <C>
1. As a result of recording land and building and
machinery and equipment at fair market value
and assigning new useful lives, depreciation
expense is decreased on a pro forma basis. $40,000
2. Pro forma income tax effect of consolidating the companies,
which includes the tax effect of pro forma adjustments as well
as the tax benefit of utilizing DEI's current year losses to
reduce
taxable income of STR. $ 4,439
</TABLE>
c. The Unaudited Pro Forma Combined Statement of Operations excludes a
one-time restructuring charge of approximately $620,000 (net of related
income tax benefit) relating to reengineering the companies' processes,
policies and procedures.
PROPOSAL TO AMEND THE DEI CERTIFICATE OF INCORPORATION
The proposed amendment to the DEI certificate of incorporation would
change the name of DEI from "Daedalus Enterprises, Inc." to "Sensys Technologies
Inc." and increase DEI's authorized Common Stock from 2,000,000 to 5,000,000
shares in order to authorize the additional shares to be issued pursuant to the
Merger Agreement. The Charter Amendment also restates the current certificate of
incorporation and makes certain non-substantive changes thereto. A copy of the
Charter Amendment is reproduced in full as Annex D. The affirmative vote of the
holders of a majority of the shares of DEI Common Stock issued and outstanding
on the DEI Record Date is required to approve the Charter Amendment.
CHANGE IN DEI'S NAME
As a condition to consummation of the Merger, DEI agreed to amend its
certificate of incorporation to change its name. DEI and STR believe that DEI's
current name will not properly reflect DEI's more diverse business strategy and
business operations after the Merger and that "Sensys Technologies Inc.", the
new name chosen for DEI following the Merger, is more reflective of the broader
sensing systems business of the combined operations of DEI and STR following the
Merger. The new name is also intended to give the combined companies a new, more
marketable image in the investment community.
If approved by the stockholders of DEI at the DEI Annual Meeting, the
new name will become effective upon the filing of the Charter Amendment with the
Delaware Secretary of State. The change in corporate name will not effect the
validity or transferability of stock certificates currently outstanding and
stockholders of DEI will not be required to exchange any certificates they
currently hold.
46
<PAGE> 52
INCREASE IN THE NUMBER OF AUTHORIZED SHARES
The Charter Amendment will also increase the number of shares of DEI
Common Stock to 5,000,000 shares from 2,000,000 shares. Following the Merger,
there will be approximately 3.9 million shares of DEI Common Stock outstanding
(including the 3.4 million shares of DEI Common Stock to be issued to STR
stockholders pursuant to the Merger) and an additional 644,288 shares will be
reserved for issuance pursuant to the DEI Long-Term Incentive Plan and other
outstanding options to purchase DEI Common Stock. See AProposal to Amend the DEI
Long-Term Incentive Plan." Any additional authorized shares would be available
to the Board of Directors for issuance without further stockholder approval
(unless required by applicable law, regulation or rule). The additional shares
of DEI Common Stock could be issued for any proper corporate purpose, including
the acquisition of other businesses, the raising of additional capital for use
in DEI's business, stock splits, the payment of stock dividends or other
distributions in shares of stock or in connection with employee stock incentive
programs. While DEI currently has no understandings or commitments with respect
to the issuance of the additional shares of DEI Common Stock (other than
pursuant to the Merger and outstanding options), it is considered advisable to
have the authorization to issue such shares in order to enable DEI, as the need
may arise, to move promptly to take advantage of market conditions and the
availability of other favorable opportunities without the delay and expense
involved in calling a special stockholders meeting for such purpose.
The authorization of additional shares of DEI Common Stock will not, by
itself, have any effect on the rights of holders of existing DEI Common Stock.
Depending on the circumstances, any issuance of additional shares of DEI Common
Stock may dilute the present equity ownership of current stockholders. Holders
of DEI Common Stock have no preemptive rights to participate in any such
issuance.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of DEI
Common Stock outstanding is required to adopt the Charter Amendment. Abstentions
and broker non-votes have the same effect as a vote against the proposal. If the
Charter Amendment is adopted by the stockholders of DEI, it will become
effective upon being duly filed with the Secretary of State of Delaware. The
Charter Amendment will not become effective if the Merger Agreement has been
terminated.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT DEI STOCKHOLDERS
VOTE FOR APPROVAL OF THE CHARTER AMENDMENT.
PROPOSAL TO AMEND THE DEI LONG TERM INCENTIVE PLAN
On December 23, 1997, the DEI Board of Directors unanimously approved
an amendment to DEI's Long-Term Incentive Plan (the "Plan") to increase the
number of shares issuable under the Plan from 64,000 to 400,000 shares of DEI
Common Stock and to increase the limit on the number of shares of DEI Common
Stock that may be subject to options granted to any salaried employee in any
three consecutive fiscal years from 25,000 to 100,000. Certain other minor
changes were made to the Plan which are not being presented to DEI stockholders
for approval. Outstanding options under the Plan will not be affected by the
Merger.
The Board of Directors of DEI has determined, and the Merger Agreement
requires, that additional shares should be made available under the Plan if the
Merger is consummated to attract, retain and motivate highly qualified
individuals to serve as employees and consultants of DEI and its subsidiaries.
Awards under the Plan are intended to align the interests of employees and
consultants with those of DEI's stockholders and encourage employees to acquire
an ownership interest in DEI. Since stock options granted under the Plan only
gain value if the price of the DEI Common Stock increases above the option
exercise price, grants of options to executives under the Plan reflect DEI's
philosophy and objective of linking executive compensation to DEI's performance.
As DEI realizes future business
47
<PAGE> 53
success, the Plan may provide compensation incentives which it cannot presently
provide through salary or bonus. Neither DEI nor STR has made any commitments to
grant any stock options following consummation of the Merger.
Section 162(m) of the Code and certain regulations promulgated
thereunder by the Internal Revenue Service contain rules regarding the federal
income tax deductibility of compensation paid to a publicly traded corporation's
chief executive officer and to each of its four most highly paid executive
officers. Under Section 162(m), DEI may deduct compensation paid to such an
executive only to the extent that it does not exceed $1,000,000 during any
fiscal year, unless the compensation constitutes "performance-based"
compensation. In general, compensation attributable to a stock option or stock
appreciation right is deemed to be based on performance if (i) the grant is made
by the corporation's compensation committee, (ii) the plan under which the grant
is made includes a per-employee limit on the number of shares with respect to
which options may be granted during a specific period; and (iii) the amount of
compensation the employee could receive under the terms of the option is based
solely on the increase in value of the stock after the date of the grant.
In 1994, when the Plan was adopted, the DEI Board concluded that it
would be advisable to establish certain restrictions on the granting of options
under the Plan to exempt from the Section 162(m) limitation compensation
realized in connection with future exercises of options granted under the Plan.
Accordingly, the Plan currently limits to 25,000 the number of shares of Common
Stock that may be included in options granted to any salaried employee in any
three consecutive fiscal years (which constitutes 39% of the total number of
shares of DEI Common Stock reserved for issuance under the Plan). In order to
give DEI additional flexibility in making grants to participants in the Plan,
and to increase the limitation to a level consistent with the proposed increase
in the number of shares of DEI Common Stock subject to the Plan and the number
of shares of DEI Common Stock outstanding after the Merger, the DEI Board is
proposing to increase the limitation to 100,000 shares (or 25% of the total
number of shares of DEI Common Stock which will be reserved for issuance under
the Plan if the Plan amendment is approved). The increase in the number of
shares of DEI Common Stock subject to the Plan and the increase in the
limitation on the number of shares of DEI Common Stock that may be subject to
options granted to any salaried employee in any three consecutive fiscal years
will only become effective if approved by a majority of the shares of DEI Common
Stock voting on the proposal at the DEI Annual Meeting and if the Merger is
consummated.
DEI'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PLAN
AMENDMENT.
GENERAL
On December 13, 1994, the stockholders of DEI approved the Plan, which
is intended to attract and motivate highly qualified individuals to serve as
employees of DEI and to encourage employees of DEI and its subsidiaries to
acquire an ownership interest in DEI. Approximately 16 employees of DEI are
currently eligible to participate in the Plan and approximately 180 employees
will be eligible upon consummation of the Merger.
The Plan is administered by the Executive Compensation/Stock Option
Committee of the DEI Board of Directors (the "Committee"), which is comprised of
no fewer than two non-employee members of the DEI Board of Directors. The
Committee is authorized to administer and interpret the Plan and to adopt such
rules and regulations as it determines are appropriate. Shares subject to the
canceled, forfeited, terminated or expired portion of grants and awards made
under the Plan may again be used for grants and awards under the Plan.
Awards may be made by the Committee to employees as the Committee may
select and may be in the form of stock options, restricted stock or performance
shares. Options under the Plan to purchase 29,975 shares of DEI Common Stock are
currently outstanding.
48
<PAGE> 54
STOCK OPTION GRANTS
Options granted under the Plan may be either incentive stock options
under Section 422 of the Code or nonqualified stock options. The exercise price
of any option granted under the Plan may be no less than the fair market value
per share of DEI Common Stock on the date of grant. Options granted under the
Plan become exercisable at such times as the Committee may determine and will
generally have a term of ten years unless the Committee determines a shorter
term. The aggregate fair market value, determined on the grant date, of the DEI
Common Stock with respect to which incentive stock options may first become
exercisable for an optionee during any calendar year may not exceed $100,000. No
salaried employee currently may receive options during any three year period to
purchase more than 25,000 shares.
Payment for shares to be acquired upon exercise of options granted
under the Plan may be made in cash, by check or, at the discretion of the
Committee, an optionee may exercise an option through a cashless exercise
procedure whereby the optionee provides an option exercise notice to DEI and
simultaneously irrevocably instructs a broker to sell a sufficient number of the
shares from the option exercise to pay the option exercise price and
accompanying taxes. At the Committee's discretion, shares may be tendered to DEI
or the cashless exercise procedure may be used to satisfy tax obligations.
TERMINATION; CHANGE IN CONTROL
Options which are not yet exercisable, restricted stock which is not
yet transferable and performance share awards with respect to which performance
goals have not yet been achieved will generally be forfeited if the holder's
employment is terminated. The Committee, however, is granted discretion under
the Plan to accelerate the exercisability of options and waive the restrictions
or conditions applicable to restricted stock or performance share awards and
such acceleration and waiver will occur automatically upon a change in control
of DEI (as defined in the Plan).
An option (or portion thereof) which is exercisable at the time of the
holder's termination may be exercised after such time to the extent it was
exercisable at the time of the holder's termination until such option
terminates. Unless the Committee otherwise provides, an exercisable option will
terminate at various times after the holder's employment terminates, based upon
the reason for the holder's termination. If employment is terminated for any
reason other than death, disability or retirement, such option will terminate on
the earlier of the expiration date of the option and the first anniversary of
the option holder's termination. If employment terminates because the holder has
died or becomes disabled, such option will terminate one year following the date
of the option holder's termination. If employment terminates due to retirement,
the option will terminate on the earlier of the expiration date of the option
and the second anniversary of the option holder's termination.
AMENDMENT
The Plan may be terminated or amended at any time by the Board of
Directors. No amendment, modification or termination of the Plan may adversely
affect any option, restricted stock award or performance share award previously
granted under the Plan without the consent of the participant. Unless the Plan
is terminated sooner by the Board, no new awards or grants may be authorized
under the Plan after October 18, 2004.
RESTRICTED STOCK GRANTS AND PERFORMANCE SHARE AWARDS
The Plan authorizes the Committee to grant restricted stock awards
pursuant to which shares of DEI Common Stock will be awarded, subject to
restrictions on transfer which lapse over a period of time or upon achievement
of performance goals, as determined by the Committee. Participants who receive
restricted stock grants are eligible to dividend and voting rights on the
awarded shares prior to the lapse of restrictions on such awards. The Committee
is also authorized to grant performance share awards under the Plan, which are
payable at the discretion of the Committee in cash or shares of DEI Common Stock
upon achievement of performance goals established by the Committee. The
49
<PAGE> 55
terms and conditions of restricted stock and performance share awards,
including the acceleration or lapse of any restrictions or conditions of such
awards, will be determined by the Committee.
PREVIOUS GRANTS
The following table sets forth the number of shares subject to
outstanding options granted under the Plan to DEI's Chief Executive Officer and
Chief Operating Officer, all persons who received options to purchase 5% or more
of the shares subject to the Plan, all current executive officers as a group,
all other employees as a group and all non-employee directors as a group. Except
as set forth below, no other options have been granted under the Plan. Options
outstanding under the Plan have exercise prices ranging from $2.25 to $2.75 per
share.
Name Number of Options
---- -----------------
Thomas R. Ory 0
Charles G. Stanich 0
Jane E. Barrett 5,000
Fred G. Osterwisch 7,000
David S. Dilworth 3,500
All current executive officers as a group 5,000
All other employees as a group 24,975
All non-employee directors as a group 0
FEDERAL INCOME TAX CONSEQUENCES
Under the Code as now in effect, at the time an ISO is granted or
exercised, the optionee will not be deemed to receive any income and DEI will
not be entitled to any deduction. However, the difference between the exercise
price and the fair market value of the shares of DEI Common Stock on the date of
exercise is a tax preference item, which may subject the optionee to the
alternative minimum tax in the year of exercise. The holder of an ISO generally
will be accorded capital gain or loss treatment on the disposition of DEI Common
Stock acquired by exercise of an ISO, provided the disposition occurs more than
two years after the date of grant and more than one year after exercise. An
optionee who disposes of shares acquired upon exercise of an ISO prior to the
expiration of the foregoing holding periods realizes ordinary income upon the
disposition equal to the difference between the exercise price and the lesser of
the fair market value of the shares on the date of exercise or the disposition
price. To the extent ordinary income is recognized by the optionee, DEI may
deduct a corresponding amount as compensation expense. Payment of the exercise
price by surrendering shares of DEI Common Stock generally will not result in
the recognition of a capital gain or loss on the shares surrendered.
Upon the exercise of a nonqualified stock option, an optionee will
recognize ordinary income equal to the difference between the exercise price and
the fair market value of the DEI Common Stock acquired at the time of exercise
and DEI will receive a corresponding deduction. Payment of the exercise price by
surrendering shares of DEI Common Stock generally will not result in the
recognition of a capital gain or loss on the shares surrendered. When the
optionee disposes of the shares acquired by the exercise of the option, any
difference from the fair market value of the shares on the date of exercise will
be treated as capital gain or loss.
DEI may withhold from an optionee's salary or other compensation (or to
secure payment from the optionee in lieu of withholding) all or any portion of
any withholding or other tax due with respect to any shares of DEI Common Stock
deliverable under such optionee's option or the Committee may permit payment of
such withholding by DEI's retention of shares of DEI Common Stock which would
otherwise be transferred to the optionee upon exercise of the option. In the
event any DEI Common Stock is retained by DEI to satisfy all or any part of the
withholding, the part of the withholding deemed to have been satisfied by such
DEI Common Stock will be equal to the fair market value of the shares of DEI
Common Stock retained by DEI.
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A participant who receives a restricted stock or performance share
award realizes ordinary income equal to the fair market value of the DEI Common
Stock on the date the restrictions lapse or the date of receipt, respectively,
and, upon withholding for income and employment taxes, DEI will receive a
compensation tax deduction equal to the ordinary income realized by the
participant.
INFORMATION ABOUT DEI
BUSINESS
GENERAL
DEI, which was incorporated in Michigan in August 1968 and
reincorporated in Delaware in January 1969, manufactures products for, and
performs development projects in, the field broadly described as "remote
sensing." Remote sensing is the detection or measurement of various physical
parameters of an object or system without making direct contact with the
observed object. DEI's customers use these remote sensing products to detect and
measure either the emitted or reflected radiation of objects or systems.
DEI is also developing a remote sensing service operation that would
utilize DEI's technology to acquire and process remote sensing data for users of
such data. See "Information About DEI -- Business -- Growth Plan."
PRODUCTS
The principal products manufactured by DEI are airborne imaging
systems. DEI's customers install these systems in aircraft and use them to
acquire optical radiation data from objects on the earth's surface and in the
atmosphere. This data is then processed into a useful form by data handling and
data processing equipment which, in some cases, is also manufactured by DEI. A
principal application of DEI's remote sensing products has been the measurement
of environmental parameters in support of pollution control programs and
environmental impact studies.
DEI manufactures these products by integrating precision optical,
mechanical and electronic components into unified systems. These components are
either purchased off the shelf, or custom designed by DEI and manufactured by
DEI, or designed and specified by DEI for outside manufacture. Highly technical
personnel, supported by supervisors and engineers, assemble, test and calibrate
these systems in preparation for delivery to customers.
DEI engages in customer-funded projects for the development of advanced
equipment in the remote sensing field. In addition to being a source of revenue,
DEI undertakes these projects to increase its technical expertise in areas
demonstrating strong potential for use in future products. Some of these
projects may lead to the incorporation of newly developed technology into the
existing product line or an expansion of the product line.
One type of customer-funded project in which DEI is actively involved
is the Small Business Innovation Research ("SBIR") program, a U. S. Government
program designed to provide increased opportunities for small businesses to
participate in federal research and development. The SBIR program's specific
objectives are to stimulate U.S. technological innovations, use small businesses
to meet federal research and development needs and increase private sector
commercialization of innovations derived from federal research and development.
The contractor is entitled to retain ownership of any technologies developed as
a result of the program. The size and scope of SBIR projects typically fall into
one of three categories. Phase I contracts provide an opportunity to establish
the feasibility and technical merit of a proposed innovation. Phase I contracts
are selected competitively, last for six months and typically have values up to
$100,000. Phase II contracts involve a major research and development effort and
are awarded only to firms conducting the most promising Phase I research project
based on its scientific and technical merit, expected value to the government
agency and commercial potential and the firm's capability. Phase II contracts
generally last for a period of 24 months and typically have values up to
$750,000. Phase III of an SBIR project is the
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<PAGE> 57
commercial sale and marketing of a product and does not receive U. S. Government
funding (unless the U. S. Government is the customer).
During fiscal 1997, DEI shared costs on two SBIR programs. One of these
programs, Large Format Multispectral Camera, was completed in February 1998. The
other, Laser Search and Rescue, has been expanded with completion now scheduled
for early fiscal 1999. DEI has applied for a patent related to the Laser Search
and Rescue technology developed under the SBIR program, which application was
recently approved and is expected to result in the issuance of a patent. DEI is
conducting marketing efforts and actively seeking partners for participation in
Phase III commercialization efforts for these two programs.
None of DEI's revenue during the last three fiscal years is
attributable to patented technologies. Therefore, the loss of patent protection,
if obtained in the future, does not constitute a material risk to DEI.
Revenue from standard remote sensing systems and customer-funded
product development systems during the three most recent fiscal years ended July
31 was approximately as follows:
FISCAL STANDARD CUSTOMER-FUNDED PRODUCT
YEAR SYSTEMS DEVELOPMENT SYSTEMS TOTAL
------ -------- ----------------------- -----
(in thousands)
1997 $2,200 $ 788 $2,988
1996 1,657 430 2,087
1995 2,340 1,278 3,618
MARKETING
Marketing activities are conducted principally through DEI's office in
Ann Arbor, Michigan, primarily through direct customer contact. DEI markets its
products through direct sales and leases with a purchase option. In addition to
direct marketing of its standard systems, DEI is engaged in seeking
customer-funded product development projects for advanced equipment. See
"Information About DEI -- Business -- Growth Plan" for a description of expected
changes in DEI's marketing strategy as it implements its growth plan.
Products are marketed to government customers in the United States and
Canada by DEI's sales force which consists of three persons, one of whom is an
officer who carries on other duties in addition to sales efforts, and a
commissioned representative who handles commercial customers.
DEI has no active international subsidiaries or branch offices. In
several countries, DEI has exclusive sales agency agreements with existing high
technology marketing operations. These agents' efforts are supported by DEI's
own sales personnel, who also travel to other countries where there is no formal
representation.
CUSTOMERS
DEI's customers include aerospace, aerial survey, oil and mineral
exploration companies, universities and domestic and foreign federal and state
government agencies. DEI's ability to continue to contract with such parties is
dependent on political, economic and social factors. Revenue from international
markets are sometimes subject to receiving approved U.S. government export
licenses. A substantial portion of revenue in both domestic and international
markets is generated by customers who depend, at least in part, upon federal,
state or local government appropriations. Many of these customers are involved
in programs aimed at improving man's impact on the environment. See "Information
About DEI -- Business -- Growth Plan" for a description of DEI's efforts to
diversify its customer base.
The following table sets forth information with respect to domestic and
international revenue during the three most recent fiscal years ended July 31:
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<PAGE> 58
<TABLE>
<CAPTION>
FISCAL INTERNATIONAL DOMESTIC
--------------------------------------------- ----------------------------------------
YEAR ASIA EUROPE OTHER(1) U.S. GOV'T. OTHER TOTAL
- ---- ---- ------ -------- ----------- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
1997 $1,178 $ 154 $0 $1,625 $31 $2,988
1996 562 814 0 618 93 2,087
1995 43 2,255 8 1,228 84 3,618
</TABLE>
(1) Revenue from geographic areas that amount to less than 10% of total revenue
are shown as "Other."
Contracts with U.S. Government agencies generally provide that the
contracts may be terminated at the convenience of the customer, and that the U.
S. Government agency will be liable only for work performed up to the date of
termination. Certain of DEI's U.S. Government revenues are derived from
contracts which are subject to bidding procedures. From time to time, DEI is
requested to bid on work to upgrade an existing DEI system owned by the U.S.
Government. These procurements are generally sole source non-competitive bids or
DEI is the only bidder.
International revenue normally consists largely of standard products,
while domestic revenue is largely customer-funded product development. The
standard product and customer-funded product development portions of the
business are conducted by the same pool of personnel using the same operating
space and equipment and constitute a single industry segment. For further
information regarding DEI's revenue by geographic area and operations, see the
table included under the caption "DEI Selected Consolidated Financial Data" and
Note J to DEI's Consolidated Financial Statements.
To protect against foreign currency transaction losses, international
sales are generally contracted in U.S. dollars and many large contracts are
secured by irrevocable letters of credit. DEI also generally receives
substantial deposits on large orders from international customers.
A majority of DEI's revenue each year is derived from a small number of
high dollar value equipment sales and contracts to a relatively small number of
customers. Because each customer may represent a substantial portion of total
revenue for that fiscal year, a small increase or decrease in the number of
customers with whom DEI has contracts could generate a relatively large
percentage increase or decrease in total revenue. Revenue during a particular
fiscal year may result, in substantial part, from contracts with a single
customer. Revenue from U.S. Government agencies accounted for approximately 54%,
30% and 34% of revenue for fiscal 1997, 1996 and 1995, respectively. Asian
customers are an important source of revenue for DEI, generating 38% and 29% of
operating revenue for fiscal years ended July 31, 1997 and 1996. Italian
customers were an important source of revenue for DEI in fiscal 1995 (28%), but
no significant orders were received in fiscal 1997 or fiscal 1996 as the Italian
market for DEI's current products is near saturation.
In fiscal 1997, 1996 and 1995, DEI had three, four and three major
customers, respectively, each accounting for at least 10% of DEI's revenue from
operations. Such major customers accounted for approximately 91%, 81% and 91% of
DEI's revenue from operations in fiscal 1997, 1996 and 1995, respectively. See
Note J to DEI's Consolidated Financial Statements. No single customer has
generated a majority of DEI's revenue during any consecutive years during this
period. Management does not consider DEI's business to be dependent upon a
single customer or group of customers.
PRODUCT DEVELOPMENT
DEI is in an industry characterized by technological change, which
requires continuous expenditure of funds for research, development and product
improvement. DEI currently intends to use, whenever possible, external contract
funds and licensing agreements to expand its product line and minimize internal
research and development costs.
DEI has incurred research and development expense of approximately
$102,000, $469,000 and $586,000 for fiscal 1997, 1996 and 1995, respectively. In
fiscal 1997, 1996 and 1995 DEI expended approximately $661,000,
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<PAGE> 59
$395,000 and $839,000, respectively, in performing customer-funded product
development under contracts for advanced equipment in the field of remote
sensing.
DEI has five employees whose primary responsibility is product
development and five employees who, in addition to their primary production,
manufacturing and administrative duties, also contribute to the product
development effort.
RAW MATERIALS
DEI's operations require a variety of unique precision
optical-mechanical and electronic components and other supplies. Although most
components and supplies are generally available from many commercial sources,
certain components, which are designed and specified to meet DEI's particular
requirements, have a limited number of manufacturing sources. Due to the
specialized nature of these components and the limited quantities in which they
are purchased, procurement lead times may be as long as six months. However, DEI
believes that the loss of a single supplier would not be expected to have a
material adverse effect on DEI.
COMPETITION
There are several competitors that compete with individual products
produced by DEI. During the past few years, one of these competitors has begun
offering to build products that compete with more of DEI's standard remote
sensing systems. To date, DEI has not been materially affected by this direct
competition. DEI expects an increase in the number of competitors as governments
worldwide continue to reduce military spending since many companies selling
similar instruments for military purposes are now beginning to pursue
non-military customers. In addition, DEI's products compete with related
technologies, such as satellite remote sensing systems. In general, the superior
spectral and spatial resolution and scheduling flexibility of DEI's products
enable DEI to compete effectively with suppliers of satellite-based data when
the capabilities of DEI's products justify the generally more costly airborne
data. DEI has been able to compete successfully against its competitors through
the demonstrated performance of its products and its product support mechanisms,
and through the excellent reputation it has earned and maintained for the
durability of its products. DEI also competes on the basis of its continuous
efforts to offer product improvements and new products that keep its technology
at the leading edge and offer customers the latest innovations.
Management believes that DEI competes successfully in the field of
product development due to DEI's special capabilities in remote sensing
technology and its history of successful completion of such development
products. See "Information About DEI -- Business -- Growth Plan" for a
description of expected changes in competition as DEI implements its growth
plan.
BACKLOG
At the end of the second quarter of fiscal 1998, backlog of unfilled
customer orders was approximately $467,000 compared to approximately $1,691,000
at the end of the comparable period in fiscal 1997. See "Information About DEI
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New Orders and Backlog."
GROWTH PLAN
DEI is in the process of implementing a growth plan that is focused on
two initiatives to provide growth in revenues and profits from new market areas.
The goal of the growth plan is to diversify DEI's revenue-producing activities
and reduce fluctuations in DEI's revenue and earnings. Management has focused
its efforts on two areas of the plan with the most near-term potential.
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<PAGE> 60
The first growth area involves the use and sale of airborne digital
cameras ("ADC") developed by DEI for the mapping of infrastructure within narrow
corridors. Examples of the types of infrastructure that would be mapped with
such a system include gas pipelines, electrical distribution systems, railroads
and highways. DEI has developed an enhanced version of the ADC and an image
processing system that can be bundled with the ADC for delivery to its customers
and for use by DEI in performing services for customers. DEI completed three
contracts in fiscal 1996 for which it has utilized the ADC, and in the fourth
quarter of fiscal 1996, DEI entered into a marketing alliance with a major
company which provides infrastructure maintenance services to the electric and
gas utilities, and railroads in the United States and Canada. Although DEI did
not receive any such contracts in fiscal 1997, marketing efforts by DEI and its
marketing partner have generated considerable interest from attendees at
presentations made across the United States in the data produced by the ADC,
which DEI hopes will generate orders in fiscal 1998. DEI has also been requested
to team with several engineering companies to provide airborne digital camera
services for a large multi-year inventory program that would establish a
foothold in this emerging market. DEI is continuing to pursue various
alternatives to obtain the additional funding necessary to bring these services
to market. However, there can be no assurance that such funding will be
obtained. See "Information About DEI -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Sources of
Capital."
DEI has entered into strategic and marketing alliances with various
companies and has signed formal agreements with two of these. DEI signed a
licensing agreement with the James W. Sewall Company (ASewall") in 1994. This
agreement gives DEI access to the technology for a prototype airborne digital
camera owned by Sewall. DEI is required to pay Sewall a royalty of 3% of the net
selling price for each digital camera sold until the total of royalty payments
reaches $50,000. DEI does not expect to produce any more digital cameras of this
type or to pay any royalty payments to Sewall in the future.
DEI has also entered into a Strategic Alliance Agreement with ERIM
International, Inc. ("ERIM") in 1997, which obligates each party to continue
evelopment of specific technological improvements to the Airborne Multispectral
Digital Camera ("AMDC") prototype product. Each party retains title to and
commercial rights to the technologies developed by that party. The agreement
defines a basis to share revenues from the sale of complete AMDC systems by
either party. DEI is also a party to a Cooperative Development and Service
Agreement with ERIM which calls for the production of a complete AMDC system
which will be used to perform commercial service contract activities for third
parties. Under the terms of this agreement, ERIM will fund the production of an
AMDC with ownership of the system shared between DEI and ERIM. ERIM will market
and develop products and services that use the AMDC. Each party will continue
the development of the AMDC product on a mutually agreed upon basis.
The other growth area involves performing domestic environmental
surveys to provide a better applications market for DEI's airborne multispectral
scanners. In order to exploit this market, DEI must perform specific
applications and show the results to be reliable and cost-effective. To date,
DEI has completed several contracts in this area for customers such as the U.S.
Environmental Protection Agency and the U. S. Bureau of Reclamation, and
continues to pursue other demonstration projects. In addition, DEI has completed
development of an airborne digital multispectral camera for NASA under a SBIR
project and has negotiated a strategic alliance to bring this product to the
commercial market in the spring of 1998.
Competition in these new areas of business will be different than that
faced by DEI in its core business and competitors will be more numerous since
there are many more companies offering products and services in each of these
areas of new business. Competition will include conventional aerial survey firms
using film cameras and commercial remote sensing satellite data. The commercial
remote sensing satellite competitors are in the formative stage and will not
have products to offer until two to three years in the future. DEI believes,
however, that its capabilities in providing the source of unique data using its
airborne digital camera and Multispectral scanners for each of these market
areas, coupled with its strategy to team with selected partners in processing
and analyzing such data, will provide the opportunity to secure significant new
business and will enable DEI to compete successfully in each of these market
areas.
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These growth plan initiatives will require changes in DEI's sales and
marketing strategies and budgets. The marketing alliance for the infrastructure
information service calls for DEI's partner to perform most marketing and sales
functions. However, DEI will provide brochures, data samples, and other support
to its partner. In addition, it is anticipated that this market will require
more participation in trade shows and more space advertising than DEI has
engaged in during previous years.
The customers for these new products and services will also be
different than those involved in DEI's core product business. It is expected
that these customers are unfamiliar with DEI. However, they are familiar with
the services provided by DEI's marketing alliance partner and this is one of the
primary strategies to accelerate access to these markets.
Although implementation of the growth plan began in fiscal 1995,
material revenue impact is not expected until late fiscal 1998 at the earliest.
These strategies are intended to reduce fluctuations in DEI's revenue and
earnings and enhance DEI's profitability and stockholder value. However, DEI's
implementation of these growth initiatives has been slowed by the small size of
DEI's staff, by its current financial position and by the lack of solid market
information caused by DEI's limited resources. DEI is seeking partners and
additional financing to help bring these services into the market more quickly.
See "Information About DEI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Sources of Capital."
PERSONNEL
As of January 31, 1998, DEI had 15 full-time employees, three of whom
were executive officers.
EXECUTIVE OFFICERS OF DEI
The executive officers of DEI (who serve as such at the pleasure of the
Board of Directors), their ages and the position or office held by each are as
follows:
Name Age Positions with DEI
- ---- --- ------------------
Thomas R. Ory 58 President and Chief Executive Officer and
Director
Charles G. Stanich 53 Vice President-Research and Development
and Chief Operating Officer and Director
Jane E. Barrett 46 Vice President-Finance, Treasurer and Chief
Financial Officer
Mr. Ory, who was appointed President and Chief Executive Officer in
August 1987, joined DEI in 1972 as Director of its Applications Division, served
as Vice President-Marketing from 1979 to 1984, and Executive Vice President from
1985 to 1987.
Mr. Stanich, who was appointed Chief Operating Officer in 1987, joined
DEI in 1974 and served as Manager, Research and Development from 1979 to 1984,
and Vice President-Research and Development since 1984.
Ms. Barrett, who was appointed Vice President-Finance and Chief
Financial Officer in March 1997 and who was appointed Treasurer in August 1996,
joined DEI in May 1996 as its Controller. Prior to joining DEI, Ms. Barrett was
employed by Federal-Mogul Corporation, a Fortune 500 manufacturer and
distributor of automotive parts, from 1984 to 1996 in various managerial
accounting positions. Her most recent position was International Accounting
Manager with responsibility for the financial functions of a $600 million
international division.
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PROPERTIES
The Company's office is located in Ann Arbor, Michigan. The office and
research facility is situated on approximately 11 acres of property. The
building encompasses 24,000 square feet, of which approximately 17,500 square
feet are devoted to engineering, manufacturing, testing and research and
development; and 3,800 square feet are devoted to marketing and administrative
activities. This facility, which is owned by DEI, is subject to a mortgage.
DEI is attempting to sell its building and lease back a portion of the
facility from the new owner. If DEI must relocate, management is confident that
a suitable facility can be found and that DEI's business will not be materially
disrupted.
MARKET PRICE AND DIVIDEND INFORMATION
DEI Common Stock is traded over the counter. The following table sets
forth the quarterly range of high and low bid prices for the common stock and
dividends declared on the common stock since July 31, 1995. Prices shown are as
reported by National Quotation Bureau, Incorporated. Such quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.
QUARTER ENDED
<TABLE>
<CAPTION>
OCT. 31 JAN. 31 APR. 30 JULY 31 OCT. 31 JAN. 31 APR. 30 JULY 31 OCT. 31 JAN. 31 APR. 30
1995 1996 1996 1996 1996 1997 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High $2 3/4 $2 3/4 $2 1/4 $2 1/4 $2 1/4 $2 $2 3/8 $2 5/8 $2 7/8 $3 1/8 $7
Low 2 1 1/2 1 9/16 1 1/2 1 5/8 1 5/8 1 7/8 2 1/8 2 5/8 2 7/8 $3 1/8
</TABLE>
As of April 20, 1998, DEI's Common Stock was held by 170 holders of
record.
DEI has not paid any cash dividends during the last two fiscal years.
The payment of future dividends will depend on the operating performance of DEI,
its prospects, its operating cash requirements and the consent of its principal
bank lender.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
DEI manufactures products for, and performs development projects in,
the field broadly described as "remote sensing." The principal products
manufactured by DEI are airborne imaging systems which are installed in aircraft
for acquisition of data on environmental parameters. A principal application of
DEI's remote sensing products has been the measurement of environmental
parameters in support of pollution control programs and environmental impact
studies.
DEI is also engaged in customer-funded projects for the development of
advanced equipment in the remote sensing field. Some of these projects may lead
to the incorporation of newly developed technology into existing or future
product lines.
These two portions of the business are conducted by the same pool of
personnel using the same equipment and operating space and constitute a single
industry segment. The margins associated with these two portions of the business
are different, with standard products generally having higher margins than
customer-funded development projects. DEI receives the majority of its revenue
from a small number of relatively large contracts. Standard product contracts
are generally of higher dollar value than customer-funded product development
contracts, with each contract representing
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<PAGE> 63
a substantial portion of total revenue each year. Therefore, the timing of the
receipt of a standard product sales contract as well as the related
manufacturing endeavor can have a material impact on a quarter-to-quarter or
year-to-year comparison of DEI's results of operations. Most standard product
sales contracts and some customer-funded product development contracts are also
accompanied by a significant deposit. Therefore, the timing of the contract
receipt can have a material impact on DEI's cash flow.
DEI incurred a loss in each of the periods presented. These losses have
caused DEI to experience severe liquidity problems and its bank line of credit
is being utilized to maintain operations. DEI's short-term viability and
operating results are dependent on its ability to acquire additional equity
capital or increase the level of new business and cash flow. The consummation of
the Merger will make available a significant amount of additional equity
capital. DEI's long-term viability is dependent upon its ability to successfully
implement its Growth Plan or otherwise attain consistent profitability. See
"Information About DEI -- Business -- Growth Plan."
MERGER
Consummation of the Merger is expected to dramatically increase DEI's
consolidated revenues and expenses and improve its profitability. However, the
obligations of DEI and STR to consummate the Merger are subject to the
satisfaction of certain conditions, including obtaining the approval of the STR
stockholders of the Merger Agreement and the approval of the DEI stockholders of
the Charter Amendment. See "The Merger Agreement -- Conditions to Consummation
of the Merger." There can be no assurance that the Merger will be consummated or
that DEI will be profitable if the Merger is consummated. If the Merger is not
consummated, DEI will continue to pursue additional equity financing through
discussions with potential investors possessing related technological and/or
marketing capabilities and will continue to attempt to sell its building and
lease back a portion of the facility from the new owner. Pending the sale of the
building or the receipt of additional equity financing, DEI will continue to
operate supported by its line of credit, but the lending bank has indicated that
it may limit the amount which DEI is permitted to borrow under the line of
credit in the absence of continued improvement in DEI's business prospects or
progress toward the acquisition of a significant amount of equity capital. See
"-- Liquidity and Capital Resources". If the Merger is not consummated and DEI
is unable to borrow amounts necessary to fund its operations, its financial
position would be materially and adversely affected and DEI may have no choice
but to cease operations if other sources of capital are not available.
Forward-looking statements in the following discussion and analysis
refer to DEI without regard to the effects of the Merger, unless otherwise
indicated.
RESULTS OF OPERATIONS
Operating Revenue
<TABLE>
<CAPTION>
STANDARD PRODUCT TOTAL
PRODUCT DEVELOPMENT OPERATING
REVENUE REVENUE REVENUE
---------------- ---------------- ----------
% OF % OF
(dollars in thousands) $ TOTAL $ TOTAL $
----- ------ ----- ----- -----
<S> <S> <C> <C> <C> <C>
SIX MONTHS ENDED JANUARY 31,
1998 $ 666 80% $ 169 20% $ 835
1997 1,017 68 488 32 1,505
FISCAL YEAR
- -----------
1997 $2,200 74% $ 788 26% $2,988
1996 1,657 79 430 21 2,087
1995 2,340 65 1,278 35 3,618
</TABLE>
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Standard product revenue and product development revenue for the six
month period ended January 31, 1998 decreased from the comparable period of
fiscal 1997 due to the low level of backlog at the beginning of fiscal 1998 and
the low level of bookings received during the period.
Standard product revenue during fiscal 1997 was higher than fiscal 1996
due to the revenue recognized on a significant standard product order received
at the beginning of fiscal 1997. The decrease in standard product revenue in
fiscal 1996 compared to fiscal 1995 was attributable to reduced backlog at the
beginning of fiscal 1996 and the low number of new contracts received in fiscal
1996.
Product development revenue was higher in fiscal 1997 compared to
fiscal 1996 due to the recognition of revenue on two product development
contracts received in late fiscal 1996. The decrease in product development
revenue in fiscal 1996 compared to fiscal 1995 was attributable to the low level
of product development backlog at the beginning of fiscal 1996 and delays in the
receipt of new product development contracts until late in the fiscal year. The
decline in customer-funded product development revenue was largely due to the
delay by the U.S. Congress in approving its fiscal 1996 budget resulting in a
delay in awarding Small Business Innovation Research contracts and in DEI's
recognition of revenue from such contracts.
The level of DEI's revenues and profits has historically fluctuated
from quarter-to-quarter and from year-to-year as the majority of its revenue is
derived from a small number of high dollar value contracts. Although
fluctuations are normal, given DEI's reliance on a small number of high value
contracts for the majority of its revenue, the low level of standard product
orders received in the last several years has caused severe liquidity problems.
Domestic vs. International Revenue
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC TOTAL
OPERATING OPERATING OPERATING
REVENUE REVENUE REVENUE
-------------- ---------------- ----------
% OF % OF
$ TOTAL $ TOTAL $
----- ----- ----- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JANUARY 31,
1998 $ 159 19% $ 676 81% $ 835
1997 782 52 723 48 1,505
FISCAL YEAR
1997 $1,332 45% $1,656 55% $2,988
1996 1,376 66 711 34 2,087
1995 2,306 64 1,312 36 3,618
</TABLE>
International revenue represented 19% and 52% of operating revenue
during the first half of fiscal 1998 and 1997, respectively. International
revenue decreased primarily due to DEI's low level of international backlog at
the beginning of fiscal 1998 and the low level of bookings received during the
period. The increase in domestic operating revenue during the first quarter of
fiscal 1998 from the same period in fiscal 1997 is due to DEI's recognition of
revenue on several domestic contracts that were in backlog at the beginning of
fiscal 1998.
International operating revenue remained relatively constant during
fiscal 1997 compared to fiscal 1996. The increase in domestic operating revenue
during fiscal 1997 compared to fiscal 1996 was due to the revenue earned on the
NASA contract received in the second quarter of fiscal 1997 and the recognition
of revenue on the two domestic product development contracts received in late
1996. The decrease in international operating revenue during fiscal 1996 and
1997 compared to fiscal 1995 was primarily due to DEI's receipt of contracts
with a lesser value during fiscal 1996 and 1997 than the relatively large
contract orders received in fiscal 1995 and, to a lesser extent, to the low
international backlog as of the beginning of fiscal 1996 and 1997. The decrease
in domestic operating revenue during fiscal 1996 compared to fiscal 1995 was due
to the delay by the U.S. Congress in approving its fiscal 1996 budget resulting
in a
59
<PAGE> 65
delay in awarding Small Business Innovation Research contracts and in DEI's
recognition of revenue from such contracts.
Management expects a significant portion of DEI's revenue to be
generated from the international market in fiscal 1998 and future years. To
mitigate foreign currency transaction losses, international contracts are
denominated in U.S. dollars and large standard product contracts are generally
secured by irrevocable letters of credit. DEI also receives substantial deposits
on many large contracts with international customers.
Other Income
Other income, for the periods presented, is comprised principally of
rental fees for equipment. The level of such income is dependent on the
requirement for equipment owned by DEI. DEI does not expect significant other
income for fiscal 1998.
Major Customers
<TABLE>
<CAPTION>
(dollars in thousands) FISCAL YEAR ENDED JULY 31,
---------------------------------
CUSTOMER DESCRIPTION 1997 1996 1995
- --------------------- ---- ----- ------
<S> <C> <C> <C>
Asian standard product customer $1,144 $562
European standard product customer 436 $1,152
European standard product customer 186 917
European product development customer 90
U.S. government agencies 1,625 618 1,228
</TABLE>
The customers to whom DEI sells change from year-to-year. No single
customer has generated a majority of DEI's revenue during any consecutive years
during this period. Revenue from U.S. government agencies accounted for
approximately 54%, 30% and 34% of revenue for fiscal 1997, 1996 and 1995,
respectively. Asian customers are an important source of revenue for DEI,
generating 38% and 29% of operating revenue for fiscal years ended July 31, 1997
and 1996, respectively. Italian customers were an important source of revenue
for DEI in fiscal year 1995 (28%), but no significant orders were received in
fiscal 1997 and fiscal 1996 as the Italian market for DEI's current products is
near saturation.
New Orders and Backlog
In the six months ended January 31, 1998, DEI received orders in the
amount of approximately $650,000 as compared to approximately $2,185,000 in the
comparable period of fiscal 1997. DEI's backlog at the end of the second quarter
of fiscal 1998 was approximately $467,000, compared to approximately $1,691,000
at the end of the comparable period in fiscal 1997. Approximately $399,000 of
the January 31, 1998 backlog is for standard products with the balance being
related to customer service orders and the two Phase II Small Business
Innovation Research (product development) contracts.
In fiscal 1997, DEI received orders in the amount of approximately
$2,629,000 as compared to approximately $2,517,000 in fiscal 1996. Approximately
$2,459,000 of the bookings received by DEI in fiscal 1997 were for standard
products, with the remainder for product development orders. DEI's backlog at
the end of fiscal 1997 was approximately $652,000, compared to approximately
$1,014,000 at the end of fiscal 1996. Approximately $369,000 of the fiscal 1997
backlog is for standard products, with the majority of the balance being related
to the two Phase II Small Business Innovation Research (product development)
contracts awarded during fiscal 1996. The Company has also been selected for the
award of two Phase I Small Business Innovation Research contracts in the third
quarter of fiscal 1998 for $140,000 and the Company is negotiating an extension
to an existing NASA contract for a value of approximately $100,000.
60
<PAGE> 66
DEI is engaged in negotiations for several standard products orders.
The negotiations for these orders have not been finalized and there can be no
assurance that these orders will be received. DEI has some high value components
in inventory that will enable DEI to immediately recognize revenue upon
receiving one of these standard product orders. The results of operations for
future periods are dependent upon the receipt and timing of future orders, the
success of management's growth strategy and the completion of the Merger.
One of the large standard product contracts that DEI has pursued for
more than three years was not awarded to DEI due to final price concessions and
contract terms requested by the customer to which DEI could not agree. A second
large international standard product program has encountered export licensing
problems which now seem to threaten the viability of the program. The current
economic crisis in several Asian countries has delayed several programs that DEI
expected to be awarded in late 1997 or early 1998.
DEI has received new orders at a level below that required for DEI to
be profitable in the last several fiscal years. Therefore, DEI's ability to
retain its line of credit and continue operations depends upon the receipt of
additional significant orders during fiscal 1998. Management is hopeful that
such orders will be received although no assurances can be given. The results of
operations for future periods are dependent upon the receipt and timing of
future orders and the success of management's growth strategy.
Cost of Revenue
The following table sets forth, for the six months ended January 31,
1998 and 1997 and for the three most recent fiscal years, cost of standard
product revenue as a percentage of standard product revenue, cost of product
development revenue as a percentage of product development revenue and cost of
operating revenue as a percentage of operating revenue.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
------------------------------------------------
STANDARD PRODUCT OPERATING
PRODUCT DEVELOPMENT REVENUE
-------- ----------- -------
<S> <C> <C> <C>
FOR THE SIX MONTHS ENDED JANUARY 31,
1998 71% 129% 82%
1997 50 89 63
FISCAL YEAR
1997 61% 80% 66%
1996 63 92 69
1995 50 66 56
</TABLE>
In the first half of fiscal 1998, cost of revenue increased as a
percentage of revenue compared to the same period in fiscal 1997 due primarily
to higher cost standard product revenue contracts in fiscal 1998 and also due to
higher than anticipated costs on the two Small Business Innovative Research
programs.
In fiscal 1997, cost of standard product revenue, cost of product
development revenue and overall cost of revenue decreased as a percentage of
related revenue compared to the previous fiscal year due primarily to economies
of scale resulting from the higher revenues in fiscal 1997 and more efficient
operations with a reduced work force.
In fiscal 1996, cost of standard product revenue and cost of product
development revenue increased as a percentage of related revenue compared to the
previous fiscal year due primarily to DEI operating significantly below its
capacity during the fiscal year, causing overhead rates to increase
substantially. Contributing to the high cost of
61
<PAGE> 67
revenue in fiscal 1996 were increases in DEI's provision for obsolete and excess
inventory caused by the reappraisal of excess inventory due to the recent low
level of contracts received for standard products.
The cost of revenue percentage for fiscal 1998 will be dependent upon
the timing and mix of future contracts.
Research and Development
% OF
(dollars in thousands) COST REVENUE
---- -------
SIX MONTHS ENDED JANUARY 31,
1998 $29 3%
1997 73 5
FISCAL YEAR
1997 $102 3%
1996 469 22
1995 586 16
Research and development expense declined in the first half of fiscal
1998 as compared to the same period one year earlier primarily due to Airborne
Digital Camera enhancements in the comparable period of fiscal 1997.
Research and development in fiscal 1997 decreased from the comparable
period in the prior year primarily since the majority of the ADC enhancements
were completed in fiscal 1996.
Contributing to the fiscal 1997 research and development expense were
costs associated with the improvement of DEI's current products and other areas
of research. The majority of DEI's investment in research and development in
fiscal 1996 was related to enhancements to the ADC developed in fiscal 1995. DEI
also shared costs in a number of customer funded product development projects
during fiscal 1997, 1996 and 1995 but did so to a lesser extent in fiscal 1997
and fiscal 1996 than in the preceding years. See Note G of Notes to DEI's
Consolidated Financial Statements.
Management's goal is to maintain research and development expense in
the near future at approximately the current levels, and then in the long-term
have research and development expense average approximately 5% of revenue so as
to continually improve its existing product line and develop new products that
are consistent with management's growth plan. Management realizes that from time
to time it may be required to invest more than 5% of revenues into research and
development to develop the products and services that DEI will require to meet
its customers' needs and to establish steady growth in its level of operations
and profits.
Selling and Administrative Expense
% OF
COST REVENUE
(dollars in thousands) ---- -------
SIX MONTHS ENDED JANUARY 31,
1998 $413 49%
1997 477 32
FISCAL YEAR
1997 $ 932 32%
1996 947 45
1995 1,473 41
Selling and administrative expense decreased in the first half of
fiscal 1998 compared to the same period in fiscal 1997, primarily due to agent
commissions paid in the comparable period of fiscal 1997.
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<PAGE> 68
Selling and administrative expense in absolute terms decreased slightly
in fiscal 1997 compared to fiscal 1996, due primarily to DEI's third quarter
staffing reductions which were offset by DEI's increased commissions on
international sales. The selling and administrative expense decreased as a
percentage of revenue due to the higher sales volume in fiscal 1997. Selling and
administrative expense in absolute terms decreased in fiscal 1996 compared to
fiscal 1995, primarily due to DEI's 1996 third quarter staffing reductions and
also due to nonrecurring marketing research expenses which were incurred in
fiscal 1995. The selling and administrative expense increased as a percentage of
revenue due to the lower sales volume in fiscal 1996.
Interest
Interest expense decreased in the first half of fiscal 1998
compared to the same period in fiscal 1997 due principally to DEI's reduced
borrowings.
Interest expense decreased over the last three fiscal years due
principally to DEI's reduced borrowings. Interest expense for fiscal 1998 will
be dependent upon future interest rates and the extent to which DEI utilizes its
line of credit during the year.
Provision (Credit) for Income Taxes
The credit for income taxes in fiscal 1997 results primarily from a
prior year refund related to a foreign sales corporation. DEI's recognition of
income tax benefit was again limited in fiscal 1997 due to the uncertainty of
realizing the net operating loss carry forward. See Note E of Notes to DEI's
Consolidated Financial Statements. The provision for income taxes in fiscal 1996
results from the increase in the valuation allowance for deferred taxes. Such
increase is attributable to the effect of the taxable losses during the three
most recent fiscal years on DEI's liquidity and the resulting uncertainty of
realizing the net operating loss carryforward. The fiscal 1996 provision
reverses a portion of the income tax benefit recognized in the fiscal 1995
provision.
LIQUIDITY AND SOURCES OF CAPITAL
DEI's primary sources of liquidity are funds from operations and
borrowings under a line of credit secured by substantially all of DEI's assets
including real estate. DEI's line of credit provides for borrowings of up to
$1,550,000 with availability subject to a formula, bearing interest at one and
one-half percent above the lending bank's prime rate. The formula permits
borrowing up to $950,000 based on the value of the real estate, with the
remaining available borrowings based on 50% of the value of certain receivables
specified in the line of credit agreement. As of January 31, 1998, DEI had an
outstanding balance of $490,000 under the line of credit, an additional $59,000
reserved for a standby letter of credit and additional borrowing availability of
$401,000.
DEI's mortgage indebtedness requires DEI to make monthly payments of
$3,685 for both principal and interest and to make a balloon payment on November
1, 2000. The mortgage bears interest at one and one-half percent over prime. DEI
has classified its total mortgage liability as current as the mortgage agreement
is cross-collateralized and cross-defaulted with the line of credit which is a
secured master demand note. See Note D of Notes to DEI's Consolidated Financial
Statements.
In the event the lending bank believes that the prospect of payment of
DEI's indebtedness under the line of credit is impaired, the lending bank is
permitted under the agreement governing the line of credit to declare such
indebtedness due and payable. The lending bank has indicated that it may limit
the amount which DEI is permitted to borrow under the line of credit in the
absence of continued improvement in DEI's business prospects or progress toward
the acquisition of a significant amount of equity capital. If DEI is unable to
borrow amounts necessary to fund its operations, its financial position would be
materially and adversely affected and DEI may have no choice but to cease
operations if other sources of capital are not available. Moreover, DEI must
increase its backlog during fiscal 1998 in order to generate sufficient cash
flow to sustain its operations.
63
<PAGE> 69
In order to provide additional working capital and retire current debt,
DEI is attempting to sell its building and lease back a portion of the facility
from the new owner. There can be no assurance that the building can be sold at a
price acceptable to DEI or that an acceptable lease-back agreement can be
negotiated. If DEI must relocate, management is confident that a suitable
facility can be found and that DEI's business will not be materially disrupted.
The sale of the building is expected to result in the termination of the
existing line of credit. Management believes that a new line of credit supported
by receivables and other assets of DEI can be negotiated with the current bank
lender or a substitute bank which will be adequate to support DEI's working
capital needs provided that DEI's backlog increases significantly over the
current level. DEI also can negotiate a line of credit secured by the
irrevocable letters of credit received on large orders from international
customers. However, any new line of credit is likely to permit substantially
less borrowing than the current line of credit. There can be no assurance that
DEI will be able to acquire a replacement line of credit at all or that the
level of borrowing permitted under any replacement line of credit will be
adequate for DEI's working capital needs.
DEI has entered into the Merger Agreement which, if consummated,
management believes will provide DEI with additional equity capital and related
technological and marketing capabilities and will have a positive effect on
DEI's short and long term liquidity. The closing of the Merger is subject to the
satisfaction or waiver of certain conditions contained therein. As a result,
there can be no assurance that the Merger will be consummated. See "The Merger
and Related Matters" and "The Merger Agreement."
Working capital decreased to a deficit of $88,000 at January 31, 1998
from a surplus of $268,000 at July 31, 1997 due primarily to the decreased
revenue and earnings for the first half. Working capital increased at July 31,
1997 from approximately $213,000 at July 31, 1996, due primarily to the
utilization of inventory parts in stock for orders received in fiscal 1997.
Funds from billed receivable collections and from customer deposits were used
for payments on the line of credit.
Cash used by operating activities was $392,000 during the first half of
fiscal 1998 as compared to cash provided of $556,000 in the first half of fiscal
1997, due primarily to the $211,000 increase in accounts receivable and the
$152,000 reduction in accounts payable and accrued expenses. Current liabilities
decreased in fiscal 1997 largely due to the payment of the line of credit. Cash
flow from operating activities was approximately $899,000 during fiscal 1997,
primarily due to the approximately $537,000 reduction in accounts receivable.
DEI expects continued investment during the remainder of fiscal 1998
for capital expenditures, primarily for equipment and software relating to the
DEI's growth plan. Due to its current financial position, DEI intends to reduce
internal research and development and to keep marketing and other administrative
costs to a minimum until its financial condition improves significantly.
The foregoing discussion and analysis contains a number of
"forward-looking statements," as that term is used in the Exchange Act, with
respect to DEI's expectations for future periods. Such statements are subject to
various risks and uncertainties, which are described in the foregoing discussion
and analysis and in "Risk Factors."
YEAR 2000
DEI is unable to assess whether the Year 2000 computing problems will
have a material impact on its business operations since it is still in the
process of investigating the problem with outside consultants.
ELECTION OF DEI DIRECTORS
NOMINEES
Five directors, constituting the entire Board of Directors of
DEI, will be elected at the DEI Annual Meeting, each to hold office until
the next annual meeting of DEI stockholders or until his successor is
elected and qualified. The
64
<PAGE> 70
individuals nominated by management for election to the DEI Board of Directors
at the DEI Annual Meeting are listed in the following table. Each of the
nominees is presently a director and has served as a director since first
elected as such.
THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY WILL VOTE FOR THE
ELECTION OF THE NOMINEES UNLESS DEI STOCKHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES. If any nominee at the time of election is unable to serve, or otherwise
is unavailable for election, and if other nominees are designated, the persons
named in such proxy will have discretionary authority to vote or refrain from
voting in accordance with their judgment on such other nominees. If any nominees
are substituted by the Board, the persons named in the accompanying form of
proxy intend to vote for such nominees. Management of DEI is not aware of the
existence of any circumstance which would render the nominees named hereunder
unavailable for election.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR APPOINTED
NAME AGE POSITIONS WITH THE COMPANY DIRECTOR
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John D. Sanders 59 Director and Chairman of the Board 1982
Thomas R. Ory 58 President and Chief Executive Officer and Director 1987
William S. Panschar 40 Director 1989
Philip H. Power 59 Director 1985
Charles G. Stanich 53 Vice President-Research and Development, Chief 1989
Operating Officer and Director
</TABLE>
Dr. Sanders serves as a business consultant to emerging technology
companies. He was Chairman and Chief Executive Officer of Tech News, Inc., a
news publisher, from 1988 to 1996, prior to its sale to The Washington Post
Company. In addition, Dr. Sanders has been a Registered Representative of
Wachtel & Co., Inc., a Washington D.C.-based stock brokerage firm, since
1968. Dr. Sanders serves on the boards of Hadron Inc., ITC Learning Corp.
and STR.
Mr. Ory, who was appointed President and Chief Executive Officer of DEI
in August 1987, joined DEI in 1972 as Director of its Applications Division,
served as Vice President-Marketing from 1979 to 1984, and as Executive Vice
President from 1985 to 1987.
Mr. Panschar is an insurance agent at The Equitable Life Assurance
Society of the United States, a life insurance and annuity company, and a
registered representative at EQ Financial Consultants, Inc., a company which
sells mutual funds and other various products, since June 1996. Prior to that he
was a Vice-President of National City Bank, Indiana from October 1993 to May
1996. Prior to taking the position at National City Bank, Mr. Panschar was the
Director-Corporate Development of The Alquin Group from 1991 to October 1993.
Prior to joining The Alquin Group, Mr. Panschar was employed by Avis
Enterprises, Inc. as Vice President-Mergers and Acquisitions from 1987 to 1990
and by Citicorp Industrial Credit Inc. from 1981 to 1987.
Mr. Power has served as Chairman of Hometown Communication Network,
Livonia, Michigan (formerly known as Suburban Communications Corp.), for
more than 20 years. Mr. Power currently serves on the board of Jacobson
Stores Inc.
Mr. Stanich, who was appointed Chief Operating Officer in 1987, joined
DEI in 1974 and served as Manager, Research and Development from 1979 to 1984,
and Vice President-Research and Development since 1984.
65
<PAGE> 71
CHANGES AND APPOINTMENTS TO DEI'S BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
DEI's Board of Directors currently consists of five members. If the
Merger is not consummated, the five nominees elected at the DEI Annual Meeting
will serve as DEI's Board of Directors until DEI's next annual stockholders
meeting. If the Merger is consummated, the number of directors on the Board of
Directors of DEI will increase to seven and Messrs. Panschar and Stanich will
resign. The following four individuals, each of whom is currently a director of
STR, will be appointed by the DEI Board of Directors in accordance with DEI's
Bylaws to fill the four vacancies: S. R. Perrino, S. Kent Rockwell, James Busey
and Charles Bernard. See "Information about STR -- Management" for a description
of the background of these individuals.
If the Merger is consummated, it is expected that the new Board of
Directors of DEI will appoint a new slate of executive officers which combines
the management of DEI and STR. The following table sets forth the slate of
executive officers expected to be appointed in such event. See "Information
about DEI -- Executive Officers of DEI" and "Information about STR --
Management" for a description of the background of these individuals.
<TABLE>
<CAPTION>
NAME EXPECTED POSITION AFTER MERGER CURRENT POSITION
- ---- ------------------------------ ----------------
<S> <C> <C>
S. R. Perrino Chief Executive Officer and President Chief Executive Officer and President of
STR
Robert Bower Chief Financial Officer and Treasurer Senior Vice President-Finance/CFO of STR
Donald Reiser Senior Vice President Senior Vice-President of STR
Thomas Ory Vice-President and President of Chief Executive Officer of DEI
Sensing and Imaging Division
</TABLE>
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of DEI has a standing Audit Committee and a
Executive Compensation/Stock Option Committee. During fiscal 1997, the DEI Board
met a total of four times. The Audit Committee and the Executive
Compensation/Stock Option Committee each met once in fiscal 1997. Each director
attended at least 75% of the meetings of the Board and the committees of which
he is a member during fiscal 1997.
The members of the Audit Committee are Messrs. Panschar, Power, and
Sanders. Generally, the Audit Committee selects the independent auditors,
reviews with the independent auditor the scope and results of the auditing
engagement and any non-audit services to be performed by the independent
auditors, examines the scope and results of DEI's procedures and the adequacy of
its system of internal accounting and financial controls, and evaluates the
independence of the independent auditors and their fees for services.
The members of the Executive Compensation/Stock Option Committee are
Messrs. Power and Sanders. The Executive Compensation/Stock Option Committee
reviews the performance of and recommends salaries and other compensation
arrangements for officers of DEI, develops bonus, pension and other compensation
plans for consideration by the DEI Board of Directors and performs such
functions as may be delegated to it under the provisions of any bonus, stock
option, pension or other compensation plan adopted by DEI.
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<PAGE> 72
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table provides a summary of compensation paid or accrued
by DEI and its subsidiaries during fiscal 1997, 1996 and 1995 to or on behalf of
DEI's Chief Executive Officer and Chief Operating Officer (the "DEI Named
Officers"). None of DEI's other executive officers earned more than $100,000 in
salary and bonus during fiscal 1997 for services rendered to DEI and its
subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL SECURITIES
NAME AND PRINCIPAL FISCAL COMPENSATION UNDERLYING ALL OTHER
POSITION YEAR SALARY OPTIONS/SARS COMPENSATION (1)
-------- ---- ------ ------------ -----------------
<S> <C> <C> <C> <C>
Thomas R. Ory 1997 $148,000 20,000 $25,865
President and CEO 1996 $148,000 -0- $26,501
1995 $148,000 -0- $28,824
Charles G. Stanich 1997 $130,000 20,000 $24,653
Vice President-Research 1996 $130,000 -0- $25,406
and Development 1995 $130,000 -0- $26,439
</TABLE>
(1) Detail of amounts reported in the "All Other Compensation" column is
provided in the table below.
<TABLE>
<CAPTION>
DIRECTOR MEDICAL REIMBURSE- IMPUTED INTEREST ON PENSION PLAN
OFFICER'S NAME FEES MENT & RELATED TAX INTEREST-FREE LOAN CONTRIBUTION
-------------- ---------- ------------------- ------------------ ------------
<S> <C> <C> <C> <C>
Thomas R. Ory $4,800 $2,630 $50 $18,385
Charles G. Stanich $4,500 $4,125 $0 $16,028
</TABLE>
OPTIONS
The following table sets forth information concerning stock option
grants during fiscal 1997 to the DEI Named Officers. Such options were not
granted pursuant to any of DEI's plans.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) (a) FISCAL YEAR ($/SHARE) DATE
---- ------- ----------- --------- ----------
<S> <C> <C> <C> <C>
T. Ory 20,000 35.2% $2.25 12/10/06
C. Stanich 20,000 35.2% $2.25 12/10/06
</TABLE>
(a) 50% of the options became exercisable immediately upon grant and the
remainder become exercisable on the first anniversary of the grant
date.
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<PAGE> 73
The following table provides information concerning unexercised stock
options held as of the end of fiscal 1997 by the DEI Named Officers. There were
no options exercised by the DEI Named Officers during fiscal year 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END
--------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(a) UNEXERCISABLE
---- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
T. Ory 25,000 10,000 $10,000 -0-
C. Stanich 23,000 10,000 $11,500 -0-
</TABLE>
(a) The value of unexercised in-the-money options was calculated using the
last sale price of DEI's Common Stock at July 31, 1997.
TERMINATION OF EMPLOYMENT
Each of the DEI Named Officers is a party to a Senior Officer Severance
Agreement that would require DEI to pay each such officer an amount equal to one
and one-half times each officer's highest annual W-2 compensation from DEI
during the three calendar years immediately preceding each officer's termination
of employment if such termination of employment meets one of several criteria.
In general, such amounts would be payable upon termination in anticipation of,
or after, a change in control or upon resignation following a reduction in such
officer's salary or other compensation, any diminution of the officer's
authority or duties or a significant change in the nature and scope of the
officer's duties, any change in the officer's status or title (other than a bona
fide promotion) or any required relocation of the officer's residence should any
event occur after a change in control or within six months prior to a change in
control. The officer would also be entitled to continuation of coverage under
DEI benefit plans for up to 18 months and to outplacement services. The cash
payment required under the agreement may be paid in a lump sum or in monthly
installments over an 18 month period, depending upon the circumstances of the
change in control. These agreements will be terminated and replaced with the
employment agreements signed in connection with the Merger Agreement if the
Merger is consummated. See "The Employment Agreements."
COMPENSATION OF DIRECTORS
Directors receive $900 per quarter with an additional payment of $300
for each Board or Committee meeting attended, and are reimbursed for travel
expenses incurred in connection with their attendance at Board and Committee
meetings. In addition, Dr. Sanders received payments of $1,500 per month for
consulting services from DEI from January 1997 through December 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires DEI's officers and
directors, and persons who own more than 10% of a registered class of DEI's
equity securities, to file reports of ownership and changes in ownership with
the Commission. Officers and directors and greater than 10% shareholders are
required by Commission regulation to furnish DEI with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it since August 1, 1996, or written representations from certain
reporting persons that no Forms 5 were required for those persons, DEI believes
that all Section 16(a) filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
PRINCIPAL STOCKHOLDERS OF DEI AND SECURITY OWNERSHIP OF DEI MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of DEI Common Stock, as of April 20, 1998, by
each person who is known by DEI to have been the beneficial owner of 5%
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<PAGE> 74
or more of the shares of DEI Common Stock outstanding as of such date, by each
director, director-nominee, officer named in the table under "Election of
Directors -- Compensation of Executive Officers -- Summary Compensation Table"
and by all directors and executive officers as a group. The table also sets
forth such information assuming the Merger were consummated on such date. Unless
otherwise noted, each stockholder exercises sole voting and investment power
with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME OF NUMBER OF PERCENT OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER SHARES(1) CLASS(2) FOLLOWING THE MERGER(1) CLASS(2)
- ----------------------- --------- ---------- ----------------------- ----------
<S> <C> <C> <C> <C>
Thomas R. Ory 66,230(3) 11.6 66,230 1.7
Charles G. Stanich 47,226(4) 8.4 47,226 1.2
John D. Sanders 28,500(5) 5.3 69,460(7) 1.7
William S. Panschar 2,760 * 2,760 *
Philip H. Power 15,150 2.8 25,470(8) *
All directors and executive
officers as a group (6 persons) 165,616(6) 27.1 216,896(9) 5.3
</TABLE>
* Less than one percent.
(1) The column sets forth shares of DEI Common Stock which are deemed to be
"beneficially owned" by the persons named in the table under Rule 13d-3
of the Commission, including shares of DEI Common Stock that may be
acquired upon the exercise of stock options or warrants that are
currently exercisable or become exercisable within 60 days after
April 20, 1998 as follows: Mr. Ory -- 35,000 shares; Mr. Stanich --
30,000 shares; Messrs. Sanders, Power and Panschar -- 2,250 shares
each; and all directors and executive officers as a group -- 76,750
shares.
(2) For purposes of calculating the percentage of DEI Common Stock
beneficially owned, the shares issuable to such person upon exercise of
stock options or warrants that are currently exercisable or become
exercisable within the next 60 days are considered outstanding.
(3) Includes 24,565 shares with respect to which Mr. Ory shares voting and
investment power with his spouse. Mr. Ory's address is P.O. Box 1869,
Ann Arbor, Michigan 48106.
(4) Includes 3,526 and 2,700 shares with respect to which Mr. Stanich
shares voting and investment power with his wife and mother,
respectively. Mr. Stanich's address is P.O. Box 1869, Ann Arbor,
Michigan 48106.
(5) Includes 550 shares owned by Dr. Sanders' wife. Dr. Sanders'
address is P.O. Box 7262, Arlington, Virginia 22207.
(6) Includes the shares described in notes (1), (3), (4) and (5).
(7) Dr. Sanders owns 5,876 shares of STR Common Stock which will convert
into 15,160 shares of DEI Common Stock. In addition to the shares
disclosed in note (1) which may be acquired upon exercise of stock
options, Dr. Sanders will have an option to purchase an additional
25,800 shares following the Merger due to his ownership of a previously
granted option to purchase 10,000 STR shares which will be converted at
the Effective Time pursuant to the Merger Agreement.
(8) Mr. Power owns 4,000 shares of STR Common Stock which will convert
into 10,320 shares of DEI Common Stock.
(9) Includes the shares described in notes (1), (3), (4), (5), (7) and (8).
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<PAGE> 75
INFORMATION ABOUT STR
GENERAL DESCRIPTION OF BUSINESS
STR was started in 1972 by its principal founder, S. R. Perrino. The
initial focus of the business was to provide field service support to the United
States Navy for electronic warfare equipment and the development of components
for the missile industry. As STR's capability expanded into the development of
microprocessor-based systems, the business base was expanded to support
customers requiring state-of-the-art, cost-effective, innovative solutions.
There is now a broad capability for the development of equipment from the audio
spectrum through microwave frequencies, in addition to real time signal
processing and the development of antennas and subsystems.
PRODUCTS
STR designs, develops, manufactures and markets intelligence sensory
and electronic reconnaissance systems for defense and commercial markets. STR is
a leader in high probability of intercept technology used to detect short
duration radar signals in a crowded signal environment, which is of great
importance in modern electronic warfare. It also performs studies and systems
engineering contracts related to electronic reconnaissance and signal processing
technology. STR's high probability of intercept systems are employed on military
platforms such as ships, submarines, patrol aircraft, and ground installations
for the interception, analysis and identification of radar signals.
Communications reconnaissance systems are employed in aircraft and ground
installations for the acquisition of communications signals of tactical military
interest. STR's reconnaissance systems are sold to the U.S. Government, prime
contractors and foreign governments. STR's studies and systems engineering
activities are performed for agencies of the U.S. Government in support of the
procurement of major surveillance and signal processing systems used by the
intelligence community. A substantial number of STR's contracts require STR to
have both facility and personnel clearances with the U.S.
Government.
Modern military operations have become substantially dependent upon the
use of electromagnetic signals in such critical battlefield functions as target
detection, weapons guidance, communications and intelligence. This has led, in
turn, to the emergence of increasingly sophisticated and rapidly evolving
electronic support measures ("ESM") and electronic countermeasures, which
broadly define electronic warfare. For example, the reliance of most modern
offensive weapons systems upon radar targeting and guidance has prompted the
development of defensive reconnaissance systems which rapidly and reliably
detect and identify hostile weapons and weapons platforms by means of their
radar emissions. Interception and interpretation of potentially hostile
communications signals has assumed similar importance in modern combat. In
peacetime, electronic reconnaissance information is of great strategic value in
assessing the strength and technical capabilities of potentially unfriendly
forces.
Reconnaissance of electromagnetic signals involves monitoring the
signal environment to detect signals of tactical or strategic interest. The
analysis of these signals permits the determination of such factors as the
direction of arrival, the location and movement of the equipment emitting the
signal, the identity of such equipment, and the type of platform on which it is
located. Signal characteristics may reveal hostile intent; for example, if
search radar signals are superseded by those of a high-pulse-rate fire control
radar, it may mean that a missile has been launched.
Communications signal reconnaissance provides important information to
military commanders as to the types of weapons platforms in the area, the
location of command centers, and data for targeting and directing weapons
against specific threats. With the proliferation of sophisticated communications
equipment throughout the world, the reconnaissance of both military
communications signals and commercial communications signals has become
increasingly important and difficult.
The communications signal environment is characterized by the vast
number of signals that are present both in peacetime and wartime, including
signals from adversaries, from friendly forces and from commercial services such
as radio, television and commercial communications. The profusion of signals
competing for the same portion of the
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electromagnetic spectrum creates a significant technical problem for
communications reconnaissance equipment to sort potential enemy signals from the
complex background. The problem is compounded by the increasing use of masking
techniques such as frequency hopping, in which the frequency of the transmitter
is rapidly varied; spectrum spreading, in which a narrow band signal may be
spread over a large portion of the spectrum; and short duration transmission,
which in a tactical setting might consist of nothing more than several brief
clicks of a microphone switch. Modern commercial communication systems are
available worldwide and can be obtained for a very small investment. These
worldwide systems employ sophisticated encryption techniques in addition to
complex digital transmission formats. Terrorists and others engaged in illegal
activities are using commercial communications today for most of their
operations. Virtually every country today has access to the sophisticated
technology which can create these masked transmissions.
STR has addressed these challenges through the development of
sophisticated new receiver technology designed to create a high probability of
signal acquisition and by use of advanced digital processing techniques and
proprietary software to handle the vast amounts of complex data associated with
communications reconnaissance.
The technical requirements and performance characteristics of both
radar and communications reconnaissance systems vary considerably depending upon
the particular tactical or strategic applications involved. In a tactical combat
situation, the velocity of modern weapons, the use of deceptive hardware and the
reconnaissance of signals from potentially hostile forces or weapons systems
require highly sensitive reception as well as accuracy of signal parameter
measurement. STR has developed technologies for both tactical and strategic
settings and a range of product designs capable of meeting the requirements of a
variety of complex applications.
RADAR THREAT WARNING SYSTEMS
Radar is used by military forces for target detection, weapon guidance
and navigation. It is also being used by terrorist groups and others engaged in
illegal activities for navigation. Radar typically operates in the microwave
portion of the electromagnetic spectrum at frequencies between 500 MHz and 40
GHz. A radar signal strikes a potential target and is reflected back to the
transmitter where it can provide information as to the targets bearing, range,
course, speed and in some cases, size.
A radar threat warning system can intercept a transmitted radar signal
which can be then analyzed for its intelligence value. Radar signals exhibit a
variety of characteristics such as frequency, direction of arrival, pulse
duration, pulse repetition frequency ("PRF"), and antenna rotation rate, all of
which vary with the type of radar emitting the signal. Once these
characteristics have been determined, they can be compared to parameters of
radars known to be associated with specific platforms and identification of the
emitter and its platform may also be possible.
A typical radar threat warning system consists of a specialized antenna
which is configured either to meet the platform or specific requirements of the
user, receivers, signal processors, and display and interface equipment whose
performance characteristics involve important trade-offs in system design.
Antenna design is critical to the performance of a system. Antennas convert the
incoming radar signals into electrical signals which the receiver can detect and
pass through a signal processor. The specific antenna design will, in the
majority of the cases, be directly applicable to the sensitivity of the system
as well as to the accuracy of the direction of arrival of the intercepted
signal. STR has the ability to design specific antennas to meet the applications
and requirements of its customers.
Receivers can be classified as either narrowband or broadband. A
receiver which is designed to intercept a narrow portion of the frequency
spectrum at any instant may be capable of detecting very weak signals in that
portion of the spectrum at the expense of missing important signals in other
portions of the spectrum. Conversely, a broadband receiver, though not as
sensitive, can simultaneously monitor a large portion of the spectrum. STR is
well known for its applications of one type of broadband receiver design called
the Digital Frequency Measurement Receiver. This equipment has the capability of
detecting and measuring the frequency of each incoming radar pulse over its
entire operating band thus resulting in a high probability of interception.
The advantages of this type of receiver include the
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simultaneous surveillance of all radars in a broad spectrum, the ability to
detect frequency hopping radars, and the assurance of intercepting a radar which
transmits for only a short period of time. The signal processor, using the
detected signal and deinterleaving all of the detailed parameters of that
intercepted signal, manipulates the data to compare these parameters with known
radars whose characteristics can be stored in a library or database. The signal
processor can then make assessments as to the host platform for the radar
emitting the signal, the potential threat to friendly forces and in some cases,
the specific intentions of an enemy weapons system. The challenge is to process
vast amounts of data from all directions over a broad frequency spectrum. In
addition, signal parameters have become extremely complex, for example, in some
cases parameters such as frequency and PRF that change from pulse to pulse can
present increasingly difficult problems for analysis and storing. STR believes
that as a result of major research and development efforts, particularly in
advanced distributed microprocessor applications, it is at the forefront of
signal processing technology in terms of its ability to rapidly handle complex
environments of exotic signals.
Display and interface equipment processes the data to the decision
maker. The important function of this step is to present only the relevant
information from the total signal environment but also allow all the detailed
information to be available for later analysis. STR's experience and talent in
understanding the operational use of reconnaissance data is essential in the
proper design of display and interface equipment.
Threat warning systems produced by STR typically sell from between
$500,000 to $1,500,000 depending upon the system configuration and complexity.
STR can configure its threat warning systems for small patrol boats as well as
large aircraft carriers and has configured systems specifically for road
vehicles. STR is presently investigating applications of its threat warning
technology for airborne applications.
STR frequently provides support in the forms of maintenance service and
spare parts for its installed systems. These activities can continue for the
life of a system and STR expects this aspect of its business to increase as the
installed product base expands.
COMMUNICATIONS RECONNAISSANCE SYSTEMS
Today, both military and commercial communications systems have been
designed to make maximum utilization of the assigned available bandwidth to
ensure growth capacity both for new customers and the ability to provide added
features. The communication transmission techniques are only limited by the
imagination of the providers. State-of-the-art of digital technology allows the
use of extremely sophisticated modulation techniques to improve performance
while still reducing cost. Worldwide commercial communications systems are now
becoming the systems of choice for terrorists and drug runners. Many third world
countries are using commercial communications instead of developing special
purpose military communication control centers. Almost all commercial
communication systems are now employing sophisticated encryption for their
transmissions. The ability to monitor the utilized spectrum and rapidly reuse
frequencies as they become available are among the techniques employed to better
utilize the existing bandwidth.
Previously, most communications reconnaissance systems would scan the
frequencies of interest, searching for signals of interest and when one was
detected, would derive more detail information from the signal. These techniques
are no longer available for modern communications systems. It is imperative to
monitor the entire frequency bands of interest and be able to instantly
determine the activity and also derive the information necessary to detect and
analyze the signal. STR has been developing intercept technology which is both
hardware and software based specifically aimed at the existing deployed global
communications systems as well as emerging satellite and land based systems
planned for future insertion into the marketplace.
STR has been providing commercial communications intercept equipment
which range in price from $175,000 to $2,000,000, depending upon the system and
applications. STR has also been investing in broadband digital receiver
technology and real time signal processing as a means to sort through the
crowded environment to detect, identify and analyze the signals of interest.
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RESEARCH AND DEVELOPMENT
STR believes that continued success of STR depends, in a large part, on
its ability to develop and apply new technology. Funding for these activities
comes both from internally sponsored research and development as well is from
customer funded contracts. Funded internal research and development over the
past three years, exclusive of cost reimbursed from customers, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Internal research and development $ 517 $ 817 $ 683
Customer funded research and development 6,318 6,352 4,491
------ ------- -----
Total $6,835 $ 7,169 5,174
====== ======= ======
</TABLE>
Current funded programs include development of (1) a digital receiver,
which is software controllable to respond to the new digital communications
formats, (2) advanced signal processing techniques to perform radar signal
sorting and analysis techniques for examination of exotic radar transmitters,
(3) advanced digital processing techniques to perform demodulation and filtering
of communications signals and (4) phase coherent synthesizer techniques for the
generation of broad band signals.
MARKETING AND CUSTOMERS
Marketing of STR's products and services is conducted primarily by
members of the technical staff assisted by a relatively small marketing staff
located in Newington, Virginia who concentrate on developing an understanding of
the customer's technical requirements and maintaining close contact with the
customers. STR has opened an office in London, England, with an effort to
concentrate marketing skills on the European marketplace. STR also utilizes
sales representatives in various countries who work closely with STR's sales
force.
Export sales of the threat warning systems and commercial communication
intercept systems must be approved by the U.S. Department of State which limits
the markets for such products and may result in delay or possible cancellation
of an order. Any tightening of restrictions on exports of military hardware
could adversely affect STR's revenue from foreign customers.
During the last fiscal year approximately 95% of STR's revenues were
attributable to contracts with numerous offices and agencies of the U.S.
Government. Most of these contracts were prime contracts. STR has a full mixture
of contract types including cost plus, fixed fee, cost plus incentive fee, time
and material and fixed price contracts with the U.S. Government. The fixed price
contracts are not subject to adjustment by reason of costs incurred in the
performance of the contract. With this type of contract STR assumes the risk
that it will be able to perform at a cost below the fixed price except for costs
incurred because of contract changes ordered by the customer. STR is subject to
various statutes and regulations governing defense contracts, which carry
substantial penalty provisions including denial of future contracts in the event
STR is found to have abused any of these regulations. STR carefully monitors all
of its contracts and contractual efforts to minimize the possibility of any
abuses associated with its government contracts. STR has experienced minimal
audit adjustments over the past ten years. The Defense Contract Audit Agency
("DCAA") has completed its audit of STR contracts through the fiscal year ended
September 30, 1996.
PATENTS
STR holds one patent and has applied for three others. STR believes
that the ownership of patents is not a significant factor in its business and
that its success depends primarily on innovative skills, technical competence,
and the ability to rapidly adapt to new and emerging requirements from its
customers. None of STR's revenue during the last three fiscal years is
attributable to patented technologies. Therefore, the loss of patent protection
does not constitute a material risk to STR. STR has registered no trademarks.
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COMPETITION
There is substantial competition in both the domestic and foreign
threat warning and communications intercept business. Competitors for U.S.
Government contracts include companies such as Raytheon Company, Lockheed-Martin
Corporation, Litton Industries, Inc., Condor Systems, Inc., and others. The size
and reputation of these companies can give them a significant advantage in
competing for contracts. STR competes in those market niches where it has
typically both a technological and cost advantage. In the foreign market, a
number of overseas companies are competitors, such as Racal Communications (UK),
Electronica (Italy), Thompson-CFS and Dassault Electronique (France). These
companies are larger and better known than STR and, in some cases, they have an
advantage in their home countries. Nevertheless, STR believes it is one of the
top five suppliers of threat warning systems to the U.S. Government and has an
opportunity to compete favorably in the foreign marketplace.
The principal competitive factors in the threat warning marketplace are
technical performance, reliability, experience and installation as well as
operation and price. Based on a combination of these factors, STR believes that
it competes very favorably in its markets. STR's most important competitive
attributes are its emphasis on technical superiority and a willingness and
capability to modify its products to meet customer specific needs. Once a
particular supplier's products have been selected for incorporation in a
military electronic system, further competition by other vendors during the life
cycle of the program is usually very limited.
BACKLOG
At December 31, 1997, STR had a funded backlog of $15,900,000 compared
to a funded backlog of $15,000,000 at December 31, 1996. A significant part of
STR's business is a short term effort which is typically transacted in a six to
nine month period. Programs are many times funded in phases with the next phase
not being funded until the prior phase is nearing completion. Multi-year funded
contracts are generally related to multi-year production efforts.
In addition, at December 31, 1997, STR has unfunded backlog of
$6,000,000 and government options outstanding of $936,000, which it expects the
U.S. Government to exercise and fund in accordance with the terms of the
respective contracts. In addition, there are programs on which STR, based on
prior experience, expects the U.S. Government to negotiate continuing
contractual coverage.
GOVERNMENT CONTRACTS
STR does business with the U.S. Government through various types of
prime government contracts including firm fixed price, cost plus fixed fee, cost
plus incentive or award fee, time and material and others. Certain of the fixed
price contracts have provisions which provide for progress payments. STR also
has similar U.S. Government subcontracts. Many of the contracts require facility
and personal security clearances which STR has the capability to provide. STR's
contracts are obtained both by competitive bid and by sole source negotiation
where STR's technological and administrative capabilities provide the basis for
such an award.
EMPLOYEES
At December 31, 1997, STR employed 162 persons. Of these employees, 3
are executive officers, 6 are non-executive officers, 54 were engaged in
engineering, 50 in technical support, 32 in administrative, and 17 in clerical.
Many of STR's employees are highly skilled, with advanced degrees. STR's
continued success depends upon its ability to continue to attract and retain
highly skilled employees. STR has experienced very low turnover of its employees
and key managers and executives. STR has never had a work stoppage, and none of
its employees are represented by a labor organization. STR considers its
employee relations to be good.
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PROPERTIES
STR's owned and leased facilities are suitable for their respective
operations. Each facility is well maintained and capable of supporting higher
levels of revenue. The table below sets forth certain information about STR's
principal facilities.
<TABLE>
<CAPTION>
ADDRESS SQUARE FEET OWNED OR LEASED DESCRIPTION PRINCIPAL ACTIVITY
- ------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
8419 Terminal Road 67,000 Leased Two 1-story and Engineering/
Newington, VA 22122 one partial Manufacturing/
2-story adjacent Administration
block.
Building is in an
industrial park
5440 Cherokee Avenue 15,000 Leased Partial occupancy Engineering
Suite 200 of 2-story brick
Alexandria, VA 22312 building. In an
office park area
1259 Courthouse Road 1,500 Leased 2-story brick Software
Suite 202 office condo development
Stafford, VA 22554
</TABLE>
STR's principal facility in Newington is equipped with equipment used
for the design, development and manufacture of its products. Facilities include
Sensitive Compartmented Information Facility ("ASCIF"), anechoic chamber, secure
test areas, environmental equipment, antennas, as well as general purpose
equipment required to manufacture and test its products.
MARKET PRICE AND DIVIDEND INFORMATION
As of April 20, 1998, STR had 47 stockholders of record and 194
beneficial holders of its shares. There is no established public trading market
for the STR Common Stock. No dividends have been paid on STR Common Stock during
the last two fiscal years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING CYCLE
In accordance with industry practice, STR classifies as current assets
amounts relating to long-term contracts which may have terms extending beyond
one year but are expected to be realized during the normal operating cycle of
STR. The liabilities in the accompanying balance sheets which have been
classified as current liabilities are those expected to be satisfied by the use
of assets classified as current assets. At September 30, 1997, substantially all
contracts will be completed within the next twelve months. Therefore,
substantially all current assets and current liabilities are expected to be
liquidated in the next twelve months.
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RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 Compared to Three Months Ended December
31, 1996
The following table sets forth, for the periods indicated, the
percentage relationship of certain items to total revenue for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1996
---- ----
$ % $ %
--- --- ---- ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue $5,837 100.0% $5,606 100.0%
Costs of revenues 5,135 88.0 4,908 87.5
General and administrative
expenses 710 12.2 651 11.6
Interest expense 103 1.8 74 1.3
------ ----- ------ -----
Net income (loss) (69) (1.2) (18) (0.3)
</TABLE>
Revenue for the three months ended December 31, 1997, was $5,837,376
compared to $5,606,100 for the three months ended December 31, 1996, resulting
in a $231,276 or 4% increase. The increase was primarily due to increased
performance under government contracts for the three months ended December 31,
1997 compared to the three months ended December 31, 1996.
Cost of revenues increased $226,636 from $4,908,274 to $5,134,910, a 5%
increase. Cost of revenues as a percent of sales increased from 87.5% to 88.0%.
The change was the result of increased production activity and performance under
government contracts, coupled with a change in the mix of contracts in process.
General and administrative expenses increased from $651,297 to
$710,076, a $58,779 or 9% increase. The increase was primarily the result of
increased research and development activity in the first quarter of fiscal 1998.
Interest expense of $74,461 for the three months ended December 31,
1996 increased 39% to $103,143 for the three months ended December 31, 1997 as
additional working capital was required to support the continued growth.
Interest as a percent of revenues increased from 1.3% to 1.8%.
The income tax benefit increase was due to the increased loss and
an effective rate change from 36% to 38%.
Net income decreased from a loss of $17,932 to a loss of $68,753,
with net income as a percentage of revenue decreasing from (0.3%) to (1.2%).
1997 Compared to 1996
The following table sets forth, for the periods indicated, the
percentage relationship of certain items to total revenue for the periods
indicated.
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<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1997 1996 1995
---- ---- ----
$ % $ % $ %
------- ------- ------- ------- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue $23,953 100.0% $21,655 100.0% $16,562 100.0%
Costs of revenues 20,762 86.7 18,607 85.9 13,733 82.9
General and administrative
expenses 2,654 11.1 2,343 10.8 2,331 14.1
Interest expense 345 1.4 232 1.1 91 0.5
Income tax 72 0.3 145 0.7 90 0.5
Net income 120 0.5 327 1.5 317 1.9
</TABLE>
Revenue increased by 10.6% to $23,953,070 in the fiscal year ended
September 30, 1997, from $21,654,578 in the fiscal year ended September 30,
1996. The primary reason for such increase was due to $1.3 million of first time
international sales and the award of a new manufacturing contract which
accounted for an increase in revenue of $1.6 million. These revenue gains were
offset by a $1.4 million decrease which STR sustained in its fiscal year ended
September 30, 1997 under an ESM contract.
Cost of revenues as a percentage of revenue increased by 0.8% to 86.7%
in the fiscal year ended September 30, 1997 compared to 85.9% in the prior
fiscal year, thereby reducing STR's gross profit margin to 13.3% from 14.1% in
the prior year. The primary reason for this reduction in gross profit margin was
the losses STR sustained in two contracts of approximately $200,000 each and
losses sustained in starting up STR's international business. These losses were
offset in part, however, by better than anticipated margins under an ESM
contract.
The decreased gross margin trend over the three year period is the
result of contract losses on two international contracts with the government of
Turkey, two loss contracts for palmtop computers and a $4.0 million production
contract with a bid at a 10% gross margin. The loss on the international
contracts was the result of underestimated costs as well as unplanned technical
problems. The palmtop computer losses were the result of development costs
exceeding the cost targets. Management expects that margins will improve as a
result of the absence of these loss contracts and since the production contract
with the low margin has been completed and similar contracts are not
anticipated.
For its fiscal year ended in 1997, STR's general and administrative
expenses also increased by $311,194 to 11.1% of revenue compared to 10.8% of
revenue in the prior fiscal year. This increase primarily resulted from the
addition of management personnel and participation in two international trade
shows.
STR's interest expense also increased by $112,677 to $345,086 in the
fiscal year ended September 30, 1997 from $232,409 in the prior fiscal year or
to 1.4% of revenue in 1997 compared to 1.1% of revenue in 1996. This increase
resulted primarily from several contracts undertaken on a shipped product basis
with no progress payments, thereby resulting in STR having to increase its
borrowings under its line of credit to obtain working capital. In addition, the
declining revenue generated under a major contract from which prompt payment was
historically made also caused STR to increase its reliance on its line of credit
thereby increasing its interest expense.
Notwithstanding the growth in revenue, because STR's cost of revenues,
selling, general and administrative expenses and interest expense expressed as a
percentage of revenue were increasing, STR's net income after taxes declined to
$119,880 for the fiscal year ended September 30, 1997 compared to $326,655 in
the prior year or by 63.3%. As a percentage of revenue for 1997, STR's net
income percentage was 0.5% compared to 1.5% in the prior fiscal year.
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1996 Compared to 1995
For the fiscal year ended September 30, 1995, STR generated $21,654,578
in revenue, a $5,092,738 increase or 31%, compared to $16,561,840 in the prior
year. The increase principally resulted from increased activities under several
contracts along with obtaining additional contracts.
Costs of revenues as a percentage of revenue, however, increased by 3%
from 82.9% in the fiscal year 1995 to 85.9% in fiscal 1996. In 1996, STR was
able, until the end of the fiscal year, to avoid any material increase in its
general and administrative expenses associated with the revenue increase.
Therefore, as a percentage of revenue, these expenses decreased to 10.8% from
14.1%.
The growth in revenue required an increase in working capital. STR
primarily relied upon its line of credit for this purpose. Therefore, STR's
interest expense increased by $141,703 from $90,706 in 1995 to $232,409 in 1996,
or by 156.2%.
For 1996, net income increased to $326,655 from $317,032 in the prior
fiscal year. As a percentage of revenue, STR's net income in 1996 decreased to
1.5% from 1.9% in the prior year. In part, this reduction was caused by an
increase in the effective tax rate STR incurred in 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 1997 and the quarter ended
December 31, 1997, net cash used in operating activities was $906,620 and
$252,969, respectively. This negative cash flow from operations was primarily
due to an increase in accounts receivable resulting from a slow down in cash
collections from customers as a result of a change in the mix of STR's
contracts. STR has recently secured several international contracts and secured
other contracts which do not provide for significant progress payments unlike
STR's historical cost plus contracts. These contracts, coupled with STR's
overall increase in contract volume and revenue growth, has negatively impacted
cash flow. This increase in accounts receivable was offset by an increase in
accounts payable as STR has negotiated extended credit terms with many of its
vendors in order to generate the working capital required to operate STR's
business.
STR's growth has also required investments in test equipment and
computer networks. Capital expenditures of $462,211 for the fiscal year ended
September 30, 1997 exceeded depreciation expense of $359,679 by $102,532.
Capital expenditures for fiscal 1998 are planned to exceed depreciation by a
similar amount. STR has one significant expenditure planned for fiscal 1998 for
improving the capability of the indoor antenna range in the approximate amount
of $150,000.
STR continues to rely on its line of credit as a means of providing
working capital. During the fiscal year ended September 30, 1997 and the quarter
ended December 31, 1997, net proceeds provided under the line of credit were
$1,583,600 and $297,523, respectively. STR anticipates it will, from time to
time, continue to rely upon its $4 million revolving bank line of credit for
obtaining working capital. This line of credit is scheduled to remain in effect
until June 30, 1998. STR intends to obtain a renewal or extension of the line of
credit after this date. Interest is charged on advances made under this line at
the bank's prime rate (8.5% as of January 31, 1998) plus 1.5%. Advances to STR
under this credit facility are limited by an availability formula based upon
accounts receivable. STR has the right to borrow up to 90% against government
receivables, 80% against non-government receivables and 50% against unbilled
governmental receivables up to a maximum of $700,000. These provisions permitted
borrowings of up to $4.5 million at December 31, 1997 and STR had outstanding
borrowings of $4.2 million under the line of credit on such date. STR's accounts
receivable, inventory and equipment secure the STR lines of credit. STR also
maintains a separate $750,000 line of credit for financing bid bonds.
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The line of credit also contains various covenants relating to dividend
restrictions, working capital, net worth, earnings and debt-to-equity ratios.
STR was not in compliance with the net worth and the debt-to-equity covenants at
September 30, 1997. In December 1997, the events of non-compliance were waived
by the bank for September 30, 1997, and the covenants were amended. Management
anticipates that it will be able to comply with these amended covenants through
the term of the agreement.
The growth in STR's revenues over the past three years coupled with
modest levels of profits has caused STR to increase its reliance on its line of
credit and negotiate expanded and extended credit terms with many of its vendors
in order to generate the working capital required to operate STR's business. On
January 30, 1998, STR completed a $3,783,000 private placement. The proceeds
from this placement enabled STR to reduce its outstanding balance on its line of
credit and accelerate its vendor payments. STR anticipates the capital raised
from the private placement will reduce STR's interest expense and provide STR
with more favorable pricing from its vendors.
STR believes that its internally generated funds coupled with advances
under its lines of credit will provide STR with sufficient working capital for
the short term future inclusive of any reasonable levels of working capital
which DEI requires for its business. STR may pursue additional or replacement
financing over the long term. STR currently believes that such debt will be
available at current market rates.
After the consummation of the Merger, the companies anticipate an
estimated pre-tax restructuring charge of approximately $1,000,000 ($620,000,
net of taxes). The charge is expected to relate to costs associated with
reengineering the combined companies' processes, policies and procedures. Costs
are expected to be incurred for external consultants, for personnel terminations
and for relocation and moving. Other costs are expected to be incurred to
realign products, services and facilities around the combined companies' core
businesses. It is anticipated that the restructuring will commence shortly after
the Merger.
YEAR 2000
STR's management and financial contract system utilizes software
designed, developed and supported by Breuer and Company ("Breuer"). Breuer has
informed STR that the system is not affected by the "Year 2000" problem. STR
management anticipates that any costs incurred to remediate any "Year 2000"
problem will not be material.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 129, "Disclosure of Information about Capital Structure," for
fiscal years beginning after December 15, 1997. The provisions of SFAS No. 129
established standards for disclosing information about an entity's capital
structure. STR believes that the adoption of this standard will not have a
material effect on STR's current disclosure requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," for fiscal years beginning after December 15, 1997. The
provisions of SFAS No. 130 establish standards for reporting and display of
comprehensive income and its components in the financial statements. This
statement requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in the financial
statements and displayed with the same prominence as other financial statements.
The provisions of SFAS No. 131 establish standards for the way that enterprises
report information about operating segments in annual financial statements and
require that selected information about operating segments in interim financial
statements be reported. It also establishes standards for related disclosure
about products and services, geographic areas, and major customers. STR is
currently reviewing these new standards of disclosure for adoption in 1999.
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MANAGEMENT
DIRECTORS
The names, ages and positions of STR's directors and executive officers
are as set forth below. Information set forth below concerning age,
occupation(s) and other directorships has been furnished by the individuals
named.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- ---- --- -------------------- -----
<S> <C> <C> <C>
S. R. Perrino 63 Chairman, President & Chief Executive Officer 1972
S. Kent Rockwell 53 Vice Chairman 1987
Charles Bernard 66 Consultant 1992
Admiral James B. Busey, IV 65 Consultant 1993
John D. Sanders 59 Investor/Consultant 1996
</TABLE>
S. R. Perrino has been Chairman of the Board and has served as
President and CEO of STR since 1972. From 1967 to 1974, Mr. Perrino worked as a
consultant to the U.S. Navy for threat warning systems, and to various companies
including STR, Systems Dynamic, Inc., and System Consultants. From 1960 through
1967, Mr. Perrino served as Director of Marketing/Project Engineer and was one
of the original founders of Radiation Systems, Inc.
S. Kent Rockwell has been a director of STR since 1987. He is former
Chairman of the Board, President and Chief Executive Officer of Astrotech
International Corporation. He is currently a director of ITEQ, Inc. Mr. Rockwell
is Chairman of Appalachian Timber Services, Inc., and Chairman and President of
Rockwell Venture Capital, Inc.
Charles Bernard, Ph.D., has been a director of STR since 1990. Prior to
his retirement, Dr. Bernard served in a number of Government positions. He was
Technical Director of the Naval Weapons Laboratory in Dahlgren, VA and the Naval
Ordinance Laboratory in White Oak, MD. He was Director of Land Warfare on the
staff of the Under Secretary of Defense for Research, Development and
Acquisition. He founded the Columbia Bay Company and co-founded K&B Engineering
Associates in 1995. In addition to serving on the STR board, Dr. Bernard has
been on the board of directors of the Naval Weapons Laboratory, Naval Ordinance
Laboratory, the Naval Surface Weapons Center, Columbia Bay Company, and K&B
Engineering Associates.
Admiral James B. Busey IV, USN (Ret.) has been a director of STR since
1992. Admiral Busey served in the U.S. Navy for 37 years in a variety of
aviation and command positions. He held the position as Commander in Chief of
U.S. Naval Forces in Europe, and Commander In Chief of Allied Forces in southern
Europe for two years prior to his retirement in 1989. Admiral Busey served as
Administrator of the Federal Aviation Administration from June 1989 until
December 1991. He served as the Deputy Secretary of Transportation until June
1992. He also served as Acting Secretary for several months during this period.
He served as the International President and CEO of the Armed Forces
Communications and Electronics Association from October 1992 until April 1996.
He continues to serve on the boards of the Flight Safety Foundation and the
National Aeronautic Association in addition to several corporate boards,
including Texas Instruments, Inc., Curtiss Wright Corporation, and The MITRE
Corporation.
John D. Sanders, Ph.D., has been a director of STR since 1996. He was
previously a director of STR from 1987 to 1991. He serves as a business
consultant to emerging technology companies. He was Chairman and Chief Executive
Officer of Tech News, Inc., a news publisher, from 1988 to 1996, prior to its
sale to the Washington Post Company. In addition, Dr. Sanders has been a
Registered Representative of Wachtel & Co., Inc. a Washington D.C.-based stock
brokerage firm, since 1968. Dr. Sanders serves on the boards of Hadron Inc., ITC
Learning Corp.
and DEI.
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COMPENSATION OF DIRECTORS
STR pays directors who are not full-time employees of STR $5,000 per
year, and pays non-employee members $1,000 for each special meeting they attend.
Each non-employee director has been granted a stock option for 10,000 shares in
connection with his service on the Board. Mr. Rockwell and Mr. Busey have
exercised their options.
EXECUTIVE OFFICERS
The following is a description of the officers of STR who are expected
to be appointed as executive officers of DEI following the Merger.
<TABLE>
<CAPTION>
EMPLOYEE NAME AGE PRINCIPAL OCCUPATION SINCE
- ------------- --- -------------------- ------
<S> <C> <C> <C>
S. R. Perrino 63 Chairman, President & Chief Executive Officer 1972
Robert R. Bower 61 Senior Vice President-Finance, CFO, Secretary 1985
Donald Reiser 71 Senior Vice President-Research and Development 1982
</TABLE>
Mr. Perrino's background is described under "Information About STR --
Management -- Directors."
Robert R. Bower currently serves as Senior Vice President-Finance and
Chief Financial Officer. He has served in this capacity for STR since 1985. He
has served as Corporate Secretary since 1989. Prior to joining STR, Mr. Bower
served as Director of Financial Planning and Analysis at Fairchild Industries,
Inc. from 1983 to 1985, and held several financial management positions at
Rockwell International Corporation from 1962 to 1982.
Donald Reiser currently serves as Senior Vice President of Research and
Development. Mr. Reiser has served in a management capacity for STR since 1982.
From 1964 to 1982, Mr. Reiser held various positions with the U.S. Central
Intelligence Agency, including that of Deputy Director for the Office of
Research and Development. He was the Vice President for Engineering for Aero Geo
Astro Corporation from 1960 to 1964. From 1950 through 1960, he held various
engineering position with E-Systems, Litton Industries and the ARMA Corporation.
SUMMARY COMPENSATION TABLE
The following table provides a summary of compensation paid or accrued
by STR during fiscal 1997 to those executive officers of STR who are expected to
serve as executive officers of DEI following the consummation of the Merger (the
"STR Named Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL FISCAL ------------------- OPTIONS/ ALL OTHER
POSITION YEAR SALARY SARS COMPENSATION (1)
-------- ---- ------ ---------- ----------------
<S> <C> <C> <C> <C>
S. R. Perrino
President and CEO 1997 $179,267 -0- $7,273
Robert Bower
Sr. Vice President 1997 $107,420 6,000 $4,953
Donald Reiser
Sr. Vice President 1997 $134,194 -0- $8,159
</TABLE>
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(1) Detail of amounts reported in the "All Other Compensation"
column is provided in the table below.
<TABLE>
<CAPTION>
LIFE CONTRIBUTION TO ESOP
OFFICER'S NAME INSURANCE COMPANY 401(K) ALLOCATION
-------------- --------- -------------- ----------
<S> <C> <C> <C>
S. R. Perrino $1,755 $3,000 $2,518
Robert Bower 786 2,508 1,659
Donald Reiser 3,023 3,000 2,136
</TABLE>
OPTIONS
The following table sets forth information concerning stock option
grants in fiscal 1997 to the STR Named Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE
- ---- ----------------- -------------- --------- ----------
<S> <C> <C> <C> <C>
S. R. Perrino 0 0 0 0
Robert Bower 6,000(a) 75% $8.69 12/09/06
Donald Reiser 0 0 0 0
</TABLE>
(a) Options vest at the rate of 20% on each of the first five anniversary
dates of grant. After the Merger, the options will become exercisable
for 15,480 shares of DEI Common Stock.
The following table provides information concerning unexercised stock
options held as of the end of fiscal 1997 by the STR Named Officers. There were
no options granted to or exercised by the STR Named Officers during fiscal year
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
----------------------------------------------- ------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(a) UNEXERCISABLE
---- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
S. Perrino 0 0 $0 $0
R. Bower 0 6,000 0 0
D. Reiser 0 0 0 0
</TABLE>
(a) The value of unexercised in-the-money options was calculated using the
most recent appraisal value of STR's Common Stock at September 30,
1997.
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RELATED PARTY TRANSACTIONS
STR's principal facilities in Newington, Virginia are leased from two
partnerships in which STR's executive officers are partners. Approximately,
54,500 square feet of space is leased from Research Development Properties, a
partnership in which S. R. Perrino, Donald Reiser, and Robert Bower, each hold a
one-fourteenth interest. S. R. Perrino is also a fifty percent partner in
Terminal Real Estate Company. This partnership leases approximately 12,500
square feet of space to STR. Both leases have been in place for several years,
expire in December 1998 and carry a rental rate of $6.35 a square foot, on a
triple net basis.
STR believes that both leases described above are at fair and
reasonable rates and in no event exceed the rates which would apply under leases
between STR and totally unrelated lessors. The two partnerships have agreed, to
sell the properties underlying the leases to unrelated purchasers. STR
anticipates any such sales will as a condition require the renegotiation of the
leases. STR is of the opinion that any such renegotiation will not have a
material adverse effect on STR.
PRINCIPAL STOCKHOLDERS OF STR AND SECURITY OWNERSHIP OF STR MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of STR Common Stock, as of April 20, 1998, by
each person who is known by STR to have been the beneficial owner of 5% or more
of the shares of STR Common Stock outstanding as of such date, by each director,
each STR Named Officer and by all directors and executive officers as a group.
Unless otherwise noted, each stockholder exercises sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME OF NUMBER OF PERCENT OF NUMBER OF DEI PERCENT OF
BENEFICIAL OWNER SHARES(1) CLASS(2) SHARES AFTER MERGER(1) CLASS (2)
- ------------------------- ------------ ---------- -------------------- --------
<S> <C> <C> <C> <C>
S. R. Perrino 314,980(3) 23.8 815,148 20.6
Donald Reiser 90,821(4) 6.9 234,318 5.9
Robert Bower 10,707(5) * 27,624 *
S. Kent Rockwell 389,998 29.4 1,006,194 25.4
John D. Sanders 15,876(6) 1.2 69,460 1.8
Charles Bernard 10,000 * 25,800 *
Admiral James Busey, IV 10,000 * 25,800 *
All directors and executive
officers as a group (7 persons) 850,420(7) 64.1 2,222,583(7) 56.2
</TABLE>
* Less than one percent
(1) The column sets forth shares of STR Common Stock which are deemed to be
"beneficially owned" by the persons named in the table under Rule 13d-3
of the Commission, including shares of STR Common Stock that may be
acquired upon the exercise of stock options or warrants that are
currently exercisable or become exercisable within 60 days after
April 20, 1998 as follows: Mr. Bower -- 1,200; Dr. Sanders -- 10,000;
Mr. Bernard -- 10,000; and all directors and executive officers as a
group -- 21,200. The options will be converted at the Effective Time
into options to purchase the following numbers of shares of DEI Common
Stock: Mr. Bower -- 3,096; Dr. Sanders -- 25,800; Mr. Bernard --
25,800; and all directors and executive officers as a group -- 54,696.
(2) For purposes of calculating the percentage of STR Common Stock
beneficially owned, the shares issuable to such person upon exercise of
stock options or warrants that are currently exercisable or become
exercisable within the next 60 days are considered outstanding.
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<PAGE> 89
(3) Includes 26,104 shares in STR deferred compensation plans held for the
benefit of Mr. Perrino for which he exercises voting control for
certain corporate events. Mr. Perrino also holds 2,500 shares of DEI
Common Stock.
(4) Includes 15,199 shares in STR deferred compensation plans held for the
benefit of Mr. Reiser for which he exercises voting control for certain
corporate events.
(5) Includes 7,507 shares in STR deferred compensation plans held for the
benefit of Mr. Bower for which he exercises voting control for certain
corporate events.
(6) Dr. Sanders also owns 26,250 shares of DEI Common Stock and options
to purchase an additional 3,000 shares, 2,250 of which are currently
exercisable.
(7) Includes the shares described in notes (1), (3), (4), (5) and (6).
INFORMATION ABOUT MERGER SUB
Merger Sub, a recently formed Virginia corporation, is a wholly owned
subsidiary of DEI. Merger Sub was organized solely to effect the proposed Merger
and has not engaged in any activities other than those relating to its formation
and capitalization and the Merger. The principal office of Merger Sub is located
at 300 Parkland Plaza, Ann Arbor, Michigan.
DESCRIPTION OF DEI CAPITAL STOCK
DEI CAPITAL STOCK
The authorized capital stock of DEI presently consists of 2,000,000
shares of DEI Common Stock, par value $0.01 per share. All of the outstanding
shares of DEI Common Stock are duly authorized, validly issued, fully paid and
nonassessable. The shares of DEI Common Stock to be issued pursuant to the
Merger will be, when issued, duly authorized, validly issued, fully paid and
nonassessable.
Holders of DEI Common Stock are entitled to such dividends as may be
declared by the Board of Directors of DEI out of the assets legally available
for that purpose and are entitled to one vote per share on all matters submitted
to a vote of the stockholders of DEI. The holders of shares of DEI Common Stock
do not have cumulative voting rights or preemptive rights. Therefore, the
holders of more than 50% of the shares voting for the election of directors can
elect all the directors, and the remaining holders will not be able to elect any
directors. Shares of DEI Common Stock received by affiliates of STR may be
resold by them only in transactions permitted under Rule 145 promulgated under
the Securities Act. See "The Merger and Related Matters -- Federal Securities
Law Consequences."
LIMITATION OF DEI DIRECTOR LIABILITY
As permitted by the DGCL, DEI's Certificate of Incorporation provides
that directors of DEI shall not be personally liable to DEI or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to DEI or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section 174 of
the DGCL, relating to prohibited dividends or distributions or the repurchase or
redemption of stock; or (iv) for any transactions from which the director
derives an improper personal benefit.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS OF DEI
Section 145 of the DGCL sets forth the conditions and limitations
governing the indemnification of officers, directors and other persons. DEI's
Bylaws provide that DEI shall indemnify its directors and officers against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts to be paid in settlement) reasonably
incurred or suffered by such person in connection with any pending, threatened
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that the director or officer is or was
serving as a director or officer. Paragraph 42(a) of DEI's Bylaws state that the
indemnification of its directors and officers shall be to the fullest extent
authorized by the DGCL. Paragraph 42(e) of DEI's Bylaws also permit DEI to
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of DEI or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
DEI would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
COMPARISON OF RIGHTS OF STR STOCKHOLDERS WITH RIGHTS OF DEI STOCKHOLDERS
The following is a summary of the material differences between the
rights of holders of DEI Common Stock and STR Common Stock. Because STR is
organized under the VSCA and DEI is organized under the DGCL, these differences
arise from various provisions of the corporate laws of such states as well as
from various differences in the articles of incorporation and bylaws of STR and
the certificate of incorporation and bylaws of DEI.
The following summary contains all material information relative to
such differences, but does not purport to be a complete statement of the
rights of holders of shares of DEI Common Stock under the DGCL, DEI's
certificate of incorporation and DEI's bylaws, or a comprehensive comparison
with the rights of the holders of shares of STR Common Stock under the VSCA,
STR's articles of incorporation, and STR's bylaws, or a complete description of
the specific provisions referred to herein. The identification of specific
differences is not meant to indicate that other significant differences do not
exist. This summary is qualified in its entirety by reference to the governing
law and the governing documents of each of DEI and STR. DEI and STR do not
believe that any of the differences described below, individually or in the
aggregate, constitute a material risk to the STR stockholders.
DIVIDENDS
Under the VSCA, a corporation's board of directors may declare
distributions to shareholders if, after the distribution, the corporation can
pay its debts as they generally become due or if the corporation's total assets
exceed its total liabilities.
Under the DGCL, a corporation's directors may declare and pay dividends
either (i) out of surplus or (ii) if there is no surplus, out of net profits
generated in the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Surplus generally means that part of the consideration
received for shares of capital stock in excess of the aggregate par value of
such shares.
ANTI-TAKEOVER MEASURES
Both the VSCA and the DGCL contain provisions which are intended to
protect corporations organized thereunder from unwanted takeovers or control
acquisitions. Under the VSCA, unless voting rights are granted by the
shareholders to an acquiror in a "control share acquisition" (as defined under
the VSCA), the acquiror does not receive voting rights for its shares. Only
Virginia corporations which have more than 300 shareholders are subject to the
provisions regarding control share acquisitions. If the shareholders of a
Virginia corporation grant voting rights in a control share acquisition in which
shares having a majority of votes are acquired, shareholders obtain dissenters
rights and can demand fair value for their shares. STR is not currently subject
to these provisions.
The DGCL does not restrict control acquisitions of corporations
organized under the DGCL. Instead, the DGCL restricts a corporation's right to
engage in a business combination with any interested stockholder within a period
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of three years from the date that such stockholder became an interested
stockholder. In general, an interested stockholder is a stockholder who holds
15% or more of the outstanding voting stock of a Delaware corporation; provided,
however, if such stockholder holds 85% of the outstanding stock, the prohibition
against a business combination does not apply.
The restriction on business combinations does not apply to
corporations, such as DEI, which do not have a class of voting securities which
is listed on a national securities exchange or an inter-dealer quotation system
of a registered national securities association (such as the Nasdaq Stock
Market) or held by more than 2,000 record holders. Following the Merger, DEI
intends to apply for listing of the DEI Common Stock on the Nasdaq Stock
Market's SmallCap Market. If such application is approved, DEI will become
subject to the restriction on business combinations in the DGCL.
DISSENTERS' APPRAISAL RIGHTS
The VSCA and DGCL contain provisions entitling dissenting holders of
shares of a corporation who comply with certain procedures to receive payment of
the "fair value" of their shares in connection with certain transactions.
Significant differences between the dissenters' appraisal rights provisions
contained in the VSCA and those contained in the DGCL include the following: (i)
dissenters' rights under the VSCA are available in connection with the
disposition of all or substantially all of a corporation's property, while
appraisal rights under the DGCL are not available with respect to dispositions
of a corporation's assets unless the corporation's certificate of incorporation
grants such rights (DEI's certificate of incorporation contains no such
provision); (ii) the VSCA provides for dissenters' rights in the event of the
consummation of a statutory share exchange (defined as an acquisition by a
corporation of all of the outstanding shares of one or more classes or series of
another corporation) where a corporation's shares are to be acquired and such
corporation's shareholders are entitled to vote thereon, while the DGCL contains
no provisions permitting statutory share exchanges; and (iii) the DGCL permits
the exercise of appraisal rights only by stockholders of record of a
corporation, while the VSCA allows the assertion of dissenters' rights by
beneficial owners of shares with the consent of the holder of record of such
shares.
STOCKHOLDER ACTIONS
Under the DGCL, special meetings of stockholders may be called by the
board of directors or by any such persons authorized by a corporation's
certificate of incorporation or bylaws. DEI's bylaws provide that a special
meeting shall be called at the request of a majority of the shares of DEI Common
Stock and may be called at any time by DEI's president. The VSCA provision is
similar to that contained in the DGCL except that it specifies that either a
corporation's president or its chairman of the board, in addition to its board
of directors, may call a special meeting of stockholders. STR's bylaws provide
that a special meeting shall be called at the request of the holders of 10% of
the outstanding shares of STR Common Stock.
Pursuant to Section 228 of the DGCL, any action required to be taken by
the stockholders at any annual or special meeting of such stockholders, or any
action which may be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and is
delivered to the corporation by delivery to its registered office in Delaware,
its principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Under the VSCA, stockholders may take action for which a stockholder
vote is required by unanimous written consent. The consents must be delivered to
the corporation's secretary. Any unanimous consent has the same effect as a
unanimous vote.
Pursuant to the DGCL, approval of holders of a majority of a
corporation's shares is required for amendments to the corporation's certificate
of incorporation and for certain other corporate transactions, such as mergers,
consolidations and sales of assets. The VSCA provides that such actions may be
taken only with the approval of holders
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of more than two-thirds of a corporation's shares unless the
corporation's articles of incorporation provide for a greater or less (but
not less than a majority) vote and except that certain amendments to a
corporation's articles of incorporation may be adopted without shareholder
action, including changing each authorized issued and unissued share of an
outstanding class into a greater number of whole shares if the corporation has
only shares of that class outstanding.
CONFLICT OF INTEREST TRANSACTIONS WITH DIRECTORS
The DGCL and the VSCA contain provisions which shift to the holders of
shares of a corporation the burden of proving that the directors have breached
their fiduciary duty to the corporation by authorizing corporate transactions in
which a director has an interest if the transaction is approved in a specified
manner.
The DGCL provides that no contract or transaction between one or more
of its directors or officers or any organization in which any of them has a
financial interest is void or voidable solely because the director or officer
participates in the meeting of the board or committee at which the contract or
transaction is authorized or solely because his votes are counted for such
purpose if the contract or transaction is fair to the corporation or if the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or known (i) to the board of directors and the
contract or transactions is authorized by a majority of the disinterested
directors or (ii) to the stockholders and the contract or transaction is
specifically approved by a vote of the stockholders.
The VSCA provision is similar to that contained in the DGCL, except
that the ability to void a transaction solely due to a director's interest may
not be eliminated by a vote of a single disinterested director and any such
elimination by a vote of shareholders must be approved by a majority of the
disinterested shareholders, thus preventing the possibility that an interested
director who is also a significant shareholder could cause shareholder approval
of the transaction by voting his shares in favor thereof.
INDEMNIFICATION
The DGCL and the VSCA have similar provisions and limitations regarding
indemnification by a corporation of its directors and officers, except that the
VSCA does not permit indemnification in connection with any proceedings in which
a director or officer was adjudged liable on the basis that personal benefit was
improperly received by him. In addition, Delaware and Virginia corporations may
provide broader indemnification than that set forth in the DGCL and the VSCA,
respectively, except that Virginia corporations may not indemnify directors or
officers against willful misconduct or a knowing violation of criminal law.
LIABILITY OF DIRECTORS
Both the DGCL and the VSCA authorize a corporation to include in its
charter provisions limiting the liability of directors to the corporation or the
holders of its shares. The VSCA also authorizes a corporation to include in its
charter a provision limiting the liability of officers to the corporation or the
holders of its shares. DEI has adopted provisions which eliminate the liability
of directors to the full extent permitted under the DGCL. STR has not adopted
any provisions limiting the liability of directors or officers to the company or
its stockholders. The DGCL does not permit elimination of liability (i) for any
breach of the director's duty of loyalty to DEI or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the DGCL, relating to
prohibited dividends or distributions or the repurchase or redemption of stock;
or (iv) for any transactions from which the director derives an improper
personal benefit. The VSCA does not permit elimination of liability for willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law, including any claim of unlawful insider trading or manipulation
of the market for any security.
87
<PAGE> 93
LEGAL MATTERS
The legality of the shares of DEI Common Stock to be issued in
connection with the Merger will be passed upon for DEI by Dykema Gossett PLLC,
Detroit, Michigan.
EXPERTS
The consolidated financial statements of DEI and its subsidiaries
included in this Joint Proxy Statement/Prospectus as of July 31, 1997 and 1996
and for the three years ended July 31, 1995, 1996 and 1997 have been audited by
Deloitte and Touche LLP, independent auditors, as stated in their report
appearing herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to DEI's ability to continue as a going
concern), and have been so included in reliance upon such report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of STR included herein as of September 30,
1997 and for the year ended September 30, 1997 have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report thereon
and included herein. Such financial statements are included herein in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of STR included herein as of
September 30, 1995 and 1996 and for the years ended September 30, 1995 and 1996
have been audited by Ross, Langan & McKendree LLP, independent accountants, as
set forth in their report thereon and included herein. Such financial statements
are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ACCOUNTANTS' REPRESENTATIVES
Deloitte & Touche LLP was DEI's independent auditor for fiscal 1997.
Deloitte & Touche LLP served as DEI's independent auditor since fiscal 1991. A
representative of Deloitte & Touche LLP will be at the DEI Annual Meeting to
answer questions from stockholders and to make a statement if the representative
desires. No accountant has been chosen for fiscal 1998 due to the expected
change in a majority of the DEI Board of Directors in connection with the
Merger.
STOCKHOLDER PROPOSALS FOR DEI'S 1998 ANNUAL MEETING
The Annual Meeting of holders of shares of DEI Common Stock following
the end of fiscal 1998 is expected to be held on or about March 1, 1999.
Stockholder proposals intended to be presented at the such Annual Meeting of
Stockholders must be received by DEI no later than October 1, 1998 if they are
to be included in DEI's proxy statement relating to that meeting. Such proposals
should be addressed to the Secretary at DEI's offices.
88
<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DAEDALUS ENTERPRISES, INC. AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors................................................................................ F-1
Consolidated Statements of Operations for the years ended July 31, 1997, 1996 and 1995......................... F-2
Consolidated Statements of Stockholders' Equity for the years ended
July 31, 1997, 1996 and 1995...................................................................................F-2
Consolidated Balance Sheets as of July 31, 1997 and 1996........................................................F-4
Consolidated Statements of Cash Flows for the years ended July 31, 1997, 1996 and 1995..........................F-6
Notes to Financial Statements (July 31, 1997)...................................................................F-7
DAEDALUS ENTERPRISES, INC. UNAUDITED FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations for the six months
ended January 31, 1998 and 1997 (Unaudited)...................................................................F-16
Consolidated Condensed Balance Sheets at January 31, 1998 (Unaudited)
and July 31, 1997.............................................................................................F-17
Consolidated Condensed Statements of Cash Flows for the six months
ended January 31, 1998 and 1997 (Unaudited)...................................................................F-18
Notes to Financial Statements (January 31, 1998)............................................................. F-19
S.T. RESEARCH CORPORATION FINANCIAL STATEMENTS
Report of Independent Accountants..............................................................................F-21
Balance Sheets at September 30, 1997 and December 31, 1997 (unaudited).........................................F-22
Statements of Income for the year ended September 30, 1997 and
three months ended December 31, 1996 and 1997 (unaudited).....................................................F-24
Statements of Stockholders' Equity for the year ended September 30, 1997
and three months ended December 31, 1997......................................................................F-25
Statements of Cash Flows for the year ended September 30, 1997 and
three months ended December 31, 1996 and 1997 (unaudited).....................................................F-26
Notes to Financial Statements..................................................................................F-28
Report of Independent Accountants..............................................................................F-39
Balance Sheets at September 30, 1996 and 1995..................................................................F-40
Statements of Income for the years ended September 30, 1996 and 1995...........................................F-42
Statements of Stockholders' Equity for the years ended September 30, 1996 and 1995.............................F-43
Statements of Cash Flows for the years ended September 30, 1996 and 1995.......................................F-44
Notes to Financial Statements..................................................................................F-45
</TABLE>
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Daedalus Enterprises, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of Daedalus
Enterprises, Inc. and subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Daedalus Enterprises, Inc. and
subsidiaries at July 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note K, the Company is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note K. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
Ann Arbor, Michigan
September 23, 1997
F-1
<PAGE> 96
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUE
Standard Products $ 2,199,756 $1,657,228 $2,339,540
Product Development 788,580 429,558 1,278,257
----------- ---------- ----------
2,988,336 2,086,786 3,617,797
Other Income 13,122 3,437 6,574
----------- ---------- ----------
3,001,458 2,090,223 3,624,371
COSTS AND EXPENSES
Cost of revenue - standard products 1,342,561 1,036,539 1,179,648
Cost of revenue - product development 629,357 395,107 839,159
Research and development - Note G 101,651 469,369 586,466
Selling and administrative 931,778 947,155 1,473,252
Interest 63,800 76,638 82,619
----------- ---------- ----------
3,069,147 2,924,808 4,161,144
LOSS BEFORE INCOME TAXES (67,689) (834,585) (536,773)
PROVISION (CREDIT) FOR INCOME TAXES - Note E (3,546) 132,000 (175,000)
----------- ---------- ----------
NET LOSS $ (64,143) $ (966,585) $ (361,773)
============ ========== ==========
NET LOSS PER SHARE -BASIC - Note I $ (0.12) $ (1.85) $ (0.70)
=========== ========== ==========
NET LOSS PER SHARE - DILUTED - Note I $ (0.12) $ (1.85) $ (0.70)
=========== ========== ==========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----- ------- --------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY
BALANCES AT JULY 31, 1994 $5,115 $1,104,145 $1,720,885
Net loss (361,773)
Stock issued pursuant to employee stock plans -
3,380 shares 34 8,986
Cash dividends - $.17 per share (87,320)
------ ---------- ----------
</TABLE>
F-2
<PAGE> 97
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BALANCES AT JULY 31, 1995 5,149 1,113,131 1,271,792
Net loss (966,585)
Stock issued pursuant to employee stock plans -
18,011 shares 180 49,208
--------- ------------ ----------
BALANCES AT JULY 31, 1996 5,329 1,162,339 305,207
Net loss (64,143)
Stock issued pursuant to employee stock plans -
1,100 shares 11 2,361
---------- ------------ ----------
BALANCES AT JULY 31, 1997 $ 5,340 $ 1,164,700 $ 241,064
========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 98
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
-----------------------------
1997 1996
---- ----
ASSETS - Note D
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 39,068 $ 56,768
Accounts receivable, less allowance of $2,500 - Note B 239,703 259,079
Unbilled accounts receivable - Note B 28,500 546,024
Inventories - Note A 601,462 640,213
Other current assets 18,075 7,829
----------- -----------
TOTAL CURRENT ASSETS 926,808 1,509,913
----------- -----------
PROPERTY AND EQUIPMENT - Note A
Land 177,131 177,131
Building 1,433,898 1,433,898
Machinery and equipment 831,767 817,640
Special equipment 445,310 397,951
----------- -----------
2,888,106 2,826,620
Less accumulated depreciation (1,745,474) (1,606,526)
----------- ----------
1,142,632 1,220,094
----------- -----------
OTHER ASSETS - Note C 250 39,446
$ 2,069,690 $ 2,769,453
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank - Note D $ 0 $ 689,000
Accounts payable 197,563 184,524
Accrued compensation and related costs 103,369 97,936
Accrued commissions 0 1,129
Customer deposits 57,142 0
Reserve for product warranties 30,000 30,500
Other accrued liabilities 28,274 32,228
Mortgage debt - Note D 242,238 261,261
----------- -----------
</TABLE>
F-4
<PAGE> 99
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
TOTAL CURRENT LIABILITIES 658,586 1,296,578
---------- ----------
STOCKHOLDERS' EQUITY - Note F
Common stock, $.01 par value
Authorized - 2,000,000 shares
Issued and outstanding - 534,024 shares
(1996 - 532,924 shares) 5,340 5,329
Additional paid-in capital 1,164,700 1,162,339
Retained earnings 241,064 305,207
---------- ----------
$1,411,104 $1,472,875
---------- ----------
$2,069,690 $2,769,453
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 100
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(64,143) $(966,585) $(361,773)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 138,948 180,280 168,584
Amortization of software 39,196 65,805 84,942
Provision (credit) for deferred income taxes 0 128,000 (135,000)
Net book value of special equipment sold 149,842 152,451 0
Loss on disposal of property and equipment 0 0 2,553
Decrease (increase) in accounts receivable 536,900 596,881 (627,429)
Decrease (increase) in inventories 38,751 (4,672) 476,096
Decrease in income taxes receivable 0 0 223,946
Decrease (increase) in deposits and
other assets (10,246) 165,473 (133,392)
Increase (decrease) in accounts payable and
accrued liabilities 12,889 (259,768) 44,031
Increase (decrease) in customer deposits 57,142 (9,652) (146,447)
-------- ---------- --------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 899,279 48,213 (403,889)
INVESTING ACTIVITIES
Purchase of property and equipment (211,328) (143,283) (134,844)
-------- -------- ---------
CASH USED IN INVESTING ACTIVITIES (211,328) (143,283) (134,844)
FINANCING ACTIVITIES
Proceeds from line of credit 1,758,000 1,967,749 2,572,000
Principal payments on line of credit (2,447,000) (1,920,749) (2,055,000)
Payments on mortgage debt (19,023) (21,347) (32,671)
Proceeds of stock issued pursuant to warrants,
stock options and Stock Purchase Plan. 2,372 49,388 9,020
Dividends paid 0 0 (40,977)
---------- ---------- ----------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (705,651) 75,041 452,372
----------- ---------- ---------
Decrease in cash (17,700) (20,029) (86,361)
Cash and cash equivalents at beginning of year 56,768 76,797 163,158
----------- ---------- ---------
CASH AND CASH EQUIVALENTS
</TABLE>
F-6
<PAGE> 101
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C>
AT END OF YEAR $39,068 $56,768 $76,797
======= ======= =======
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed by Daedalus
Enterprises, Inc. ("DEI") in preparation of the consolidated financial
statements is set forth below. Certain reclassifications were made to the July
31, 1996 financial statements to conform with the classification used in the
July 31, 1997 financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of DEI and its wholly owned subsidiaries. Upon consolidation, all
intercompany accounts, transactions, and profits are eliminated.
REVENUE RECOGNITION. Revenue on major contracts is recognized using the
percentage-of-completion method based upon the cost incurred as a percentage of
the total estimated cost, whereby revenue and related costs are recognized
throughout the performance period of the contract. If estimated total costs on
any contract indicate a loss, the entire amount of the estimated loss is
recognized immediately.
Contract research revenue from U.S. Government agencies (see Note J) generally
provides for reimbursement of costs plus fees. Revenue, fees and profits on such
contracts are recognized as costs are incurred. Reimbursable contract costs
(including overhead and general and administrative expenses) are subject to
audit and adjustment by negotiation between DEI and U.S. Government
representatives. Revenue under these contracts is recorded at amounts that are
expected to be realized upon the final settlement with any adjustments to
revenue reflected in the year of settlement. Some development contracts involve
cost-sharing by DEI. DEI recognizes its share of these costs, which are
classified as research and development expense, as incurred.
CASH AND CASH EQUIVALENTS. DEI considers all highly liquid securities purchased
with an original maturity date of three months or less to be cash equivalents.
INVENTORIES. Inventories, principally work-in-process and purchased parts, are
stated at the lower of first-in, first-out cost or market. Inventory at July 31,
1997 and 1996 included work-in-process of approximately $115,000 and $104,000,
respectively, with the remainder consisting of raw materials and subassemblies.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost and depreciated
over the useful life by the straight-line method. Special equipment includes
construction-in-progress, relating to a multispectral scanner system, in the
amount of approximately $158,000 and $119,000 at July 31, 1997 and July 31,
1996, respectively.
Special equipment consists of equipment manufactured by DEI and includes direct
manufacturing costs and overhead. Such equipment which is used in manufacturing
or research activities of DEI is normally made available for sale by DEI.
Therefore, revenue from the sale of such equipment, if any, is included in
revenue and the depreciated cost is included in cost of revenue. During the
fiscal years ended July 31, 1997 and July 31, 1996, DEI sold one such system in
each year with a cost of approximately $150,000 and $152,000, respectively.
CAPITALIZED SOFTWARE. Capitalized software costs consist of costs incurred for
internally developed software to be sold as part of standard products or used in
customer-funded product development contracts. Capitalization begins upon the
establishment of technological feasibility. The ongoing assessment of
recoverability of capitalized software development costs requires considerable
judgment by management with respect to certain external factors, anticipated
future gross revenue, estimated economic life, and changes in hardware and
software technology.
Capitalized software is amortized on a product-by-product basis over the related
sales on a per-unit basis with minimum amortization based on the straight-line
method over an estimated five year useful life.
F-7
<PAGE> 102
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
NEW FINANCIAL ACCOUNTING STANDARDS. DEI has not completed the process of
evaluating the impact that will result from adopting Statement of Financial
Accounting Standards ("SFAS"), No. 130 "Comprehensive Income" ("No. 130") and
No. 131 "Disclosures About Segments of an Enterprise and Related Information"
("No. 131"). SFAS No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997. DEI is, therefore, unable to determine the impact that
adopting No. 130 and No. 131 will have on its financial statements when such
statements are adopted.
The Financial Accountings Standards Board has issued SFAS No. 128 "Earnings Per
Share," which became effective for financial statements issued after December
15, 1997. The statement requires companies to present earnings per share on the
face of the statement of operations in two categories called "Basic" and
"Diluted" and requires restatement of all periods presented. DEI adopted SFAS
No. 128 during the first quarter of 1998.
NOTE B - ACCOUNTS RECEIVABLE
At July 31, 1997 and 1996, respectively, accounts receivable included
approximately $6,000 in each year from agencies of the United States federal
government that will be paid upon the completion and audit of the cost plus
fixed-fee contracts between DEI and the government agencies.
Unbilled accounts receivable represent revenue recognized using the
percentage-of-completion method, which are not yet billable under the terms of
the contract. These amounts become billable based on contract terms either upon
shipment of the items, presentation of invoices, or completion of the contract.
The cost of such revenue is determined generally by separate job cost accounts
and involves no deferral of costs.
To prevent foreign currency transaction losses, international sales are
contracted in U.S. dollars and large standard product contracts are generally
secured by irrevocable letters of credit. DEI also receives substantial deposits
on large sales to international customers.
NOTE C - CAPITALIZED SOFTWARE
There was no unamortized software at July 31, 1997. Other assets include
approximately $39,000 of unamortized software at July 31, 1996. No software was
capitalized in fiscal years 1997 and 1996.
NOTE D - NOTE PAYABLE AND LONG-TERM DEBT
On July 31, 1997, DEI had a $1,550,000 line of credit, with availability subject
to a formula, bearing interest at one and one-half percent above the lending
bank's prime rate (effective rate of 10%). The formula permits borrowing up to
$950,000 based on the value of the real estate, with the remaining available
borrowings based on 50% of the value of certain receivables specified in the
line of credit agreement. As of July 31, 1997, total availability was
approximately $1,000,000 pursuant to the formula. DEI had an outstanding balance
of zero under this line of credit agreement at July 31, 1997 with $59,000 of the
line of credit reserved for a standby letter of credit. This compares to a
balance of $689,000 (effective rate of 9.75%) under the prior line of credit
agreement and an additional $258,000 reserved for a standby letter of credit at
July 31, 1996.
DEI had a maximum balance outstanding of $689,000 and $747,000 during fiscal
1997 and 1996, respectively. The average outstanding balance and interest rate
in fiscal 1997 and 1996 was $385,505 and 9.69% and $480,186 and 9.75%,
respectively.
DEI has a mortgage with a balance of $242,238 and $261,261 as of July 31, 1997
and 1996, respectively, bearing interest at one and one-half percent over prime
(effective rate of 10% and 9.75% at July 31, 1997 and 1996, respectively).
Monthly payments on the mortgage are $3,685 for both interest and principal with
the mortgage
F-8
<PAGE> 103
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
being due on November 1, 2000. DEI has classified its total mortgage liability
as current as the mortgage agreement is cross-collateralized and cross-defaulted
with the line of credit which is a secured master demand note.
Aggregate annual maturities of long-term debt based on the refinanced mortgage
interest rate of 10% are as follows:
<TABLE>
<CAPTION>
Fiscal Year Maturity
----------- --------
<S> <C>
1998 20,934
1999 23,125
2000 25,547
2001 172,632
-------
242,238
=======
</TABLE>
Interest paid on all debt was approximately $64,000, $77,000 and $83,000 in
fiscal 1997, 1996 and 1995, respectively.
NOTE E - INCOME TAXES
The credit for income taxes in fiscal 1997 results primarily from a prior year
refund related to a Foreign Sales Corporation. DEI has limited its recognition
of income tax benefit due to the uncertainty of realizing the net operating loss
carryforward. Provision (credit) for income taxes is made up of the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ (3,500) $ 4,000 $ (40,000)
Deferred:
Tax provision (benefit) 0 128,000 (135,000)
---------- -------- ---------
PROVISION (CREDIT) FOR INCOME TAXES $ (3,500) $132,000 $(175,000)
========= ======== =========
</TABLE>
A reconciliation of the provision (credit) for income taxes and the amount
computed by applying the statutory federal income tax rates to earnings is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax on earnings at statutory rates (35%
in 1997, 1996 and 1995) $(24,000) $(292,000) $(188,000)
Effect of federal tax rate difference as the result of
surtax exemptions 0 0 6,000
Foreign Sales Corporation tax (benefit). 0 (2,000) (10,000)
Increase in income taxes resulting from valulation
allowance for net operating loss 17,000 392,000 0
Increase in income taxes resulting from
nondeductible expenses 3,500 34,000 17,000
-------- --------- ---------
PROVISION (CREDIT) FOR INCOME TAXES $ (3,500) $ 132,000 $(175,000)
======== ========= =========
</TABLE>
No federal corporate tax payments were made in fiscal years 1997, 1996 and 1995.
F-9
<PAGE> 104
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
The temporary differences that give rise to deferred tax assets and liabilities
at July 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSET (LIABILITY)
1997 1996
---- ----
SHORT- LONG- SHORT- LONG-
TERM TERM TERM TERM
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net operating loss carryforward $385,000 $379,000
Accrued personal leave $14,300 $14,000
Inventory reserve 24,700 32,000
Warranty reserve 8,700 8,900
Capitalized software (11,000)
Depreciation (26,000) (34,000)
Valuation allowance (50,000) (359,000) (47,000) (345,000)
Other 2,300 3,100
---------- -------- --------- --------
$ 0 $ 0 $ 0 $ 0
========== ======== ========= ========
</TABLE>
For the current fiscal year, DEI has limited the recognition of income tax
benefit for its current operating losses due to cumulative losses realized in
recent years. DEI recorded a valuation allowance of $409,000 as of July 31,1997
and $392,000 as of July 31, 1996. The increase in the valuation allowance during
fiscal 1997 and 1996 was $17,000 and $392,000, respectively. At July 31, 1997,
DEI had approximately $1,328,000 of net operating loss carryforward for tax
purposes as follows:
<TABLE>
<CAPTION>
Expiration Date Net Operating Loss
-----------------------------------
<S> <C>
2009 $ 42,000
2010 506,000
2011 775,000
2012 5,000
----------
$1,328,000
==========
</TABLE>
NOTE F - STOCK OPTIONS AND STOCK PURCHASE PLANS
DEI reserved 100,000 shares of common stock for sale to eligible employees
through payroll deductions over six-month periods pursuant to the 1983 Employee
Stock Purchase Plan (the "Purchase Plan"). The purchase price is the lower of
90% of the fair market value of the stock on the first or last day of the
purchase period. Under the Purchase Plan, 1,100, 1,011, and 3,079 shares were
issued during fiscal 1997, 1996 and 1995 at an average price of
F-10
<PAGE> 105
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
$2.16, $2.36 and $3.56 per share, respectively. At July 31, 1997 and 1996, there
were 65,568 and 66,918 shares, respectively, available for future purchase.
DEI has an incentive stock option plan established in 1983 and a long-term
incentive plan and a non-employee director stock option plan established in 1995
(collectively the "Plans"). The long-term incentive plan provides for the
granting of options, restricted stock and/or performance awards to key employees
and the non-employee director plan provides for the granting of options to
outside members of the board of directors to purchase common stock of DEI at the
fair value at the date of the grant. There are 64,000 and 21,000 shares of
common stock reserved under the 1995 long-term incentive plan and the 1995
non-employee director stock option plan, respectively. There are 28,000
exercisable options outstanding and 3,000 stock appreciation rights outstanding
under the 1983 incentive stock option plan; however, no additional options can
be granted under this plan. Options granted pursuant to the Plans are generally
exercisable ratably over a two to five year period and expire after ten years.
Transactions under the Plans during fiscal years 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION OPTION
OF SHARES PRICE PRICE
--------- ----- -----
<S> <C> <C> <C>
Outstanding July 31, 1994 71,250 $2.75 - $7.00 $4.18
Options granted to non-employee directors 12,000 $3.94 $3.94
Options exercised (950) $3.00 $3.00
Options canceled (5,100) $3.00 - $6.75 $4.10
------- ------------- -----
Outstanding July 31, 1995 77,200 $2.75 - $7.00 $4.16
Options granted to employees 15,000 $2.75 $2.75
Options exercised (17,000) $2.75 $2.75
Options canceled (9,100) $2.75 - $6.75 $4.64
------ ------------- -----
Outstanding July 31, 1996 66,100 $2.75 - $7.00 $3.60
Options granted to employees 16,850 $2.25 $2.25
Options canceled in connection with SARs (11,850) $5.00 - $7.00 $6.63
Options canceled (3,750) $2.75 - $3.94 $3.70
------- ------------- -----
Outstanding July 31, 1997 67,350 $2.75 - $4.00 $3.25
====== ============= =====
</TABLE>
Of the outstanding options at July 31, 1997 and 1996, 54,425 and 52,350 are
exercisable, respectively. Of the 67,350 shares covered by outstanding options
at July 31, 1997, 3,000 were accompanied by stock appreciation rights. In
addition to options granted under the Plans, non-qualified options to purchase
40,000 shares have been issued to two officers of DEI at $2.25 per share which
expire on December 10, 2006, options to purchase 3,000 shares have been issued
to the corporate secretary at $2.25 per share which expire on December 10, 2006
and options to purchase 2,000 shares have been issued to an employee at $4.00
per share which expire on September 1, 1999.
F-11
<PAGE> 106
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
Total shares of common stock reserved pursuant to the Purchase Plan, the Plans
and the non-qualified options were 224,118.
The weighted average estimated fair value of options granted during fiscal 1997
and 1996 was $1.03 and $1.49 per share, respectively. DEI applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its granted options. Accordingly, no compensation cost has been recognized for
its granted options. Had compensation cost for DEI's granted options been
determined based on the fair value at the grant dates consistent with the method
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," DEI's net loss and loss per common share for the year
ended July 31, 1997 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss to common shareholders
As reported $ 64,143 $966,585
Pro forma $ 106,175 $977,768
Net loss per share
As reported $0.12 $1.85
Pro forma $0.20 $1.87
</TABLE>
The fair value of options granted by DEI during 1997 and 1996 were estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used: no dividend yield, expected
volatility of 51.1% and 83.3%, risk free rate of 6.23% and 5.78% and expected
lives of five and ten years.
NOTE G - CUSTOMER-FUNDED PRODUCT DEVELOPMENT
DEI is engaged in customer-funded product development projects in which DEI
shares a portion of the cost of developing the technology and retains all rights
to the technology. DEI earned product development revenue of approximately
$789,000, $430,000, and $1,278,000 while incurring related cost of revenue of
approximately $661,000, $395,000, and $839,000 in fiscal years 1997, 1996 and
1995, respectively. In addition to these costs of revenue, DEI performed
internal research and development of approximately $26,000 and $74,000 related
to the customer-funded product development projects in fiscal years ended July
31, 1996 and July 31, 1995, respectively. There was no internal research and
development performed in support of customer-funded product development projects
in fiscal year 1997.
NOTE H - PENSION PLAN
DEI has a qualified defined contribution plan ("Pension Plan") and a 401(k)
employee savings plan ("Savings Plan") covering all employees meeting age and
length of service requirements. The Pension Plan provides only for Company
contributions of 10% of the active participants' eligible wages. Pension
expense, which is funded quarterly, was $99,000, $96,000 and $135,000 in 1997,
1996 and 1995, respectively. The Savings Plan requires no Company contributions;
however, DEI may make contributions at the discretion of the Board of Directors.
No contributions were made to the Savings Plan during fiscal years 1997, 1996 or
1995. DEI has no other postretirement benefits.
F-12
<PAGE> 107
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTE I - EARNINGS PER SHARE
DEI uses the treasury stock method to calculate diluted earnings per share. No
adjustment was made to either the net loss or the number of shares outstanding
for common stock equivalents in calculating earnings per share for fiscal 1997,
1996, and 1995 as such adjustments would have been antidilutive.
Weighted average number of shares outstanding and earnings per share for the
three years ended July 31 are computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average number of shares outstanding 533,464 522,597 513,287
Additional shares using the
treasury stock method 0 0 0
-------- --------- ---------
AVERAGE NUMBER OF SHARES
OUTSTANDING AND EQUIVALENTS 533,464 522,597 513,287
======== ========= =========
Net loss $(64,143) $(966,585) $(361,773)
======== ========= =========
LOSS PER SHARE $ (0.12) $ (1.85) $ (0.70)
======== ========= ==========
</TABLE>
NOTE J - SEGMENT INFORMATION
DEI manufactures products for, and performs development projects in, the field
broadly described as "remote sensing". Remote sensing is defined as the
detection or measurement of various physical parameters of an object or system
without direct contact with the object or system being observed. The principal
products manufactured by DEI are airborne imaging systems which are installed in
aircraft for acquisition of data on environmental parameters. A principal
application of DEI's remote sensing products has been the measurement of
environmental parameters in support of pollution control programs and
environmental impact studies.
DEI is also engaged in customer-funded projects for the development of advanced
systems in the remote sensing field. Some of these projects lead to the
incorporation of newly developed technology into the standard product line.
These two portions of the business are conducted by the same pool of personnel
using the same operating space and equipment and constitute a single industry
segment.
The following table sets forth information with respect to domestic and
international sales of DEI's products and services:
F-13
<PAGE> 108
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
International
Government agencies
Thailand $1,144,200 $ 0 $ 0
Korea 1,130 0 0
---------- ------------ ----------
Total Asia 1,145,330 0 0
Portugal $ 0 $ 436,400 $1,152,000
Germany 67,735 0 39,654
Spain 49,700 33,438 0
Denmark 0 0 5,165
Italy 0 55,360 1,023,896
Sweden 0 0 34,517
England 8,233 14,975 0
---------- ------------ ----------
Total Europe 125,668 540,173 2,255,232
India $ 0 $ 0 $ 33,176
Taiwan 0 0 10,123
---------- ------------ ----------
Total Other 0 0 43,299
Total Government Agencies $1,270,998 $ 540,173 $2,298,531
Commercial
Japan $ 32,800 $ 562,200 $ 0
Sweden 21,541 208,869 0
Australia 0 0 7,377
Italy 3,164 61,693 0
Germany 3,533 0 0
Other 217 3,385 0
---------- ------------ ----------
Total Commercial 61,255 836,147 7,377
---------- ------------ ----------
Total International $1,332,253 $ 1,376,320 $2,305,908
========== ============ ==========
Domestic
U.S. Government agencies $1,625,433 $ 617,842 $1,228,389
Other 30,650 92,624 83,500
---------- ------------ ----------
1,656,083 710,466 1,311,889
---------- ------------ ----------
$2,988,336 $ 2,086,786 $3,617,797
========== ============ ==========
</TABLE>
DEI's revenue each year is derived from a small number of high dollar value
equipment sales and contracts with a relatively small number of customers. These
customers change from year-to-year and no single customer has generated a
majority of DEI's revenue during any consecutive years. Sales to major customers
in each of the three years ended July 31, 1997 are as follows:
F-14
<PAGE> 109
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JULY 31,
-----------------
CUSTOMER DESCRIPTION 1997 1996 1995
(000) (000) (000)
----- ----- -----
<S> <C> <C> <C>
Standard product customer
Thailand $1,144 $ 0 $ 0
Japan 0 562 0
Portugal 0 436 1,152
Sweden 0 186 0
Italy 0 0 917
European product development customer - Italy 0 0 90
U.S. Government 1,625 618 1,228
</TABLE>
NOTE K - GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended July 31, 1997, 1996 and 1995, DEI incurred
losses of $64,143, $966,585 and $361,773, respectively, and has classified all
of its debt as current for the years ended July 31, 1997 and 1996. These factors
among others may indicate that DEI will be unable to continue as a going concern
for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
DEI be unable to continue as a going concern. As described in Note D, since
DEI's debt facility is in the form of a secured master demand note, DEI has
classified the balance of its mortgage debt ($221,000 related to its mortgage)
as a current liability. DEI's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreement, to obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. DEI will continue to pursue additional equity financing through
discussions with potential investors possessing related technological and/or
marketing capabilities. Pending the receipt of additional equity financing, DEI
will continue to operate supported by its line of credit, but the lending bank
has indicated that it may limit the amount which DEI is permitted to borrow
under the line of credit in the absence of continued improvement in DEI's
business prospects or progress toward the acquisition of a significant amount of
equity capital. If DEI is unable to borrow amounts necessary to fund its
operations, its financial position would be materially and adversely affected
and DEI may have no choice but to cease operations if other sources of capital
are not available.
F-15
<PAGE> 110
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended
----------------------
January 31,
1998 1997
---- ----
<S> <C> <C>
OPERATING REVENUE
Standard products $ 665,702 $1,016,511
Product development 169,224 488,180
834,926 1,504,691
Other Income 16,683 5,862
---------- ----------
851,609 1,510,553
COST AND EXPENSES
Cost of revenue - standard products 469,800 507,604
Cost of revenue - product development 218,451 435,456
Research and development 28,589 73,172
Selling and administrative 413,439 477,221
Interest 27,340 35,370
---------- ----------
1,157,619 1,528,823
---------- ----------
NET EARNINGS (LOSS) BEFORE INCOME TAXES (306,010) (18,270)
========== ==========
CREDIT FOR INCOME TAXES - NOTE C 0 0
NET EARNINGS ( LOSS) $ (306,010) $ (18,270)
========== ==========
NET EARNINGS (LOSS) PER SHARE - BASIC $ (0.57) $ (0.03)
========== ==========
NET EARNINGS (LOSS) PER SHARE - DILUTED $ (0.57) $ (0.03)
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-16
<PAGE> 111
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
----------- ----------
(unaudited)
<S> <C> <C>
ASSETS - Note D
CURRENT ASSETS
Cash and cash equivalents $ 18,744 $ 39,068
Accounts receivable, less allowance of $2,500 132,806 239,703
Unbilled accounts receivable 346,231 28,500
Inventories - Note B 483,190 601,462
Other current assets 21,297 18,075
----------- -----------
TOTAL CURRENT ASSETS 1,002,268 926,808
PROPERTY AND EQUIPMENT
Land 177,131 177,131
Building 1,433,898 1,433,898
Machinery and equipment 843,886 831,767
Special equipment 542,980 445,310
----------- -----------
2,997,805 2,888,106
Less accumulated depreciation (1,803,420) (1,745,474)
----------- -----------
1,194,385 1,142,632
OTHER ASSETS 250 250
$ 2,196,903 $ 2,069,690
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIIABILITIES
Note payable to bank - Note D $ 490,000 $ 0
Accounts payable 60,531 197,563
Accrued compensation and related costs 118,247 103,369
Customer deposits 161,065 57,142
Reserve for product warranties 28,585 30,000
Other accrued liabilities 0 28,274
Mortgage debt - Note D 232,297 242,238
----------- -----------
TOTAL CURRENT LIABILITIES 1,090,725 658,586
STOCKHOLDERS' EQUITY
Common stock $.01 par value
Authorized--2,000,000 shares 5,346 5,340
Issued and outstanding--534,574 shares
(July 31, 1997--534,024 shares)
Additional paid-in capital 1,165,778 1,164,700
Retained earnings (64,946) 241,064
----------- -----------
1,106,178 1,411,104
----------- -----------
$ 2,196,903 $ 2,069,690
=========== ===========
</TABLE>
The accompanying notes are in integral part of these condensed financial
statements.
F-17
<PAGE> 112
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
January 31,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (306,010) $ (18,270)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 57,946 68,725
Amortization of software 0 29,189
Net book value of special equipment sold 0 138,726
Decrease (increase) in accounts receivable (210,834) 72,308
Decrease in inventory 118,272 138,017
Increase in other assets (3,222) (5,683)
Increase (decrease) in accounts payable and accrued expenses (151,843) (16,737)
Decrease in customer deposits 103,923 150,073
----------- -----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES (391,768) 556,348
INVESTING ACTIVITIES
Purchase of property and equipment (109,699) (158,767)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (109,699) (158,767)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 965,000 665,000
Payments on revolving line of credit (475,000) (1,104,000)
Payments on long-term debt (9,941) (9,284)
Proceeds of stock issued pursuant to stock option and
stock purchase plan 1,084 708
----------- -----------
CASH PROVIDED (USED) IN FINANCING ACTIVITIES 481,143 (447,576)
INCREASE (DECREASE) IN CASH (20,324) 49,995
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,068 56,768
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 18,744 $ 6,773
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-18
<PAGE> 113
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1998
NOTE A - BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the results of operations, financial position and cash flows for
the periods presented. The accompanying unaudited financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information necessary to be in conformity with generally accepted
accounting principles.
Reference is made to the Notes to Consolidated Financial Statements in the
Annual Report to Stockholders for the year ended July 31, 1997.
The results of operations for the six months ended January 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
NOTE B -INVENTORY
Inventory includes work-in-process of approximately $19,000 and $115,000 as of
January 31, 1998 and July 31, 1997, respectively. The remaining inventory
consists of parts and subassemblies, both purchased and manufactured, that can
be used in the manufacturing process or sold as spare parts.
NOTE C - INCOME TAXES
DEI estimates its provision for income taxes using its estimated annual
effective rate. DEI has limited the recognition of income tax benefit for its
net operating loss carryforwards due to cumulative losses realized in recent
years. The valuation allowance for deferred taxes is $498,000 at January 31,
1998 and $409,000 at July 31, 1997.
NOTE D - REVOLVING CREDIT
On January 31, 1998, DEI had a $1,550,000 line of credit with a bank, with
availability subject to a formula, bearing interest at one and one-half percent
above the bank's prime rate (effective rate of 10%). The formula is $950,000
based on the value of the real estate, with the remaining available borrowings
based on 50% of the value of certain receivables specified in the line of credit
agreement. As of January 31, 1998, total remaining availability was $401,000
based on the formula. The outstanding balance under this line of credit
agreement was approximately $490,000 at January 31, 1998, with $59,000 of the
line of credit agreement reserved for a standby letter of credit. This compares
to an outstanding balance of zero (effective rate of 10%) at July 31, 1997 with
an additional $59,000 reserved for a standby letter of credit.
DEI has classified its total mortgage liability as current because the mortgage
agreement is cross-collateralized and cross-defaulted with the line of credit,
which is a secured master demand note.
NOTE F - EARNINGS PER SHARE
The computation of net earnings per share is based on the weighted average
number of shares of common stock outstanding during the six month periods ended
January 31, 1998 and 1997. The weighted average number of shares used in the
computation was 534,392 and 533,173 for the six months ended January 31, 1998
and 1997, respectively, all of which were issued and outstanding. No adjustments
were made to either net earnings (loss) or the number of shares outstanding in
calculating earnings (loss) per share as such adjustments would have been
antidilutive.
F-19
<PAGE> 114
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTE G - SUBSEQUENT EVENT
DEI entered into a merger agreement (the "Merger") with S. T. Research
Corporation ("STR"), a Virginia corporation, on December 23, 1997. Under the
agreement, each outstanding share of STR would be exchanged for 2.58 newly
issued shares of DEI's common stock and STR would become a wholly owned
subsidiary of DEI. STR is a supplier of technology-driven solutions for
communications and radar intercept equipment to the U. S. government (its
principal customer) and a major supplier of threat warning systems to the
surface and subsurface community. STR had revenues of approximately $24 million
during its last fiscal year, and total assets of approximately $10.8 million and
working capital of approximately $1.6 million at September 30, 1997. The Merger
is expected to close in the second quarter of calendar 1998 and will be subject
to the satisfaction of various conditions, including the approval of the Merger
by the shareholders of STR and approval by DEI's stockholders of an amendment to
its Certificate of Incorporation to permit the issuance of shares pursuant to
the Merger.
F-20
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
S.T. Research Corporation:
We have audited the accompanying balance sheet of S.T. Research Corporation (the
Company) as of September 30, 1997 and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S.T. Research Corporation as of
September 30, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
December 22, 1997, except for
Note 16, as to which the date is
January 30, 1998
F-21
<PAGE> 116
S.T. RESEARCH CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 119,524 $ 140,438
Accounts receivable 4,045,201 2,915,548
Unbilled contract costs, net (Note 3) 5,374,597 6,197,676
Inventories (Note 5) 203,311 110,902
Deferred tax assets (Note 8) 226,737 264,451
Other current assets 174,553 107,572
Prepaid income taxes 155,152 75,438
------------ -------------
Total current assets 10,299,075 9,812,025
PROPERTY AND EQUIPMENT (Note 6) 875,532 932,302
OTHER ASSETS 83,975 60,137
------------ -------------
TOTAL ASSETS $ 11,258,582 $ 10,804,464
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 117
S.T. RESEARCH CORPORATION
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---- ----
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit (Note 7) $ 4,208,614 $ 3,911,091
Accounts payable 3,038,408 2,880,022
Accrued salaries, benefits, and related expenses 1,370,998 1,213,392
Other accrued expenses 112,225 174,073
Capital leases (Note 12) 52,055 75,891
------------ ------------
Total current liabilities 8,782,300 8,254,469
LONG-TERM LIABILITIES
Capital leases (Note 12) 8,993 13,953
------------ ------------
TOTAL LIABILITIES 8,791,293 8,268,422
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 3,000,000 shares
authorized, of which 723,792 were issued
at September 30, 1997 and December 31, 1997 72,379 72,379
Additional paid-in capital 1,232,716 1,232,716
Retained earnings 1,162,194 1,230,947
------------ ------------
Total stockholders' equity 2,467,289 2,536,042
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,258,582 $ 10,804,464
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 118
S.T. RESEARCH CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30.
--------------------- -------------
1997 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
REVENUE
Contract revenue $ 5,837,376 $ 5,606,100 $ 23,953,070
------------ ------------ ------------
COSTS AND EXPENSES
Cost of revenues 5,134,910 4,908,274 20,761,886
General and administrative expenses 710,076 651,297 2,654,218
------------ ------------ ------------
Total costs and expenses 5,844,986 5,559,571 23,416,104
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (7,610) 46,529 536,966
OTHER INCOME (EXPENSES)
Interest expense (103,143) (74,461) (345,086)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (110,753) (27,932) 191,880
INCOME TAX BENEFIT (PROVISION) (Note 8) 42,000 10,000 (72,000)
------------ ------------ ------------
NET INCOME (LOSS) ($ 68,753) ($ 17,932) $ 119,880
============ ============ ============
PER SHARE AMOUNT
Basic earnings (loss) per share ($ .09) ($ .02) $ .17
============ ============ ============
Diluted earnings (loss) per share ($ .09) ($ .02) $ .16
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 723,792 723,950 723,827
Diluted 744,116 752,460 748,216
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 119
S.T. RESEARCH COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 $72,421 $1,236,306 $1,111,067 $2,419,794
Common stock repurchase (418 shares at cost) (42) (3,590) -- (3,632)
Net income -- -- 119,880 119,880
------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 72,379 1,232,716 1,230,947 2,536,042
Net loss (unaudited) -- -- (68,753) (68,753)
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 (unaudited) $72,379 $1,232,716 $1,162,194 $2,467,289
======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 120
S.T. RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
------------------- -------------
1997 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 68,753) ($ 17,932) $ 119,880
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 74,597 74,590 359,679
Deferred tax expense 37,714 -- 11,000
Cash provided by assets
and liabilities:
Accounts receivable (1,129,653) (227,821) (649,410)
Unbilled contract costs 823,079 174,415 (1,812,266)
Inventories (92,409) 190,153 130,461
Other current assets (66,981) 2,161 (59,121)
Prepaid income taxes (79,714) -- (75,438)
Other assets (4,993) (11,573) (12,687)
Accounts payable 158,386 582,834 1,579,559
Accrued expenses 95,758 (552,470) (457,223)
Income taxes payable -- (52,500) (50,500)
Other -- -- 9,446
----------- ----------- -----------
Net cash provided by (used in)
operating activities (252,969) 161,857 (906,620)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized acquisition costs (18,845) -- --
Acquisitions of property and equipment (17,827) (232,680) (462,211)
Net cash used in investing
activities (36,672) (232,680) (462,211)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 121
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Three Month Ended Year Ended
December 31, September 30,
------------ -------------
1997 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds under line of credit $297,523 $ 82,867 $1,583,600
Principal payments on capital lease
obligations (28,796) (26,341) (111,907)
Repurchase of common stock - (3,632) (3,632)
-------- -------- ----------
Net cash provided by financing
activities 268,727 52,894 1,468,061
-------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (20,914) (17,929) 99,230
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 140,438 41,208 41,208
-------- -------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $119,524 $ 23,279 $ 140,438
======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 99,580 $ 69,545 $ 310,457
======== ======== ==========
Cash payments for income taxes $ - $ 42,500 $ 186,938
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 122
S.T. RESEARCH CORPORATION
NOTES TO FINANCIAL. STATEMENTS
NOTE 1 - STR AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Business Activities:
S.T. Research Corporation ("STR") designs, develops, manufactures, and markets
reconnaissance systems and related products primarily through U.S. Government
contracts.
Revenue Recognition:
The estimated revenue of performance under Government fixed-price and cost-type
contracts, including customer funded research and development, is recognized
under the percentage of completion method of accounting whereunder the estimated
revenue is determined on the basis of completion to date (the total contract
amount multiplied by percent of performance to date less revenue value
recognized in previous periods) and general and administrative expenses are
expensed as incurred. Revenues under cost-reimbursement contracts are recorded
as costs are incurred and include estimated earned fees in the proportion that
costs incurred to date bear to total estimated costs. The fees under certain
Government contracts may be increased or decreased in accordance with cost or
performance incentive provisions which measure actual performance against
established targets or other criteria. Such incentive fee awards or penalties,
which historically are not material, are included in revenue at the time the
amounts can be determined reasonably. Anticipated losses are recognized at the
time they become known.
Inventories:
Inventories are stated at the lower of cost or market, determined on the
first-in, first-out basis.
Property and Equipment:
Furniture and equipment are recorded at cost and are depreciated over estimated
useful lives ranging from three to eight years using straight-line and
accelerated methods. Leasehold improvements are amortized over the life of the
improvement using the straight-line method. Amortization of leasehold
improvements and capital lease obligations are included in depreciation expense.
The cost and accumulated depreciation or amortization of assets sold or retired
are removed from the respective accounts and any gain or loss is reflected in
other income (expenses).
STR reviews long-lived assets for impairment whenever events indicate that the
carrying amount of an asset may not be recoverable and recognizes an impairment
loss under certain circumstances in the amount by which the carrying value
exceeds the fair value of the asset.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, STR considers all unrestricted
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-28
<PAGE> 123
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 1 - STR AND ITS SIGNIFICANT ACCOUNTING POLICIES (continued):
Income Taxes:
STR accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities have been established for the temporary differences
between financial statement and tax basis of assets and liabilities existing at
the balance sheet date using expected tax rates. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is expected to more
likely than not be realized.
Use of Estimates:
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Accordingly, actual results could differ from those estimates.
Operating Cycle:
In accordance with industry practice, STR classifies as current assets amounts
relating to long-term contracts which may have terms extending beyond one year
but are expected to be realized during the normal operating cycle of STR. The
liabilities in the accompanying balance sheets which have been classified as
current liabilities are those expected to be satisfied by the use of assets
classified as current assets. At September 30, 1997, substantially all contracts
will be completed within the next twelve months. Therefore, substantially all
current assets and current liabilities are expected to be liquidated in the next
twelve months.
Earnings Per Share:
Effective December 31, 1997, STR adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." This Statement requires the
discussion of basic and diluted earnings per share and revises the method
required to calculate these amounts under previous standards. Basic earnings per
share is computed using the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding during each
period. Earnings per share data for periods prior to the three months ended
December 31, 1997 have been restated to reflect adoption of this Statement.
<TABLE>
<CAPTION>
Three Months Three Months Year Ended
Ended December Ended December September
31, 1997 31, 1996 30, 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ (68,753) $ (17,932) $ 119,880
Weighted average shares
outstanding - basic 723,792 723,950 723,827
Basic earnings (loss) per share $ (.09) $ (.02) $ .17
Effect of dilutive securities:
Shares issuable upon exercise of
stock options 20,324 28,510 24,389
--------- --------- ---------
Weighted average shares
</TABLE>
F-29
<PAGE> 124
NOTES TO FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
outstanding - diluted 744,116 752,460 748,216
Diluted earning (loss) per share $ (.09) $ (.02) $ .16
</TABLE>
Unaudited Financial Statements:
The unaudited balance sheet as of December 31, 1997, and the unaudited
statements of income, changes in stockholders' equity and cash flows for the
three months ended December 31, 1997 and 1996, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. Operating results for the three-month period ended
December 31, 1997, are not necessarily indicative of the results for the entire
year.
F-30
<PAGE> 125
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 2 - CASH HELD IN TRUST - RESTRICTED:
On January 1, 1990, STR established a health and disability benefit plan
pursuant to the Employee Retirement Income Security Act of 1974 for employees
and their dependents. STR funds the plan by making monthly contributions to a
trust established and administered by an independent third party. The monthly
contribution is based on a predetermined rate for each enrolled employee. The
excess contributions over claims are maintained in trust to cover future claims
of the enrolled employees. STR may terminate the trust at any time, for any
reason, by resolution of its Board of Directors, and upon written notice to the
enrolled employees. Distribution of trust assets shall be determined by STR. STR
maintains individual claim and aggregate stop loss coverage. STR records a
liability in the financial statements for known claims outstanding and an
estimate, based on prior experience, of incurred but not reported claims in
excess of amounts remaining in the trust fund. The trust cash account had a zero
balance as of September 30, 1997. STR accrued a liability of $143,688 at
September 30, 1997 under its health and disability plan.
NOTE 3 - UNBILLED CONTRACT COSTS, NET:
Net unbilled contract costs consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Unbilled costs and accrued profit on
contracts in progress $ 12,128,273
Progress payments (5,930,597)
-------------
Total $ 6,197,676
=============
</TABLE>
Unbilled costs and accrued profit on contracts in progress comprise principally
amounts of revenue recognized on contracts for which billings had not been
presented to the contractor because the amounts were not billable at the balance
sheet date. It is anticipated such unbilled amounts receivable at September 30,
1997, will be billed over the next 270 days as products and/or services are
delivered. Retainages, which approximate $70,000 at September 30, 1997, will be
billed and collected as contracts are finalized with the contractor. As of
September 30, 1997, there are no significant unrecovered costs or estimated
profits subject to future negotiation.
Receivables under certain Government contracts are based on provisional rates
that permit recovery of overhead not exceeding certain limits. These overhead
rates are subject to audit on an annual basis by the Defense Contract Audit
Agency (DCAA). When final determination and approval of the allowable rates have
been made, receivables may be adjusted accordingly. In management's opinion, any
adjustments will not be material. The DCAA has completed their audit of the
rates through September 30, 1996.
NOTE 4 - RESEARCH AND DEVELOPMENT:
Research and development costs are included in general and administrative
expenses in the statement of income and are expensed until product feasibility
is established. The amount of net research and development costs expensed during
1997 was $516,830. No research and development costs were capitalized in 1997.
F-31
<PAGE> 126
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 5 - INVENTORIES:
Inventories consist of the following at December 31 and September 30, 1997:
<TABLE>
<CAPTION>
December 31 September 30
----------- ------------
(unaudited)
<S> <C> <C>
Materials $ 199,686 $ 107,277
Work-in-process 3,625 3,625
----------- ------------
Total $ 203,311 $ 110,902
=========== ============
</TABLE>
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows at September 30, 1997:
<TABLE>
<S> <C>
Furniture and fixtures $ 95,814
Machinery and equipment 1,942,415
Leasehold improvements 316,824
Equipment capitalized under capital leases 328,350
------------
Subtotal 2,683,403
Less accumulated depreciation (1,751,101)
------------
Total $ 932,302
============
</TABLE>
Depreciation expense was approximately $360,000 for the year ended September 30,
1997.
NOTE 7 - NOTE PAYABLE - LINE OF CREDIT:
Effective July 31, 1997, STR's bank loan agreement (bank agreement) was amended
and extended to June 30, 1998. The amended agreement provides a maximum
available line of credit of $4,000,000. However, the total borrowing base
generally cannot exceed the sum of 90 percent of qualified Government accounts
receivable, 80 percent of qualified non-Government accounts receivable and 50
percent of qualified unbilled Government accounts receivable up to a maximum of
$700,000. On October 23, 1997, the bank amended STR's bank agreement to allow an
over-advance of $500,000 through January 31, 1998. The over-advance will allow
STR to drawdown $500,000 in excess of its existing $4,000,000 line of credit.
The bank agreement amendment establishes the interest rate at the bank's prime
(8.5 percent at September 30, 1997) plus 1.5 percent. The amendment also
contains various covenants as to dividend restrictions, working capital, net
worth, earnings and debt-to-equity ratios. STR was not in compliance with the
net worth and the debt-to-equity covenants at September 30, 1997. In December
1997, the events of non-compliance were waived by the bank for September 30,
1997, and the covenants were amended. Management anticipates that it will be
able to comply with these amended covenants through the term of the agreement.
F-32
<PAGE> 127
NOTE 7 - NOTE PAYABLE - LINE OF CREDIT (continued):
On July 29, 1997, STR established an additional line of credit (line of credit)
for the sole purpose of bid bond financing. The line of credit provides for
additional financing of $750,000, bears interest at the bank's prime rate plus 2
percent and expires on June 30, 1998. Bid bonds of approximately $65,000 have
been applied to the line of credit as of September 30, 1997.
STR's accounts receivable, inventory and equipment are pledged as collateral
against the bank agreement and the line of credit. The bid bond financing line
of credit and over-advance are personally guaranteed by STR's president.
NOTE 8 - INCOME TAXES:
STR's components of income tax expense are as follows for the year ended
September 30, 1997:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Current tax expense $ 51,000 $ 10,000 $ 61,000
Deferred tax expense 10,000 1,000 11,000
---------- ----------- ----------
Income tax expense $ 61,000 $ 11,000 $ 72,000
========== =========== ==========
</TABLE>
STR's deferred tax assets by tax jurisdiction is as follows at September 30,
1997:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Federal $ 220,500
State 43,951
-----------
Total $ 264,451
===========
</TABLE>
Deferred tax assets consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Deferred compensation $ 111,227
Accrued vacation 134,641
Other, net 18,583
-----------
$ 264,451
===========
</TABLE>
F-33
<PAGE> 128
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 8 - INCOME TAXES (continued):
Income taxes at statutory rates are reconciled to STR's actual provision as
follows:
<TABLE>
<CAPTION>
Percent of
Pretax
Amount Income
------ ------
<S> <C> <C>
Tax at federal statutory rate $ 65,000 34%
State income taxes, net of federal tax benefit 11,000 6
Other (4,000) (2)
-------- --
Provision for income taxes $ 72,000 38%
======== ==
</TABLE>
No valuation allowance was established at September 30, 1997, in view of STR's
ability to carry back deferred tax assets to recover taxes paid in previous
years.
NOTE 9 - EMPLOYEE BENEFIT PLANS:
STR's employee benefit plan (the Plan) consists of three segments. The Plan is
comprised of a nonleveraged Employee Stock Ownership Plan (ESOP), a 401(k) plan
and a profit sharing plan. Eligible employees must have attained 21 years of
age, and have completed 500 hours of service during the eligibility computation
period. Contributions to the Plan are at the sole discretion of the Board of
Directors.
Company contributions to the ESOP totaled $118,000 in 1997. The total number of
ESOP shares at September 30, 1997, all of which are allocated, is 240,547. At
termination or retirement, the Plan will repurchase the participant's vested
number of allocated shares for cash at the then fair market value of STR's
stock. At December 31, 1996, the fair market value of STR's common stock, as
determined by an independent appraisal, was $8.07 per share. There were no
purchases of STR's common stock by the ESOP in 1997.
Eligible employees may elect to participate in STR's 401(k) plan. In 1997, STR
matched 40 percent of the first 5 percent of employee contributions, which
amounted to $112,000.
STR did not make a contribution to the profit sharing plan in 1997.
F-34
<PAGE> 129
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 10 - STOCK OPTIONS:
STR currently has two stock option plans (1991 Option Plan and 1996 Option
Plan). Under the 1991 Option Plan, the option terms are for five years and are
fully vested upon grant. Under the 1996 Option Plan, the option terms are for
ten years with a five-year vesting period for employees and immediate vesting
for directors. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
1991 Weighted Average 1996 Weighted Average
Option Plan Exercise Price Option Plan Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 44,000 $ 3.06 6,000 $ 8.69
Granted -- -- 18,000 $ 8.62
Expired (4,000) $ 3.93 -- --
Forfeited (10,000) $ 4.08 -- --
------- ------
Balance at September 30, 1997 30,000 $ 2.60 24,000 $ 8.64
======= ======
</TABLE>
The weighted average grant date fair value of options granted during 1997 was
$11.87 per share.
The Black-Scholes model was used to estimate the fair value of the options.
Significant assumptions include a risk-free interest rate of 7.5 percent and an
expected life equal to the term of the options.
The following summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Number Range of Weighted Average
Outstanding Exercise Prices Remaining Life
----------- --------------- --------------
<C> <C> <C> <C>
1991 Option Plan 30,000 $1.94 to $3.93 3.3 years
1996 Option Plan 24,000 $8.07 to $8.69 9.1 years
------
54,000
======
</TABLE>
F-35
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS, Continued
NOTE 10 - STOCK OPTIONS (Continued):
STR does not recognize compensation costs for its stock option plan in the
determination of net income. Had compensation cost been determined based on the
fair value at the grant dates for awards under the plan, STR's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below at September 30, 1997:
<TABLE>
<CAPTION>
Basic Diluted
Earnings Earnings
Net income Per Share Per Share
---------- --------- ---------
<S> <C> <C> <C>
As reported $ 119,880 $ .17 $ .16
Pro forma $ 114,080 $ .16 $ .15
</TABLE>
NOTE 11 - CONCENTRATIONS OF CREDIT RISK:
As of September 30, 1997, STR had funds on deposit in excess of the federally
insured amount with NationsBank. Approximately 95 percent of STR's revenues are
generated from contracts with U.S. Government agencies or U.S.
Government contractors.
NOTE 12 - LEASE COMMITMENTS:
Operating Leases:
The facilities at STR's principal location have been leased from partnerships
(related party) in which certain officers and employees of STR are partners. The
risk and rewards associated with the facilities and the obligations imposed by
the partnerships' debt reside with the partnerships. In 1993, STR entered into a
letter agreement to extend the lease commitment for its principal location. The
terms of the letter agreement extended the lease through December 31, 1998, with
an option to renew the lease for an additional five years, and provided for
minimum lease payments of $347,000 a year. The landlord may cancel the lease by
providing 180 days written notice and a cash payment of $250,000 to STR.
STR also has an additional facility lease agreement for three years with an
unrelated third party. The terms of the lease provide for annual minimum lease
payments of $30,713 and an annual escalation of three percent.
In connection with an acquisition (Note 14), STR assumed a lease of a
corporation for a facility used in the corporation's operations. The terms of
the lease provide for annual minimum lease payments of $84,744 plus operating
expenses through April 30, 1998. It also contains an option to extend for five
years.
STR leases various equipment under noncancellable operating leases.
F-36
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 12 - LEASE COMMITMENTS (Continued):
There were no amounts unpaid on these leases at September 30, 1997. Rent expense
for the year ended September 30, 1997 was $759,295, which included $418,784
associated with leases from related parties. As of September 30, 1997, minimum
rental payments under operating leases for facilities and equipment are as
follows:
<TABLE>
<CAPTION>
Related Party Third Party
------------- -----------
<S> <C> <C>
1998 $418,784 $384,392
1999 104,696 179,193
2000 -- 64,345
2001 -- 36,133
2002 -- 4,724
-------- --------
Total $523,480 $668,787
======== ========
</TABLE>
STR subleases a portion of its facility at its principal location. As of
September 30, 1997, minimum rentals to be received under the sublease are as
follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1998 $36,648
1999 18,774
---- -------
Total $55,422
=======
</TABLE>
Capital Leases:
At September 30, 1997, STR was obligated on capital leases for equipment having
an aggregate book value of $328,350. The following schedule illustrates the
future minimum lease payments:
<TABLE>
<CAPTION>
Years Ending September 30, Amount
-------------------------- ------
<S> <C>
1998 $ 81,898
1999 14,597
----------
Subtotal 96,495
Less amount representing interest (6,651)
----------
Present value of minimum lease obligations 89,844
Less current portion (75,891)
----------
Capital leases payable - long-term portion $ 13,953
==========
</TABLE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
Based on existing rates, economic conditions and the short maturities, the
carrying amounts of all the financial instruments at September 30, 1997 are
reasonable estimates of their fair values. STR's financial instruments
F-37
<PAGE> 132
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued):
include cash and cash equivalents, accounts receivable, the note payable - line
of credit, accounts payable and the capital lease obligations.
NOTE 14 - ACQUISITIONS:
On January 17, 1997, STR acquired a division of a corporation for an aggregate
purchase price of $110,150 plus liabilities assumed of $53,855. The acquisition
was accounted for as a purchase and was included with operations from the
acquisition date through September 30, 1997. Pro forma results of operations
would not differ significantly from STR's historical operating results.
The total purchase price of $164,005 was allocated as follows:
<TABLE>
<S> <C>
Property and equipment $141,375
Prepaid expenses and deposits 22,630
--------
Total $164,005
========
</TABLE>
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 129, "Disclosure of Information about Capital Structure," for fiscal years
beginning after December 15, 1997. The provisions of SFAS No. 129 established
standards for disclosing information about an entity's capital structure. STR
believes that the adoption of this standard will not have a material effect on
STR's current disclosure requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," for fiscal years beginning after December 15, 1997. The provisions
of SFAS No. 130 establish standards for reporting and display of comprehensive
income and its components in the financial statements. This statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in the financial statements and
displayed with the same prominence as other financial statements. The provisions
of SFAS No. 131 establish standards for the way that enterprises report
information about operating segments in annual financial statements and require
that selected information about operating segments in interim financial
statements be reported. It also establishes standards for related disclosure
about products and services, geographic areas, and major customers. STR is
currently reviewing these new standards of disclosure for adoption in 1999.
NOTE 16 - SUBSEQUENT EVENTS:
On November 11, 1997, STR announced it had reached an agreement in principle to
merge with Daedalus Enterprises, Inc. ("Daedalus"). Daedalus is a publicly
traded company. Under the agreement, STR will become a wholly owned subsidiary
of Daedalus. An agreement and plan of merger was executed on December 23, 1997,
wherein each of STR's shares issued and outstanding, other than dissenter's
shares, will be converted on the effective date of the merger into the right to
receive 2.58 Daedalus shares of common stock. The merger, which is subject to
regulatory approval, is expected to be finalized during the second quarter of
calendar 1998.
On January 30, 1998, STR completed a private placement of securities, whereby
STR issued 582,000 shares of common stock. The common stock was issued for cash
of $6.50 per share for aggregate proceeds of $3,783,000.
F-38
<PAGE> 133
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
S.T. Research Corporation
Newington, Virginia
We have audited the accompanying balance sheets of S.T. Research Corporation as
of September 30, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of STR's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of S.T. Research Corporation as of September
30, 1996 and 1995, and the results of its operations and cash flows for the
years then ended in conformity with generally accepted accounting principles.
ROSS, LANGAN & MCKENDREE, L.L.P.
McLean, VA
November 20, 1996
F-39
<PAGE> 134
S.T. RESEARCH CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 41,208 $ 184,785
Cash held in trust - restricted (Note 2) 9,446 7,942
Accounts receivable 2,266,138 1,026,201
Unbilled contract costs, net (Note 3) 4,385,410 3,343,609
Inventories - at cost (Note 5) 241,363 41,034
Deferred tax asset (Note 8) 275,451 252,427
Other current assets 48,451 42,210
---------- ----------
Total current assets 7,267,467 4,898,208
---------- ----------
PROPERTY AND EQUIPMENT (Note 6) 829,770 707,839
---------- ----------
OTHER ASSETS
Deposits 47,450 36,090
---------- ----------
TOTAL ASSETS $8,144,687 $5,642,137
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 135
S.T. RESEARCH CORPORATION
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
-------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit (Note 7) $2,327,491 $ 321,282
Accounts payable 1,300,463 1,677,549
Accrued salaries, benefits, and related expenses 1,629,551 1,043,727
Other accrued expenses 215,137 173,435
Capital leases (Note 13) 111,907 80,707
Income taxes payable 50,500 101,600
---------- ----------
Total current liabilities 5,635,049 3,398,300
LONG-TERM LIABILITIES
Capital leases (Note 13) 89,844 150,698
---------- ----------
TOTAL LIABILITIES 5,724,893 3,548,998
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 3,000,000 shares
authorized, of which 724,204 were issued
at September 30, 1996 and 1995 72,421 72,421
Additional paid-in capital 1,236,306 1,236,306
Retained earnings 1,111,067 784,412
---------- ----------
Total stockholders' equity 2,419,794 2,093,139
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,144,687 $5,642,137
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 136
S.T. RESEARCH CORPORATION
STATEMENTS OF INCOME
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
September 30,
--------------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
REVENUE
Contract revenue $ 21,654,578 $ 16,561,840
------------ ------------
COSTS AND EXPENSES
Cost of revenues 18,607,490 13,732,783
General and administrative expenses 2,343,024 2,331,319
------------ ------------
Total costs and expenses 20,950,514 16,064,102
------------ ------------
INCOME FROM OPERATIONS 704,064 497,738
OTHER INCOME (EXPENSES)
Interest expense (232,409) (90,706)
------------ ------------
INCOME BEFORE INCOME TAXES 471,655 407,032
INCOME TAX PROVISION (Note 8) 145,000 90,000
------------ ------------
NET INCOME $ 326,655 $ 317,032
============ ============
PER SHARE AMOUNT
Basic earnings per share $ .45 $ .44
============ ============
Diluted earnings per share $ .42 $ .42
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 724,204 719,743
Diluted 769,507 575,149
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 137
S.T. RESEARCH CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Total
Additional Retained Stockholders'
Common Paid-in Earnings Equity
Stock Capital (Restated - Note 15) (Restated - Note 15)
----- ------- -------------------- --------------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $ 71,350 $1,187,377 $ 467,380 $1,726,107
Sale of common stock (Note 9) 1,071 48,929 -- 50,000
Net income -- -- 317,032 317,032
---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1995 72,421 1,236,306 784,412 2,093,139
Net income -- -- 326,655 326,655
---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996 $ 72,421 $1,236,306 $1,111,067 $2,419,794
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 138
S.T. RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
September 30,
-----------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 326,655 $ 317,032
----------- -----------
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
(Gain) loss on disposition of property and equipment (1,275) 4,846
Depreciation 281,355 190,120
Deferred tax expense (23,024) (34,927)
Changes in assets and liabilities
(Increase) decrease in cash held in trust (1,504) 126
Increase in accounts receivable (2,281,738) (969,183)
(Increase) decrease in inventories (200,329) 47,214
Increase in other current assets (6,241) (3,222)
Increase in deposits (11,360) (2,652)
Increase (decrease) in accounts payable (377,085) 1,056,464
Increase in accrued expenses 627,526 70,464
Increase (decrease) in income taxes payable (51,100) 98,222
----------- -----------
Total adjustments (2,044,775) 457,472
----------- -----------
Net cash provided by (used in) operating activities (1,718,120) 774,504
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment (349,728) (400,537)
Proceeds from disposition of property and equipment 4,100 --
----------- -----------
Net cash used in investing activities (345,628) (400,537)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 139
S.T. RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
September 30,
----------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) under line of credit $ 2,006,209 ($ 538,073)
Principal payments on capital lease obligations (86,038) (36,156)
Issuance of common stock -- 50,000
----------- -----------
Net cash provided by (used in) financing activities 1,920,171 (524,229)
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (143,577) (150,262)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 184,785 335,047
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 41,208 $ 184,785
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 224,906 $ 93,904
=========== ===========
Cash payments for income taxes $ 219,123 $ 15,900
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
DEI incurred capital lease obligations of $56,383 in 1996 and $271,968 in 1995
in conjunction with fixed asset leases.
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 140
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - STR AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Business Activities:
S. T. Research Corporation ("STR") designs, develops, manufactures, and markets
reconnaissance systems and related products primarily through U.S. Government
contracts.
Revenue Recognition:
Revenue under Government fixed-price and cost-type contracts, including customer
funded research and development, is recognized using the percentage of
completion method. Revenue recognized in the current period is calculated by
multiplying the completion percentage by the total contract value, less revenue
recognized in previous periods. The completion percentage is the ratio of the
total costs incurred to date to the total anticipated costs. Revenue under
cost-reimbursement contracts are recorded as costs are incurred and include
estimated earned fees in the proportion that costs incurred to date bear to
total estimated costs. The fees under certain Government contracts may be
increased or decreased in accordance with cost or performance incentive
provisions which measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties, which historically are not
material, are included in revenue at the time the amounts can be determined
reasonably. Anticipated losses are recognized at the time they become known.
Inventories:
Inventories are stated at the lower of cost or market, determined on the
first-in, first-out basis.
Property and Equipment:
Property and equipment are recorded at cost and are depreciated over estimated
useful lives ranging from three to eight years using straight-line and
accelerated methods. Leasehold improvements are amortized over the life of the
improvement using the straight-line method. Amortization of leasehold
improvements and capital lease obligations are included in depreciation expense.
The cost and accumulated depreciation or amortization of assets sold or retired
are removed from the respective accounts and any gain or loss is reflected in
other income (expenses).
Cash and Cash Equivalents:
For purposes of the statement of cash flows, STR considers all unrestricted
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Income Taxes:
STR accounts for income taxes in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities have been established for the temporary differences
between financial statement and tax basis of assets and liabilities existing at
the balance sheet date using expected tax rates. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is expected to more
likely than not be realized.
F-46
<PAGE> 141
NOTES TO FINANCIAL STATEMENTS
F-47
<PAGE> 142
NOTE 1 - STR AND ITS SIGNIFICANT ACCOUNTING POLICIES (continued):
Use of Estimates:
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Accordingly, actual results could differ from those estimates.
Operating Cycle:
In accordance with industry practice, STR classifies as current assets amounts
relating to long-term contracts which may have terms extending beyond one year
but are expected to be realized during the normal operating cycle of STR. The
liabilities in the accompanying balance sheets which have been classified as
current liabilities are those expected to be satisfied by the use of assets
classified as current assets.
Earnings Per Share:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earning Per Share." This Statement requires the
discussion of basic and diluted earnings per share and revises the method
required to calculate these amounts under previous standards. Basic earnings per
share is computed using the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding during each
period. Earnings per share data for periods prior to December 31, 1997 have been
restated to reflect adoption of this Statement. The following summary is
presented for the years ended:
<TABLE>
<CAPTION>
September 30,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net Income $326,655 $317,032
Weighted average shares
outstanding - basic 734,204 719,743
Basic earnings per share $ .45 $ .44
Effect of dilutive securities:
Shares issuable upon
exercise of stock options 29,083 18,217
Shares issuable upon
exercise of warrants 16,220 19,189
Weighted Average Shares
outstanding - diluted 769,507 757,149
Diluted earnings per share $ .42 $ .42
</TABLE>
NOTE 2 - CASH HELD IN TRUST - RESTRICTED:
On January 1, 1990, STR established a health and disability benefit plan
pursuant to the Employee Retirement Income Security Act of 1974 for employees
and their dependents. STR funds the plan by making monthly contributions to a
trust established and administered by an independent third party. The monthly
contribution is
F-48
<PAGE> 143
based on a predetermined rate for each enrolled employee. The excess
contributions over claims are maintained in trust to cover future claims of the
enrolled employees. STR may terminate the trust at any time, for any reason, by
resolution of its Board of Directors, and upon written notice to the enrolled
employees. Distribution of trust assets shall be determined by STR. STR
maintains individual claim and aggregate stop loss coverage. STR records a
liability in the financial statements for known claims outstanding and an
estimate, based on prior experience, of incurred but not reported claims in
excess of amounts remaining in the trust fund. The trust cash account had a
balance of $9,446 and $7,942 at September 30, 1996 and 1995, respectively. STR
accrued a liability of $155,410 at September 30, 1996 and $142,969 at September
30, 1995 under its health and disability plan.
F-49
<PAGE> 144
NOTE 3 - UNBILLED CONTRACT COSTS, NET:
Net unbilled contract costs consist of the following:
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Unbilled costs and accrued profit on
contracts in progress $ 10,680,854 $ 10,900,698
Progress payments (6,295,444) (7,557,089)
------------ ------------
Total $ 4,385,410 $ 3,343,609
============ ============
</TABLE>
Unbilled costs and accrued profit on contracts in progress represent revenue
recognized in excess of billings at the balance sheet date. It is anticipated
that such unbilled amounts receivable will be billed over the next 270 days as
the products and/or services are delivered. Retainages, which approximate
$120,000 and $88,000 at September 30, 1996 and 1995, respectively, will be
billed and collected as contracts are finalized. As of September 30, 1996 and
1995, there were no significant unrecovered costs or estimated profits subject
to future negotiations.
Receivables under certain government contracts are based on provisional rates
that permit recovery of overhead not exceeding certain limits. These overhead
rates are subject to audit on an annual basis by the Defense Contract Audit
Agency (DCAA). When final determination and approval of the allowable rates have
been made, receivables may be adjusted accordingly. In management's opinion, any
adjustments will not be material.
NOTE 4 - RESEARCH AND DEVELOPMENT:
Research and development costs are included in general and administrative
expenses in the statement of income and are expensed until product feasibility
is established. The amount of research and development costs expensed totaled
$817,100 and $683,400 for 1996 and 1995, respectively. No research and
development costs were capitalized in 1996 and 1995.
NOTE 5 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Materials $139,226 $ -
Work-in-process 102,137 41,034
-------- ------
Total $241,363 $41,034
======== =======
</TABLE>
F-50
<PAGE> 145
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Furniture and fixtures $113,214 $94,958
Machinery and equipment 1,744,578 1,659,320
Leasehold improvements 295,658 249,075
Equipment capitalized under capital leases 328,350 253,551
----------- ----------
Subtotal 2,481,800 2,256,904
Less accumulated depreciation (1,652,030) (1,549,065)
----------- ----------
Total $ 829,770 $ 707,839
=========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1996 and 1995 was
$281,355 and $190,120, respectively.
NOTE 7 - NOTE PAYABLE - LINE OF CREDIT:
STR's bank loan agreement has been amended and extended to April 30, 1997. The
amended agreement provides a maximum available line of credit of $3,000,000.
However, the total borrowing base generally cannot exceed the sum of 90 percent
of qualified government accounts receivable, 80 percent of qualified
non-government accounts receivable and 50 percent of qualified unbilled
government accounts receivable up to a maximum of $700,000.
The amendment establishes the interest rate at the bank's prime plus 1.5
percent. The amendment also contains various covenants as to working capital,
net worth, interest coverage and a debt-to-equity ratio. STR was in compliance
with these covenants at September 30, 1996.
The line of credit is secured by STR's accounts receivable and equipment and is
personally guaranteed by STR's president.
F-51
<PAGE> 146
NOTE 8 - INCOME TAXES:
STR's components of income tax expense from continuing operations are as
follows:
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Current tax expense $ 134,500 $ 33,500 $ 168,000
Deferred tax benefit (19,000) (4,000) (23,000)
--------- --------- ---------
Income tax expense $ 115,500 $ 29,500 $ 145,000
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(Restated - Note 15)
September 30, 1995
----------------------------------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Current tax expense $ 95,000 $ 30,000 $ 125,000
Deferred tax benefit (31,000) (4,000) (35,000)
--------- --------- ---------
Income tax expense $ 64,000 $ 26,000 $ 90,000
========= ========= =========
</TABLE>
STR's deferred tax assets by tax jurisdiction are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
Federal $230,500 $212,000
State 44,951 40,427
-------- --------
Total $275,451 $252,427
======== ========
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
September 30,
---------------------------------
(Restated - Note 15)
1996 1995
---- ----
<S> <C> <C>
Deferred compensation $101,786 $ 88,235
Accrued vacation 158,141 120,628
Tax credits - 15,500
Other, net 15,524 28,064
-------- --------
Total $275,451 $252,427
======== ========
</TABLE>
F-52
<PAGE> 147
NOTE 8 - INCOME TAXES (continued):
Income taxes at statutory rates are reconciled to STR's actual provision as
follows:
<TABLE>
<CAPTION>
Year Ending September 30,
-----------------------------------------------------------
(Restated - Note 15)
1996 1995
---- ----
Percent of Percent of
Pretax Pretax
Amount Income Amount Income
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax at federal statutory rate $160,000 34% $138,000 34%
State income taxes, net of
federal tax benefit 28,000 6 24,000 6
Research and development
credit benefit (37,000) (8) (63,000) (16)
Other (6,000) (1) (9,000) (2)
-------- -- -------
Provision for income taxes $145,000 31% $90,000 22%
======== == ======= ==
</TABLE>
At September 30, 1995, STR had $15,500 of available research and development
credits. During 1996, STR generated an additional $21,625 of research and
development credits. All the available credits were applied in 1996. No
valuation allowance was established at September 30, 1996 and 1995.
NOTE 9 - EMPLOYEE BENEFIT PLANS:
STR's employee benefit plan (the Plan) consists of three segments. The Plan is
comprised of a nonleveraged Employee Stock Ownership Plan (ESOP), a 401(k) plan
and a profit sharing plan. Eligible employees must have attained 21 years of
age, and have completed 500 hours of service during the eligibility computation
period. Contributions to the Plan are at the sole discretion of the Board of
Directors.
During 1995, the ESOP purchased 10,706 shares of STR's common stock for an
average purchase price of $4.67 per share. The purchase price per share was
based on an independent appraisal of STR's common stock. The total purchases
were $50,000 in 1995. There were no purchases in 1996. The total number of ESOP
shares at September 30, 1996, all of which are allocated, is 240,547. At
December 31, 1995, the fair market value of STR's common stock, as determined by
an independent appraisal, was $8.69 per share. Company contributions totaled
$105,000 in 1996 and $27,232 in 1995. At termination or retirement, the Plan
will repurchase the participant's vested number of allocated shares for cash at
the then fair market value of STR's stock.
Eligible employees may elect to participate in STR's 401(k) plan. During 1996,
STR elected to match 50 percent of the first 5 percent of the employee
contribution. STR elected to match 45 percent of the total employee contribution
in 1995. Company contributions to the 401(k) plan totaled $95,000 in 1996 and
$97,769 in 1995.
STR did not contribute to the profit sharing plan in either 1996 or 1995.
NOTE 10 - STOCK OPTIONS:
STR has established a stock option plan in order that Board members and certain
key employees may purchase shares of common stock. Outstanding options are as
follows:
F-53
<PAGE> 148
<TABLE>
<CAPTION>
Shares Option
Outstanding Price
----------- -----
<S> <C> <C>
Balance at October 1, 1994 44,000
Granted -
Revoked -
------
Balance at September 30, 1995 44,000
Granted 6,000 $8.69 per share
Revoked -
------
Balance at September 30, 1996 50,000
======
Year exercisable: Shares
------
1997 10,000 $3.93 per share
1998 4,000 $4.30 per share
1999 -
2000 -
2001-2006 36,000 $1.94 - $8.69 per share
------
Total 50,000
======
</TABLE>
NOTE 11 - STOCK WARRANTS:
On July 13, 1989, STR executed a loan agreement with MetCap. The loan has been
repaid, but under the terms of the original agreement, MetCap obtained a stock
purchase warrant to acquire 20,000 shares of STR's stock. A subsequent amendment
and anti-dilution provisions of the agreement have resulted in MetCap holding
warrants for 31,394 shares at $1.73 per share as of September 30, 1995. The
warrants were redeemed for $18,000 during 1996.
NOTE 12 - CONCENTRATIONS OF CREDIT RISK:
As of September 30, 1996 and 1995, STR had funds on deposit in excess of the
federally insured amount with NationsBank. Approximately 95 percent of STR's
revenues are generated from contracts with U.S. Government agencies or U.S.
Government contractors.
F-54
<PAGE> 149
NOTE 13 - LEASE COMMITMENTS:
Operating Leases:
The facilities at STR's principal location have been leased from partnerships in
which certain officers and employees of STR are partners. The risk and rewards
associated with the facilities and the obligations imposed by the partnerships'
debt reside with the partnerships.
In 1993, STR entered into a good faith letter agreement to extend the lease
commitment for its principal facilities. The terms of the letter agreement
extended the lease through December 31, 1998 with an option to renew the lease
for an additional five years, and provided for minimum lease payments of
$347,000 a year. As of the report date, STR had not entered into the formal
lease agreement. The landlord may cancel the lease by providing 180 days written
notice, and a cash payment of $250,000 to STR.
STR also leases various equipment under non-cancellable operating leases.
There were no amounts unpaid on this lease at September 30, 1996 and 1995. Total
sublease income was $26,922 for 1996 and $26,300 for 1995. Total rent expense
was $510,642 and $567,350 for 1996 and 1995, respectively. As of September 30,
1996, minimum rental payments under operating leases for facilities and
equipment are as follows:
<TABLE>
<CAPTION>
Years Ending September 30, Amount
-------------------------- ------
<S> <C>
1997 $ 489,957
1998 443,636
1999 121,781
2000 4,567
----------
Total $1,059,941
==========
</TABLE>
As of September 30, 1996, minimum rentals to be received under subleases are as
follows:
<TABLE>
<CAPTION>
Years Ending September 30, Amount
-------------------------- ------
<S> <C>
1997 $ 34,500
1998 36,648
1999 18,774
Total $ 89,922
==========
</TABLE>
F-55
<PAGE> 150
NOTE 13 - LEASE COMMITMENTS (continued):
Capital Leases
At September 30, 1996, STR was obligated on capital leases for equipment having
an aggregate book value of $328,350. The following schedule illustrates the
future minimum lease payments:
<TABLE>
<CAPTION>
Years Ending September 30, Amount
-------------------------- ------
<S> <C>
1997 $132,977
1998 81,898
1999 14,597
--------
Subtotal 229,472
Less amount representing interest (27,721)
--------
Present value of minimum lease obligations 201,751
Less current portion (111,907)
--------
Capital leases payable - long-term portion $ 89,844
========
</TABLE>
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENT:
Based on existing rates, economic conditions, and the short maturities, the
carrying amounts of all the financial instruments at September 30, 1996 and 1995
are reasonable estimates of their fair value. STR's financial instruments
include cash and cash equivalents, cash held in trust, accounts receivable, the
note payable - line of credit, accounts payable and the capital lease
obligations.
NOTE 15 - PRIOR PERIOD RESTATEMENT:
The income tax provision, income taxes payable and the deferred tax asset was
incorrectly computed for the year ended September 30, 1995. As a result, the
1995 financial statements have been restated. The adjustment to the income tax
provision increased net income and retained earnings for the year ended
September 30, 1995 by $10,000 over the amount previously reported.
NOTE 16 - SUBSEQUENT EVENTS:
On November 13, 1996, STR entered into a letter of intent agreement to purchase
the business and assets, including the assumption of lease agreements, of a
division of a major corporation. Final settlement on the purchase is anticipated
to occur in early 1997.
On December 9, 1996, the Board of Directors ratified actions taken by STR's
management to form a Virginia corporation primarily to develop and protect its
commercial line of communication services. It is anticipated that all business
activities of the new corporation will be consolidated within STR as a
communications division.
F-56
<PAGE> 151
NOTE 17 - NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," for fiscal
years beginning after December 15, 1995. The provisions of SFAS No. 121
establish standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of.
In October 1995, the FASB issued SFAS No.123, "Accounting for Stock-Based
Compensation," SFAS No.123 is effective for fiscal years beginning after
December 15, 1995 and establishes financial accounting and reporting standards
for stock-based employee compensation plans.
STR believes the adoption of these standards in 1997 will not have a material
impact on STR's current disclosure requirements
F-57
<PAGE> 152
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made as of December
23, 1997, by and among Daedalus Enterprises, Inc., a Delaware corporation
("DEI"), DEI Merger Sub, Inc., a Virginia corporation and wholly owned
subsidiary of DEI ("Merger Sub"), and S. T. Research Corporation, a Virginia
corporation ("STR"). DEI, Merger Sub and STR may be referred to individually
as a "Party" or collectively as the "Parties".
W I T N E S S E T H
WHEREAS, STR, Merger Sub and DEI desire that Merger Sub merge with and
into STR (the "Merger"), with STR being the surviving corporation of the
Merger;
WHEREAS, DEI, Merger Sub and STR desire to make certain representations,
warranties, covenants and agreements in connection with the Merger; and
WHEREAS, the Merger is intended to constitute a tax-free reorganization as
described in Section 368 of the Code.
NOW, THEREFORE, subject to the terms and conditions of this Agreement and
the Articles of Merger to be filed in the Commonwealth of Virginia in order to
effectuate the Merger, and in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the Parties hereby agree as
follows:
1. DEFINITIONS. For purposes of this Agreement, the following capitalized
terms will have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 5.7.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act.
"Agreement" has the meaning set forth in the Preamble to this Agreement.
"Articles of Merger" means the Articles of Merger to be filed with the
Virginia State Corporation Commission setting forth the terms of the Merger.
"Balance Sheet" has the meaning set forth in Section 4.1(h).
"Certificate" has the meaning set forth in Section 3.1(a).
"Closing" has the meaning set forth in Section 8.1.
"Closing Date" has the meaning set forth in Section 8.1.
"Code" means the Internal Revenue Code of 1986, as amended.
A-1
<PAGE> 153
"Constituent Corporations" has the meaning set forth in Section 2.1(b).
"DEI" has the meaning set forth in the Preamble to this Agreement.
"DEI Amended Certificate" means the Amended and Restated Certificate of
Incorporation of DEI in the form attached as Exhibit 5.2.
"DEI Balance Sheet" has the meaning set forth in Section 4.2(o).
"DEI Common Stock" means the common stock, $.01 par value, of DEI.
"DEI License Agreement" has the meaning set forth in Section 4.2(l).
"DEI SEC Documents" has the meaning set forth in Section 4.2(d).
"DEI Share" means any share of DEI Common Stock.
"DEI Subsidiaries" has the meaning set forth in Section 4.2(b).
"DGCL" means the Delaware General Corporation Law.
"Dissenters' Shares" has the meaning set forth in Section 3.1(e).
"Effective Time" has the meaning set forth in Section 2.2(a).
"Employee Benefit Plan" means any (a) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan,
(b) qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), (d) Employee Welfare Benefit Plan, including medical,
dental, disability and other welfare benefits plan, and material fringe benefit
plan or program, (e) employee, severance and termination agreements and
arrangements, and (f) all plans, programs and arrangements with respect to
stock options, restricted stock, phantom stock and other stock-based or
stock-related compensation.
"Employee Pension Benefit Plan" has the meaning set forth in Section 3(2)
of ERISA.
"Employee Welfare Benefit Plan" has the meaning set forth in Section 3(1)
of ERISA.
"Employment Agreement" means an employment agreement in the form attached
hereto as Exhibit 8.2(a)(iii).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all
A-2
<PAGE> 154
other laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof) concerning pollution
or protection of the environment, public health and safety, or employee health
and safety, including laws relating to emissions, discharges, releases, or
threatened releases of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes into ambient air, surface water, ground
water, or lands or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic
materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974
(including any amendments thereof, and the regulations and published
interpretations thereunder).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means American Stock Transfer and Trust Company.
"Financial Statements" has the meaning set forth in Section 4.1(f).
"GAAP" means United States generally accepted accounting principles, as in
effect from time to time.
"Higher Offer" has the meaning set forth in Section 5.7.
"Intellectual Property Rights" means all of the right, title and interest
of the party in and to (a) all inventions (whether patentable or unpatentable
and whether or not reduced to practice), all improvements thereto, and all
patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all
trade secrets and confidential business information (including ideas, research
and development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies
and tangible embodiments thereof (in whatever form or medium).
"Knowledge" means present actual knowledge, without independent
investigation.
"Liability" means any liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), including any liability for
Taxes.
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"License Agreement" has the meaning set forth in Section 4.1(l).
"Merger" has the meaning set forth in the first recital to this Agreement.
"Merger Consideration" has the meaning set forth in Section 3.1(a).
"Merger Sub" has the meaning set forth in the Preamble to this Agreement.
"Multiemployer Plan" has the meaning set forth in Section 3(37) of ERISA.
"Ordinary Course of Business" means the ordinary course of business
consistent with current and past custom and practice (including with respect to
quantity and frequency).
"Party" and "Parties" have the meaning set forth in the Preamble of this
Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or association, or a governmental entity (or any department,
agency, or political subdivision thereof).
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business
and not incurred in connection with the borrowing of money.
"STR" has the meaning set forth in the Preamble to this Agreement.
"STR Share" means any share of STR common stock, $.10 par value.
"Subject Company" has the meaning set forth in Section 5.11.
"Surviving Corporation" has the meaning set forth in Section 2.1(a).
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property,
sales, use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
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"VSCA" means the Virginia Stock Corporation Act.
2. MERGER.
2.1 The Merger.
(a) Subject to the terms and conditions of this Agreement, the
Articles of Merger, the DGCL and the VSCA, at the Effective Time (as defined in
Section 2.2(a) below) (i) Merger Sub will be merged with and into STR and
(ii) the separate corporate existence of Merger Sub will cease and STR will
continue as the "Surviving Corporation".
(b) At the Effective Time (i) the Surviving Corporation will
continue its corporate existence under the laws of the Commonwealth of Virginia
and will possess all of the rights, privileges, immunities, powers,
franchises and purposes of STR and Merger Sub immediately prior to the Merger
(STR and Merger Sub will sometimes be referred to in this Agreement as the
"Constituent Corporations"), (ii) all property of the Constituent Corporations
will be the property of the Surviving Corporation and (iii) the Surviving
Corporation will, by operation of law, assume all of the liabilities and
obligations of the Constituent Corporations.
(c) The Articles of Incorporation of STR in effect at and as of the
Effective Time will remain the Articles of Incorporation of the Surviving
Corporation without any modification or amendment in the Merger.
(d) The Bylaws of STR in effect at and as of the Effective Time will
remain the Bylaws of the Surviving Corporation without any modification or
amendment in the Merger.
(e) The existing directors and officers of STR in office
immediately prior to the Effective Time will remain the directors and
officers of the Surviving Corporation until their successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's Articles
of Incorporation, bylaws and applicable law.
2.2 Effectiveness of the Merger.
(a) The Articles of Merger will be filed with the Virginia State
Corporation Commission on the day of the Closing or as soon thereafter as is
practicable. The Merger will become effective at the time at which the Articles
of Merger are filed with the Virginia State Corporation Commission, or at such
later time as is agreed upon by the Parties and specified in the Articles of
Merger (the "Effective Time").
(b) If, at any time after the Effective Time, the Surviving Corporation
will consider or be advised that any further deeds, assignments or other things
are necessary or desirable to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation, the title to any property or rights of the
Constituent Corporations acquired or to be acquired by reason or as a result
of, the Merger, the Constituent Corporations and their officers and directors,
on behalf of the Constituent
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Corporations, to the extent permitted by law, will execute and deliver all such
deeds and assignments and do all things necessary or desirable to vest, perfect
or confirm title to such property or rights in the Surviving Corporation and
otherwise to carry out the purpose of this Agreement, and the officers and
directors of the Surviving Corporation are fully authorized in the name of the
Constituent Corporations or otherwise to take any and all such actions.
3. MERGER CONSIDERATION.
3.1 Merger Consideration and Conversion of Shares. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder
thereof:
(a) Each STR Share issued and outstanding at the Effective Time, other
than Dissenters' Shares (as defined in Section 3.1(e)), shall be converted into
the right to receive 2.58 DEI Shares in accordance with Section 3.2 (the
"Merger Consideration"). At the Effective Time, each STR Share shall cease to
be outstanding, shall automatically be canceled and retired and shall cease to
exist. Each holder of a stock certificate which immediately prior to the
Effective Time represented outstanding STR Shares (a "Certificate") shall cease
to have any rights with respect thereto except the right to receive, without
interest, the Merger Consideration upon the surrender of such Certificate in
accordance with Section 3.2. No transfers of the STR Shares shall be made on
the stock transfer books of STR at or after the Effective Time.
(b) Each STR Share issued and held by STR immediately prior to the
Effective Time, if any, shall cease to be outstanding, shall automatically be
canceled and retired without payment of any consideration therefor and shall
cease to exist.
(c) DEI Shares issued and outstanding immediately prior to the
Effective Time shall remain outstanding and shall be unaffected by the Merger.
Outstanding certificates representing DEI Shares will continue to represent the
number of shares of common stock of DEI following the Effective Time and need
not be exchanged for new certificates of DEI by any holders thereof.
(d) Each share of common Stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into the same number
of shares of common stock of the Surviving Corporation.
(e) Notwithstanding anything in this Agreement to the contrary, the STR
Shares which are issued and outstanding immediately prior to the Effective Time
and which are held by shareholders who do not vote in favor of the approval and
adoption of this Agreement and who comply with all of the relevant provisions
of Sections 13.1-729 through 13.1-741 of the VSCA (the "Dissenters' Shares")
shall not be converted into or be exchangeable for the right to receive the
Merger Consideration. Dissenters' Shares shall, from and after the Effective
Time, no longer be outstanding and shall be canceled and retired and shall
cease to exist, and each holder of Dissenters' Shares shall thereafter cease to
have any rights with respect to such Shares except the right, if any, to
receive payment pursuant to the relevant provisions of Sections 13.1-729
through 13.1-741 of the VSCA. If any holder of STR Shares shall fail to
perfect or shall have effectively withdrawn or lost
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the right to dissent, the STR Shares held thereby shall thereupon be treated as
though converted into the Merger Consideration pursuant to Section 3.1(a) and
such shares shall be deemed not to be Dissenters' Shares. Any Merger
Consideration otherwise to have been paid to holders of Dissenters' Shares
shall be retained by DEI.
(f) Any option outstanding at the Effective Time to purchase DEI Shares
shall be unaffected by the Merger unless the terms of the agreement evidencing
such option provide otherwise. Each and every option outstanding at the
Effective Time to purchase STR Shares shall automatically, at the Effective
Time, become an option to purchase a number of DEI Shares equal to the product
of (i) the number of STR Shares for which the option is exercisable, multiplied
by (ii) the Merger Consideration to be exchanged for each STR Share in the
Merger. The terms of options to purchase STR Shares shall not otherwise be
affected or modified as a result of the Merger.
3.2 Exchange of Certificates; Transmittal Letter. (a) Promptly after the
Effective Time, DEI shall mail or cause to be mailed to each holder of record
(other than STR and holders of Dissenters' Shares) of a Certificate or
Certificates (i) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the
Certificates for payment therefor. Upon surrender of Certificates for
cancellation to the Exchange Agent, together with such letter of transmittal
duly executed and any other required documents, the holder of such Certificates
shall be entitled to receive for each of the Shares represented by such
Certificates the Merger Consideration and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, such Certificates shall represent
solely the right to receive the Merger Consideration as contemplated by Section
3.1(a) with respect to each of the STR Shares represented thereby.
(b) No dividends or other distributions that are declared after the
Effective Time on DEI Shares and payable to the holders of record thereof after
the Effective Time will be paid to persons entitled by reason of the Merger to
receive DEI Shares until such persons surrender their Certificates. Upon such
surrender, there shall be paid to the person in whose name the DEI Shares are
issued any dividends or other distributions having a record date after the
Effective Time and payable with respect to such DEI Shares between the
Effective Time and the time of such surrender. After such surrender there
shall be paid to the person in whose name the DEI Shares are issued any
dividends or other distributions on such DEI Shares which shall have a record
date after the Effective Time and prior to such surrender and a payment date
after such surrender and such payment shall be made on such payment date. In
no event shall the persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. Notwithstanding the foregoing, neither the Exchange Agent nor
any Party hereto shall be liable to any holder of STR Shares for any DEI Shares
or dividends thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the DEI
Shares held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such DEI Shares for the account of the persons entitled thereto.
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(c) If any certificate representing DEI Shares is to be issued in a
name other than that in which the Certificate surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance
of certificates for such DEI Shares in a name other than that of the registered
holder of the Certificate surrendered, or shall establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not applicable.
(d) If a Certificate is lost or destroyed, the registered owner thereof
shall be entitled to receive the Merger Consideration to which such registered
owner would otherwise be entitled on the surrender of such Certificate by
presenting an affidavit to DEI or the Exchange Agent attesting to the loss or
destruction of such Certificate. DEI or the Exchange Agent may require such
registered owner, as a condition precedent to receiving the Merger
Consideration, to furnish DEI or the Exchange Agent with a bond or agreement
of indemnity, in such form and amount and with such sureties, or without
sureties, as DEI or the Exchange Agent may direct or approve.
(e) No certificates or scrip representing a fraction of a DEI Share
shall be issued upon the surrender of Certificates for exchange pursuant to
this Section. In lieu of any such fractional shares, each holder of STR
Shares shall be entitled to receive a cash payment in an amount equal to the
product of (i) the fractional interest of a DEI Share to which such holder
would have been entitled (computed based upon the aggregate number of STR
Shares owned by such holder and the aggregate number of DEI Shares to which
such holder is entitled) and (ii) the average of the published bid and asked
prices per DEI Share for the trading day immediately prior to the Effective
Time.
4. REPRESENTATIONS AND WARRANTIES.
4.1 Representations and Warranties of STR. STR represents and warrants to
DEI and Merger Sub as follows:
(a) Authorization of Transaction. STR has full corporate power and
authority to execute and deliver this Agreement and, subject to obtaining the
necessary approval of its shareholders, to consummate the transactions
contemplated hereby and thereby and perform its obligations hereunder and
thereunder. This Agreement constitutes the valid and legally binding
obligation of STR enforceable in accordance with its terms and conditions.
Except for the filing of the Articles of Merger with the Virginia State
Corporation Commission, STR is not required to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
(b) Organization and Qualification. (i) STR is a corporation duly
organized, validly existing, and in good standing under the laws of the
Commonwealth of Virginia. STR is duly authorized to conduct its business and
is in good standing as a foreign corporation under the laws of each
jurisdiction where the failure to be so authorized and in good standing, in the
aggregate for all such failures, could reasonably be expected to have a
material adverse effect on STR. Such
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jurisdictions are listed on Schedule 4.1(b)(i). STR has all licenses, permits,
and authorizations necessary to carry on the business in which it is engaged
and to own and use the properties owned and used by it. Schedule 4.1(b)(i)
also lists the directors and officers of STR. STR has delivered to DEI correct
and complete copies of the Articles of Incorporation and Bylaws of STR (as
amended to the date hereof). STR is not in violation of any provision of its
Articles of Incorporation or Bylaws.
(ii) Except as set forth in Schedule 4.1(b)(ii), STR does not
own and has never owned, directly or indirectly, a 50% or greater interest
in the outstanding voting securities of any Person.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement nor the consummation of the transactions contemplated hereby or
thereby, will (i) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of
any government, governmental agency, or court to which STR is subject or any
provision of its Articles of Incorporation or Bylaws, (ii) except as set forth
in Schedule 4.1(c), result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which STR is a party or by which
it is bound or to which any of its assets is subject or (iii) result in the
imposition of any Security Interest upon any of STR's assets.
(d) Capitalization. The entire authorized capital stock of STR
consists of 3,000,000 shares of STR Common Stock, of which 723,786 shares are
issued and outstanding, and 140 shares of STR's preferred stock, none of
which are issued and outstanding. Each of the holders of STR Shares owns the
STR Shares free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws). All of the
issued and outstanding STR Shares have been duly authorized, are validly
issued, fully paid, and nonassessable, and are held of record by the
shareholders and in the amounts listed in Schedule 4.1(d) to this Agreement.
Except as set forth on Schedule 4.1(d), STR has no outstanding subscriptions,
warrants, options, rights, convertible securities or other agreements or
commitments obligating STR to issue any additional shares. STR holds 418 of
its authorized shares in treasury.
(e) Equity Interests. Except as set forth in Schedule 4.1(e), STR
does not control, directly or indirectly, or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association.
(f) Financial Statements. Attached as Schedule 4.1(f) are the
following financial statements of STR (collectively the "Financial
Statements"): (i) an audited balance sheet as of September 30, 1997 and 1996
and related statements of operations, stockholders' equity and cash flows for
the fiscal years ended September 30, 1997, 1996 and 1995 for STR. The
Financial Statements have been prepared in accordance with GAAP and present
fairly the financial condition of STR as of such dates and the results of
operations of STR for such periods. The Financial Statements are correct and
complete, to the extent required by GAAP, and are consistent with the books and
records of STR (which books and records are correct and complete).
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(g) Subsequent Events. Except as set forth in Schedule 4.1(g), since
September 30, 1997, STR has not:
(i) issued, sold, purchased or redeemed any shares of its capital
stock; granted any stock options or made any other commitment to issue or sell
shares of its capital stock; amended its Articles of Incorporation or Bylaws;
or declared, set aside or made any payment or distribution upon its capital
stock;
(ii) incurred any liability or obligation under agreements or
otherwise, except current liabilities entered into or incurred in the
Ordinary Course of Business; issued any notes or other corporate debt
securities; or waived any of its rights;
(iii) mortgaged, pledged or subjected to any lien any asset or,
except in the Ordinary Course of Business, entered into any lease of real
property, machinery, equipment or buildings, or sold or transferred any
intangible asset;
(iv) effected any increases in salary, wage or other compensation
of any kind, whether current or deferred, to any officer, employee, agent,
broker or consultant, other than routine increases in the Ordinary
Course of Business; entered into any salary, wage or other compensation
agreement with a term of one year or longer with any employee or made any
contribution to any trust or plan for the benefit of employees except as
required by the terms thereof as now in effect;
(v) entered into any material transaction other than in the
Ordinary Course of Business;
(vi) suffered any damage, destruction or loss to any of its
properties or assets (whether or not covered by insurance);
(vii) suffered any adverse changes which in the aggregate have
had or are reasonably likely to have a material adverse effect on
the business, financial condition or prospects of STR; or
(viii) become (A) subject to any outstanding injunction,
judgment, order, decree, ruling or charge or (B) a party or, to the
Knowledge of STR, is threatened to be made a party, to any action, suit,
proceeding, hearing, or investigation of, in or before any court or
quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction of before any arbitrator.
(h) Undisclosed Liabilities. STR does not have any Liability, except
for (i) Liabilities set forth on the audited balance sheet of STR as of
September 30, 1997 (the "Balance Sheet") and (ii) Liabilities which have arisen
after September 30, 1997 in the Ordinary Course of Business (none of which
liabilities resulted from, arose out of, relate to, is in the nature of, or was
caused by any breach of contract, breach of warranty, tort, infringement,
violation of law or provisions in the Articles of Incorporation or bylaws of
STR providing for indemnification of directors, officers or employees).
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(i) Legal Compliance; Licenses and Authorizations.
(i) STR has complied in all material respects with all
applicable laws, statutes, rules, regulations and orders of federal, state,
local, and foreign governments (and all agencies thereof), including,
without limitation, all Environmental, Health and Safety Laws, and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or
notice has been filed or commenced against it alleging any failure so to
comply.
(ii) STR holds all licenses and other permits and
authorizations necessary for the operation of the business of STR as presently
conducted and such licenses, permits and authorizations will be in full force
and effect for the entire duration of their respective unexpired license
terms, unimpaired by any acts or omissions of STR, except for such licenses,
permits and authorizations with respect to which the failure of STR to hold
such licenses, permits and authorizations would not have a material adverse
effect on STR. There is not now pending or, to the Knowledge of STR, threatened
any action by the grantor of any such license, permit or authorization to
revoke, cancel or refuse to renew any such license, permit or authorization.
(j) Tax Returns and Taxes. (i) STR has filed all federal, state, local
and other Tax returns and reports which are required to be filed; (ii) STR has
paid all Taxes, interest, penalties, assessments and deficiencies due or
assessed pursuant to such returns; (iii) STR has not received any notice of
assessment of additional Taxes or executed or filed with any taxing authority
any agreement extending the period of assessment of any Taxes; (iv) there are
no claims, examinations, proceedings or proposed deficiencies for Taxes pending
or, to the Knowledge of STR, threatened against STR; (v) STR is current in the
payment of all withholding and other employee taxes which are due and payable;
(vi) there are no Tax liens on any of the assets or properties of STR; (vii)
the accruals for Taxes contained in the Balance Sheet are adequate to cover all
liabilities for Taxes of STR for all periods ending on or before the date of
such statement; (viii) all Taxes for periods beginning after the date of such
statement up to the Closing have been paid or are adequately reserved against
on the books of STR; (ix) STR has not been audited by the Internal Revenue
Service, has not received any notice of an audit and has not been threatened
with an audit.
(k) Litigation. None of STR or any director or officer of STR is (i)
subject to any outstanding injunction, judgment, order, decree, ruling, or
charge or (ii) a party or, to the Knowledge of STR, threatened to be made a
party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. No director or
officer of STR has any reason to believe that any such action, suit,
proceeding, hearing, or investigation may be brought or threatened against STR.
(l) Intellectual Property. Except as set forth in Schedule 4.1(l), STR
does not hold, own or use any domestic or foreign patents and registered
trademarks, tradenames and service marks, or patent, trademark, tradename and
service mark applications filed in connection with the business of STR. Set
forth on Schedule 4.1(l) is a correct and complete list of all license and
other agreements allowing STR to use intellectual property rights of third
parties in the United States or foreign countries entered into by STR or
affecting the business of STR (the "License Agreements").
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Except as set forth on Schedule 4.1(l), (y) STR has and owns all right,
title and interest in and to all of the Intellectual Property Rights (including
the exclusive right to use, sell, license or dispose of such rights and to
bring actions for infringement thereof) which are required or necessary for STR
to conduct its business in the normal course in accordance with past practice,
free and clear of any claims, liens, licenses or encumbrances and (z) no Person
has a right to receive a royalty or similar payment in respect of any of the
Intellectual Property Rights. STR has no Knowledge of and has not received any
notice of any infringements of, or claims or assertions of infringement of, any
of the Intellectual Property Rights, and STR has not taken or omitted to take
any action which would have the effect of waiving any of its rights relating to
any of the Intellectual Property Rights. There have been no claims and, to the
Knowledge of STR, there is no basis for any claim challenging the scope,
validity or enforceability of any of the Intellectual Property Rights which are
material to the conduct of STR's business. The manufacture, sale or use of any
products now or heretofore manufactured or sold by STR did not and does not
infringe (nor has any claim been made that any such action infringes) the
intellectual property rights of others. Each of the License Agreements is in
full force and effect and there has occurred no default which is continuing in
respect of any License Agreement.
(m) Tangible Assets. STR owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted, free and clear of all liens and encumbrances except as set
forth on Schedule 4.1(m). Each such tangible asset is in good operating
condition and repair (subject to normal wear and tear) and is suitable for the
purposes for which it presently is used.
(n) Contracts. Except as set forth on Schedule 4.1(n), STR is not a
party to any outstanding:
(i) written contract (or collective bargaining agreement) with any
labor union or representative of employees;
(ii) written or oral commitment, contract, or agreement involving
an obligation or liability on the part of STR of more than $10,000 (excluding
orders for the purchase of standard products and services from STR accepted in
the Ordinary Course of Business and providing for prevailing prices and
customary conditions of sale);
(iii) written or oral lease of real property or personal property;
(iv) written or oral agreement, contract or commitment containing
any covenant limiting the freedom of STR to engage in any line of business
or compete with any Person;
(v) written or oral employment, consulting, sales representative,
agency or distributor agreement that is not cancelable by STR pursuant to its
stated terms on notice of not longer than three months and without liability,
penalty or premium;
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(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance or other plan or arrangement
for the benefit of its current or former directors, officers and employees;
(vii) written or oral agreement or contract relating to any
indebtedness or the mortgaging, pledging or the placing of a lien on any of the
properties or assets of STR which is not reflected in the Financial
Statements;
(viii) guaranty of any obligation;
(ix) loans to or from officers, directors or affiliates;
(x) any agreement with any shareholder of STR or any of its
affiliates; or
(xi) any other written or oral agreement which is material to the
operations or business prospects of STR.
STR has delivered to DEI a correct and complete copy of each written agreement
listed in Schedule 4.1(n) (as amended to date) and a written summary setting
forth the terms and conditions of each oral agreement referred to in Schedule
4.1(n). With respect to each such agreement: (A) the agreement is legal, valid,
binding, enforceable, and in full force and effect, (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
by this Agreement; (C) no party is in breach or default, and no event has
occurred which with notice or lapse of time could constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement and (D) no party has repudiated any provision of the agreement.
Except as set forth in Schedule 4.1(n), no contract or agreement described in
Schedule 4.1(n) requires the consent of any party to the execution of this
Agreement or the consummation of the transactions contemplated by this
Agreement.
(o) Notes and Accounts Receivable. Except as set forth in Schedule
4.1(o), all notes and accounts receivable of STR are reflected properly on its
books and records, are subject to no known setoffs or counterclaims, are
current and collectible, subject only to the reserve for bad debts set forth on
the face of the Balance Sheet (rather than in any notes thereto) as adjusted
for the passage of time through the Closing Date in accordance with the past
custom and practice of STR.
(p) Inventories. (i) All inventory of STR, including, without
limitation, raw materials, work in process, finished goods, returned products,
goods in transit and all other materials used or consumed in their
business and reflected on the Balance Sheet: (A) was acquired and has been
maintained in the Ordinary Course of Business; (B) is of good and merchantable
quality; (C) consists substantially of a quality, quantity and condition
usable, leasable or saleable in the Ordinary Course of Business; (D) is valued
at reasonable amounts based on the Ordinary Course of Business during the past
six months; and (E) is not subject to any write-down or write-off. (ii) STR is
not under any Liability or obligation with respect to the return of inventory
in the possession of wholesalers, retailers or other customers. (iii) All
inventory has been valued on the Balance Sheet and on STR's records and books
of account at the lower of cost (determined on a first in, first out
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basis) or market value on a basis consistent with that reflected in the
Financial Statements. (iv) Obsolete inventory and inventory of below-standard
quality has been written down to amounts not in excess of realizable market
value. (v) All of the work-in-process, raw materials and supplies inventory can
be used or consumed in the Ordinary Course of Business and are not in amounts
in excess of normal requirements. (vi) Since the date of the Balance Sheet,
there has been no change in the amount of inventory except changes as a result
of the purchase and sale of, or adjustment to, inventory in the Ordinary Course
of Business, including, but not limited to, established seasonal patterns.
(q) Insurance. Set forth on Schedule 4.1(q) is a complete and correct
list of all policies of insurance of STR, indicating for each policy the
carrier, risks insured against, coverage limits, deductible amounts, premium
rate, expiration date, all outstanding claims thereunder and whether the terms
of such policy provide for retrospective premium adjustments. All such
policies are outstanding and in full force and effect.
(r) [reserved]
(s) Payments. STR has not directly or indirectly, nor has any agent,
representative or employee of STR, directly or indirectly, paid or delivered
any fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, government official or other party, in the
United States or any other country, which is in any manner related to the
operations of STR and which is, or may be with the passage of time or
discovery, illegal under any federal, state or local law (including, without
limitation, the U.S. Foreign Corrupt Practices Act) or any other country having
jurisdiction. STR has not participated, directly or indirectly, in any
boycotts or other similar practices affecting any of its actual or potential
customers and STR has at all times done business in an open and ethical manner.
(t) Employee Benefits.
(i) Schedule 4.1(t) to this Agreement lists each Employee Benefit
Plan that STR maintains or to which it contributes.
(A) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
material respects with its underlying documents, the applicable requirements of
ERISA, the Code, and other applicable laws.
(B) All applicable disclosure and filing requirements have
been timely satisfied in all material respects with respect to each such
Employee Benefit Plan. The requirements of Part 6 of Subtitle B of
Title I of ERISA and of Code Section 4980B have been met with respect to each
such Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(C) All premiums or other payments for all periods ending
on or before the Closing Date have been paid with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan.
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(D) With respect to each such Employee Benefit Plan, STR
has delivered to DEI correct and complete copies of the plan documents and
summary plan descriptions, the most recent Form 5500 Annual Report, if
applicable, and all related insurance contracts, or trust or other funding
agreements which, if applicable, implement each such Employee Benefit Plan.
(ii) STR does not contribute to, has never contributed to, nor
has ever been required to contribute to any Multiemployer Plan, and has
no Liability (including withdrawal Liability) under any Multiemployer Plan.
(iii) STR does not maintain, has never maintained, does not
contribute, has never contributed, nor has ever been required to contribute to
any Employee Welfare Benefit Plan providing medical, health, or life
insurance or other welfare-type benefits for current or future retired or
terminated employees, their spouses, or their dependents (other than in
accordance with Code Section 4980B).
(iv) There is no litigation, disputed claim (other than routine
claims for benefits), governmental proceeding, audit, inquiry or
investigation pending or, to the Knowledge of STR, threatened with respect to
any such Employee Benefit Plan, its related assets or trusts, or any fiduciary,
administrator or sponsor of such Employee Benefit Plan.
(v) Except as disclosed in Schedule 4.1(t), with respect to each
Employee Pension Benefit Plan:
(A) each such plan which is intended to qualify as a
tax-qualified retirement plan under Code Section 401(a) has received a
favorable determination letter(s) from the Internal Revenue Service
(copies of which have been delivered to DEI) as to qualification of such plan
covering the period from its adoption through the Closing Date; all amendments
required to maintain such qualification have been timely adopted; nothing has
occurred, whether by action or failure to act, which has resulted in or could
cause the loss of such qualification (whether or not eligible for review under
the Internal Revenue Service's Closing Agreement Program, Voluntary Compliance
Resolution program or any similar governmental agency program); and each trust
thereunder is exempt from tax pursuant to Code Section 501(a);
(B) no event has occurred and no condition exists relating
to any such plan that would subject STR or DEI to any tax under Code
Sections 4972 or 4979, or to any Liability under ERISA Section 502; and
(C) neither any such plan nor any other Person has engaged
in a "prohibited transaction" (as defined in ERISA Section 406 or Code Section
4975) with respect to such Plan, for which no individual or class exemption
exists.
(u) Insider Interests. Except as set forth on Schedule 4.1(u), (i) no
officer or director of STR, nor any shareholder of STR, has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to
the business of STR, and (ii) no such person has any business relationship with
STR, except as an officer, employee, director or shareholder thereof.
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(v) Brokers' Fees. STR has no Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(w) Form S-4 Registration Statement. None of the information
supplied or to be supplied by STR for inclusion or incorporation by reference
in the Form S-4 registration statement (including the joint proxy statement
contained therein) to be filed with the SEC pursuant to Section 5.10 hereof
will, on the date the joint proxy statement (including any amendment or
supplement thereto) is first mailed to stockholders and at the time of the
meeting of STR's stockholders and the time of the meeting of DEI's stockholders
to approve this Agreement, or, in the case of the Form S-4 registration
statement, at the time it becomes effective under the Securities Act and at the
Effective Time, 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 therein not misleading.
(x) Anti-Takeover Statutes. No "fair price", "moratorium", "control
share acquisition", "business combination", or other similar anti-takeover
statute or regulation is applicable to the Merger or the transactions
contemplated thereby.
4.2 Representations and Warranties of DEI. DEI and Merger Sub
represent and warrant to STR as follows:
(a) Authorization of Transaction. DEI has full corporate power and
authority to execute and deliver this Agreement and each Employment Agreement
being executed and delivered by DEI and, subject to obtaining the approval of
its stockholders, to consummate the transactions contemplated hereby and
thereby and to perform its obligations hereunder and thereunder. This
Agreement and each Employment Agreement to which DEI is a party constitutes the
valid and legally binding obligation of DEI enforceable in accordance with its
terms and conditions. Except for the filing of the Articles of Merger with
the Virginia State Corporation Commission, DEI is not required to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
(b) Organization and Qualification. (i) DEI is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Delaware. DEI is duly authorized to conduct its business and is in good
standing as a foreign corporation under the laws of each jurisdiction where the
failure to be so authorized and in good standing, in the aggregate for all such
failures, could reasonably be expected to have a material adverse effect on the
business of DEI and the DEI Subsidiaries, taken as a whole. Such jurisdictions
are listed on Schedule 4.2(b)(i). DEI has all licenses, permits, and
authorizations necessary to carry on the business in which it is engaged and to
own and use the properties owned and used by it. DEI has delivered to STR
correct and complete copies of the Certificate of Incorporation and Bylaws of
DEI (as amended to the date hereof). DEI is not in violation of any provision
of its Certificate of Incorporation or Bylaws.
(ii) The DEI SEC Documents set forth the name and
jurisdiction of incorporation of each Person in which DEI directly or
indirectly owns a 50% or greater interest in
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the outstanding voting securities thereof (the "DEI Subsidiaries"). DEI owns
all of the issued and outstanding securities of each DEI Subsidiary free and
clear of all liens, charges, encumbrances and other rights of third parties,
and all such securities have been duly and validly issued and are fully paid
and non-assessable. Each DEI Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of its respective state or
jurisdiction of incorporation, each has the corporate power to own or lease its
properties and to carry on its business as presently conducted, and each is
duly authorized to do business as a foreign corporation and is in good standing
in all jurisdictions where the failure to so qualify would have a material
adverse effect on the business of DEI and the DEI Subsidiaries, taken as a
whole. None of the DEI Subsidiaries is in violation of any provision of its
charter or bylaws. Merger Sub was formed solely for the purpose of the Merger
and to engage in the transactions contemplated thereby, is 100% owned by DEI
and has not done any business, incurred any liabilities or obligations or
entered into any contracts other than this Agreement.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement or the Employment Agreements to which it will be a party, nor the
consummation of the transactions contemplated hereby or thereby, will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which DEI is subject or any provision of its
Certificate of Incorporation or bylaws, (ii) result in a breach of, constitute
a default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
DEI is a party or by which it is bound or to which any of its assets is subject
or (iii) result in the imposition of any Security Interest upon DEI's assets.
(d) DEI SEC Documents; Options and Warrants. DEI has delivered to STR
true and complete copies of its Form 10-K for the year ended July 31, 1997 and
all other documents that DEI has filed with the SEC since such date pursuant to
the Exchange Act (the "DEI SEC Documents"). Such reports are complete and
correct in all material respects. The financial statements included in such
Form 10-K have been prepared in accordance with GAAP and present fairly the
consolidated financial condition of DEI and the DEI Subsidiaries as of such
dates and the consolidated results of operations of DEI and the DEI
Subsidiaries for such periods. The Financial Statements are correct and
complete, to the extent required by GAAP, and are consistent with the books and
records of DEI and the DEI Subsidiaries (which books and records are correct
and complete). Except as set forth on Schedule 4.2(d), DEI has no outstanding
subscriptions, warrants, options, rights, convertible securities or other
agreements or commitments obligating DEI to issue any additional shares.
(e) Merger Consideration. The shares of DEI Common Stock to be issued
and delivered pursuant to this Agreement and the Merger are duly authorized
and, when issued and delivered as contemplated herein, will be duly and validly
issued, fully paid and non-assessable.
(f) Equity Interests. Except for the DEI Subsidiaries, DEI does not
control, directly or indirectly, or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association.
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(g) Subsequent Events. Except as set forth in the DEI SEC Documents or
Schedule 4.2(g), or as otherwise contemplated by this Agreement, since July 31,
1997, neither DEI nor any DEI Subsidiary has:
(i) issued, sold, purchased or redeemed any shares of its
capital stock; granted any stock options or made any other commitment to issue
or sell shares of its capital stock; amended its Certificate of Incorporation
or Bylaws; or declared, set aside or made any payment or distribution upon its
capital stock;
(ii) incurred any liability or obligation under agreements
or otherwise, except current liabilities entered into or incurred in the
Ordinary Course of Business; issued any notes or other corporate debt
securities; or waived any of its rights;
(iii) mortgaged, pledged or subjected to any lien any asset
or, except in the Ordinary Course of Business, entered into any lease of real
property, machinery, equipment or buildings, or sold or transferred any
intangible asset;
(iv) effected any increases in salary, wage or other
compensation of any kind, whether current or deferred, to any officer,
employee, agent, broker or consultant, other than routine increases in the
Ordinary Course of Business; entered into any salary, wage or other
compensation agreement with a term of one year or longer with any employee or
made any contribution to any trust or plan for the benefit of employees except
as required by the terms thereof as now in effect;
(v) entered into any material transaction other than in the
Ordinary Course of Business;
(vi) suffered any damage, destruction or loss to any of its
properties or assets (whether or not covered by insurance);
(vii) suffered any adverse changes which in the aggregate
have had or are reasonably likely to have a material adverse effect on the
business, financial condition or prospects of DEI and the DEI Subsidiaries,
taken as a whole; or
(viii) become (A) subject to any outstanding injunction,
judgment, order, decree, ruling or charge or (B) a party or, to the Knowledge
of DEI, is threatened to be made a party, to any action, suit, proceeding,
hearing, or investigation of, in or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction of
before any arbitrator, which, with respect to (A) or (B), would be required to
be disclosed in a report filed by DEI under the Exchange Act.
(h) Undisclosed Liabilities. Neither DEI nor any DEI Subsidiary has any
Liability, except for (i) Liabilities set forth in the DEI SEC Documents and
(ii) Liabilities which have arisen after the date of the current period balance
sheet contained in the most recent DEI SEC Document
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in the Ordinary Course of Business (none of which liabilities resulted
from, arose out of, relate to, is in the nature of, or was caused by any breach
of contract, breach of warranty, tort, infringement, violation of law or
provisions in the Certificate of Incorporation or bylaws of DEI or a DEI
Subsidiary providing for indemnification of directors, officers or employees).
(i) Legal Compliance; Licenses and Authorizations.
(i) DEI and the DEI Subsidiaries have complied in all
material respects with all applicable laws, statutes, rules, regulations and
orders of federal, state, local, and foreign governments (and all agencies
thereof), including, without limitation, all Environmental, Health and Safety
Laws, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
(ii) DEI and the DEI Subsidiaries hold all licenses and
other permits and authorizations necessary for the operation of the business of
DEI and the DEI Subsidiaries as presently conducted and such licenses, permits
and authorizations will be in full force and effect for the entire duration of
their respective unexpired license terms, unimpaired by any acts or omissions
of DEI or a DEI Subsidiary, except for such licenses, permits and
authorizations with respect to which the failure of DEI or a DEI Subsidiary to
hold such licenses, permits and authorizations would not have a material
adverse effect on DEI and the DEI Subsidiaries, taken as a whole. There is not
now pending or, to the Knowledge of DEI, threatened any action by the grantor
of any such license, permit or authorization to revoke, cancel or refuse to
renew any such license, permit or authorization.
(j) Tax Returns and Taxes. Except as set forth in Schedule 4.2(j), (i)
DEI and the DEI Subsidiaries have filed all federal, state, local and other Tax
returns and reports which are required to be filed; (ii) DEI and the DEI
Subsidiaries have paid all Taxes, interest, penalties, assessments and
deficiencies due or assessed pursuant to such returns; (iii) DEI and the DEI
Subsidiaries have not received any notice of assessment of additional Taxes or
executed or filed with any taxing authority any agreement extending the period
of assessment of any Taxes; (iv) there are no claims, examinations,
proceedings or proposed deficiencies for Taxes pending or, to the Knowledge of
DEI, threatened against DEI or a DEI Subsidiary; (v) DEI and the DEI
Subsidiaries are current in the payment of all withholding and other employee
taxes which are due and payable; (vi) there are no Tax liens on any of the
assets or properties of DEI or a DEI Subsidiary; (vii) the accruals for Taxes
set forth in the current period balance sheet contained in the most recent DEI
SEC Document are adequate to cover all liabilities for Taxes of DEI and the DEI
Subsidiaries for all periods ending on or before the date of such statement;
(viii) all Taxes for periods beginning after the date of such statement up to
the date hereof and the Closing have been paid or are adequately reserved
against on the books of DEI and the DEI Subsidiaries; (ix) DEI and the DEI
Subsidiaries have not been audited by the Internal Revenue Service since the
fiscal 1989 Tax return, have not received any notice of an audit and have not
been threatened with an audit.
(k) Litigation. Except as set forth in Schedule 4.2(k), none of DEI,
the DEI Subsidiaries or any director or officer of DEI or the DEI Subsidiaries
is (i) subject to any outstanding injunction, judgment, order, decree,
ruling, or charge or (ii) a party or, to the Knowledge of DEI,
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threatened to be made a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator. No director or officer of DEI or the DEI Subsidiaries has any
reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against DEI or the DEI Subsidiaries.
(l) Intellectual Property. Except as set forth in Schedule 4.2(l),
DEI and the DEI Subsidiaries do not hold, own or use any domestic or foreign
patents and registered trademarks, tradenames and service marks, or patent,
trademark, tradename and service mark applications filed in connection with the
business of DEI and the DEI Subsidiaries. Set forth on Schedule 4.2(l) is a
correct and complete list of all license and other agreements allowing DEI and
the DEI Subsidiaries to use intellectual property rights of third parties in
the United States or foreign countries entered into by DEI and the DEI
Subsidiaries or affecting the business of DEI and the DEI Subsidiaries (the
"DEI License Agreements"). Except as set forth on Schedule 4.2(l), (y) DEI and
the DEI Subsidiaries have and own all right, title and interest in and to all
of the Intellectual Property Rights (including the exclusive right to use,
sell, license or dispose of such rights and to bring actions for infringement
thereof) which are required or necessary for DEI and the DEI Subsidiaries to
conduct their business in the normal course in accordance with past practice,
free and clear of any claims, liens, licenses or encumbrances and (z) no Person
has a right to receive a royalty or similar payment in respect of any of the
Intellectual Property Rights. Except as set forth on Schedule 4.2(l), DEI and
the DEI Subsidiaries have no Knowledge of and have not received any notice of
any infringements of, or claims or assertions of infringement of, any of the
Intellectual Property Rights, and DEI and the DEI Subsidiaries have not taken
or omitted to take any action which would have the effect of waiving any of its
rights relating to any of the Intellectual Property Rights. There have been no
claims and, to the Knowledge of DEI, there is no basis for any claim
challenging the scope, validity or enforceability of any of the Intellectual
Property Rights which are material to the conduct of the business of DEI and
the DEI Subsidiaries. The manufacture, sale or use of any products now or
heretofore manufactured or sold by DEI and the DEI Subsidiaries did not and
does not infringe (nor has any claim been made that any such action infringes)
the intellectual property rights of others. Each of the DEI License Agreements
is in full force and effect and there has occurred no default which is
continuing in respect of any DEI License Agreement.
(m) Tangible Assets. DEI and the DEI Subsidiaries own or lease all
buildings, machinery, equipment, and other tangible assets used in the conduct
of their business as presently conducted, free and clear of all liens and
encumbrances except as set forth on Schedule 4.2(m). Each such tangible asset
is in good operating condition and repair (subject to normal wear and tear) and
is suitable for the purposes for which it presently is used.
(n) Contracts. All material contracts which are required to be
attached to or incorporated by reference in the DEI SEC Documents have been so
attached or incorporated. With respect to each such contract filed with or
incorporated by reference into a DEI SEC Document: (A) the contract is legal,
valid, binding and enforceable; (B) the contract will continue to be legal,
valid, binding and enforceable on identical terms following the consummation of
the transactions contemplated by this Agreement; (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time could
constitute a breach or default, or permit termination,
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modification, or acceleration, under the contract and (D) no party has
repudiated any provision of the contract. Except as set forth in Schedule
4.2(n), none of such contracts requires the consent of any party to the
execution of this Agreement or the consummation of the transactions
contemplated by this Agreement.
(o) Notes and Accounts Receivable. All notes and accounts receivable
of DEI and the DEI Subsidiaries are reflected properly on its books and
records, are subject to no known setoffs or counterclaims, are current
and collectible, subject only to the reserve for bad debts set forth on the
face of the audited balance sheet (rather than in any notes thereto) filed as
part of the DEI SEC Documents (the "DEI Balance Sheet") as adjusted for the
passage of time through the Closing Date in accordance with the past custom and
practice of DEI and the DEI Subsidiaries.
(p) Inventories. (i) All inventory of DEI and the DEI Subsidiaries,
including, without limitation, raw materials, work in process, finished goods,
returned products, goods in transit and all other materials used or consumed in
their business and reflected on the DEI Balance Sheet: (A) was acquired and has
been maintained in the Ordinary Course of Business; (B) is of good and
merchantable quality; (C) consists substantially of a quality, quantity and
condition usable, leasable or saleable in the Ordinary Course of Business; (D)
is valued (after taking into account the reserve set forth on the DEI Balance
Sheet) at reasonable amounts based on the Ordinary Course of Business during
the past six months; and (E) is not subject to any write-down or write-off in
excess of the reserve set forth on DEI Balance Sheet. (ii) DEI and the DEI
Subsidiaries are not under any Liability or obligation with respect to the
return of inventory in the possession of wholesalers, retailers or other
customers. (iii) All inventory has been valued on the DEI Balance Sheet and on
DEI's records and books of account at the lower of cost (determined on a first
in, first out basis) or market value (after taking into account the reserve set
forth on the DEI Balance Sheet). (iv) Obsolete inventory and inventory of
below-standard quality has been written down to amounts not in excess of
realizable market value (after taking into account the reserve set forth on the
DEI Balance Sheet). (v) All of the work-in-process, raw materials and supplies
inventory can be used or consumed in the Ordinary Course of Business and are
not in amounts in excess of normal requirements. (vi) Since the date of the
DEI Balance Sheet, there has been no change in the amount of inventory except
changes as a result of the purchase and sale of, or adjustment to, inventory in
the Ordinary Course of Business, including, but not limited to, established
seasonal patterns.
(q) Insurance. Set forth on Schedule 4.2(q) is a complete and correct
list of all policies of insurance of DEI and the DEI Subsidiaries, indicating
for each policy the carrier, risks insured against, coverage limits, deductible
amounts, premium rate, expiration date, all outstanding claims thereunder and
whether the terms of such policy provide for retrospective premium adjustments.
All such policies are outstanding and in full force and effect.
(r) [reserved]
(s) Payments. Neither DEI nor any DEI Subsidiary has directly or
indirectly, nor has any agent, representative or employee of any of them,
directly or indirectly, paid or delivered any fee, commission or other sum of
money or item or property, however characterized, to any finder, agent,
government official or other party, in the United States or any other country,
which
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is in any manner related to the operations of DEI and the DEI Subsidiaries and
which is, or may be with the passage of time or discovery, illegal under any
federal, state or local law (including, without limitation, the U.S. Foreign
Corrupt Practices Act) or any other country having jurisdiction. Neither DEI
nor any DEI Subsidiary has participated, directly or indirectly, in any
boycotts or other similar practices affecting any of its actual or potential
customers and DEI and the DEI Subsidiaries have at all times done business in
an open and ethical manner.
(t) Employee Benefits.
(i) Schedule 4.2(t) to this Agreement lists each Employee Benefit
Plan that DEI or a DEI Subsidiary maintains or to which it contributes.
(A) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
material respects with its underlying documents, the applicable requirements of
ERISA, the Code, and other applicable laws.
(B) All applicable disclosure and filing requirements have
been timely satisfied in all material respects with respect to each such
Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of
ERISA and of Code Section 4980B have been met with respect to each such
Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(C) All premiums or other payments for all periods ending
on or before the Closing Date have been paid with respect to each such
Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(D) With respect to each such Employee Benefit Plan, DEI
has delivered to STR correct and complete copies of the plan documents
and summary plan descriptions, the most recent Form 5500 Annual Report, if
applicable, and all related insurance contracts, or trust or other funding
agreements which, if applicable, implement each such Employee Benefit Plan.
(ii) DEI and the DEI Subsidiaries do not contribute to, have never
contributed to, nor have ever been required to contribute to any Multiemployer
Plan, and have no Liability (including withdrawal Liability) under any
Multiemployer Plan.
(iii) DEI and the DEI Subsidiaries do not maintain, have never
maintained, do not contribute, have never contributed, nor have ever been
required to contribute to any Employee Welfare Benefit Plan providing medical,
health, or life insurance or other welfare-type benefits for current or future
retired or terminated employees, their spouses, or their dependents (other than
in accordance with Code Section 4980B).
(iv) There is no litigation, disputed claim (other than routine
claims for benefits), governmental proceeding, audit, inquiry or investigation
pending or, to the Knowledge of DEI, threatened with respect to any such
Employee Benefit Plan, its related assets or trusts, or any fiduciary,
administrator or sponsor of such Employee Benefit Plan.
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(v) Except as disclosed in SCHEDULE 4.2(T), with respect to each
Employee Pension Benefit Plan:
(A) each such plan which is intended to qualify as a
tax-qualified retirement plan under Code Section 401(a) has received a
favorable determination letter(s) from the Internal Revenue Service
(copies of which have been delivered to STR) as to qualification of such plan
covering the period from its adoption through the Closing Date; all amendments
required to maintain such qualification have been timely adopted; nothing has
occurred, whether by action or failure to act, which has resulted in or could
cause the loss of such qualification (whether or not eligible for review under
the Internal Revenue Service's Closing Agreement Program, Voluntary Compliance
Resolution program or any similar governmental agency program); and each trust
thereunder is exempt from tax pursuant to Code Section 501(a);
(B) no event has occurred and no condition exists relating
to any such plan that would subject STR or DEI to any tax under Code
Sections 4972 or 4979, or to any Liability under ERISA Section 502; and
(C) neither any such plan nor any other Person has engaged
in a "prohibited transaction" (as defined in ERISA Section 406 or Code
Section 4975) with respect to such Plan, for which no individual or class
exemption exists.
(u) Insider Interests. No officer or director of DEI or any DEI
Subsidiary, nor any shareholder of DEI, has any interest in any property, real
or personal, tangible or intangible, used in or pertaining to the business of
DEI and the DEI Subsidiaries, and no such person has any business relationship
with DEI or any DEI Subsidiary, except as an officer, employee, director or
shareholder thereof.
(v) Brokers' Fees. Except as set forth in Schedule 4.2(v), DEI and
the DEI Subsidiaries have no Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
(w) Form S-4 Registration Statement. None of the information supplied
or to be supplied by DEI for inclusion or incorporation by reference in the
Form S-4 registration statement (including the joint proxy statement contained
therein) to be filed with the SEC pursuant to Section 5.10 hereof will, on the
date the joint proxy statement (including any amendment or supplement thereto)
is first mailed to stockholders and at the time of the meeting of STR's
stockholders and the time of the meeting of DEI's stockholders to approve this
Agreement, or, in the case of the Form S-4 registration statement, at the time
it becomes effective under the Securities Act and at the Effective Time,
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
therein not misleading.
(x) Anti-Takeover Statutes. No "fair price", "moratorium", "control
share acquisition", "business combination", or other similar anti-takeover
statute or regulation is applicable to the Merger or the transactions
contemplated thereby.
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5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
5.1 General. Each of the Parties will use its best efforts to take
all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 7 below).
5.2 Stockholder Meetings. As soon as practicable following the date
hereof, each of DEI and STR, acting through its Board of Directors, will take
all action necessary in accordance with its Certificate of Incorporation and
Bylaws and applicable law to duly call, give notice of, convene and hold a
special meeting of its stockholders for the purpose of voting, in the case of
STR, upon the approval of this Agreement and the transactions contemplated
hereby and, in the case of DEI, upon the approval of the DEI Amended
Certificate (in the form attached hereto as Exhibit 5.2, which increases the
number of authorized DEI Shares to 5,000,000 and changes DEI's name to "Sensys
Technologies Inc.") and an amendment to the DEI Long-Term Incentive Plan
increasing the number of shares available thereunder to 400,000. Subject to
the fiduciary duties of DEI's Board of Directors and STR's Board of Directors
under applicable law (as determined following consultation with counsel) and
the next succeeding sentence, the Board of Directors of each of DEI and STR
shall recommend and declare advisable such approval and use its best efforts to
solicit votes in favor of the matters set forth above. The Board of Directors
of each of DEI or STR, as the case may be, may at any time prior to the
Effective Time withdraw, modify, or change any recommendation and declaration
regarding this Agreement and the Merger (in the case of STR) or the approval of
the DEI Amended Certificate and the amendment to the DEI Long-Term Incentive
Plan (in the case of DEI), or recommend and declare advisable any other offer
or proposal, if (i) such Board of Directors determines that the failure to so
withdraw, modify, or change its recommendation and declaration would cause the
Board of Directors to breach its fiduciary duties to DEI's or STR's
stockholders, as the case may be, under applicable law as advised in writing by
counsel, or (ii) another Person or group makes a Higher Offer that the Board of
Directors reasonably believes, in the good faith exercise of its business
judgment, is likely to lead to consummation of an agreement to acquire all of
the stock of DEI or STR, as the case may be, and, notwithstanding anything
contained in this Agreement to the contrary, any such withdrawal, modification,
or change of recommendation shall not constitute a breach of this Agreement by
DEI or STR, as the case may be; provided that neither Board of Directors may
withdraw, modify or change its recommendation or declaration with respect to
this Agreement or the Merger because of the trading price of DEI Shares between
the date hereof and the date of the applicable stockholder meeting.
5.3 Notices and Consents. DEI and STR will give any notices to third
parties, and use their best efforts to obtain any third-party authorizations,
consents, or approvals required in order to consummate the transactions
contemplated by this Agreement.
5.4 Operation of Business. From the date of this Agreement until the
Effective Time, STR and DEI will each operate its business in the Ordinary
Course of Business. STR and DEI will each use its best efforts to preserve
intact its present business organization, maintain in effect all material
licenses, permits and approvals of governmental authorities necessary for the
conduct of its present
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business and maintain its present operations, physical facilities, working
conditions and relationships with lessors, suppliers, customers, clients and
employees. Each of STR and DEI agree not to engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of Business
without the prior written consent of DEI (in the case of STR) or STR (in the
case of DEI). Without limiting the generality of the foregoing and except as
otherwise specifically provided in this Agreement, from the date of this
Agreement until the Effective Time, each of STR and DEI will not, without the
prior written consent of the other Party:
(a) amend its Articles of Incorporation or Certificate of
Incorporation, as the case may be, or its Bylaws;
(b) pay or declare any cash dividend, or other dividend or distribution
with respect to its capital stock;
(c) issue, transfer, sell or deliver, or commit to issue, transfer,
sell or deliver, any shares of its capital stock (or any options, warrants or
any rights thereto including, without limitation, any securities
convertible into or exchangeable, with or without additional consideration, for
such capital stock) except pursuant to the exercise of stock options or
warrants existing on the date of this Agreement or under the conditions set
forth in Schedule 5.4(c);
(d) increase or reduce the number of shares of its capital stock by
split-up, reverse split, reclassification or distribution of stock dividends;
(e) purchase or otherwise acquire for any consideration any outstanding
shares of its capital stock or securities carrying the right to acquire, or
convertible into or exchangeable for such stock, with or without additional
consideration;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
business of any corporation, partnership, association or other business
organization or division thereof, or make any investment of a capital nature
either by purchase of stock or securities, contributions to capital, property
transfer or otherwise, or by the purchase of any property or assets of any
other individual, partnership, firm or corporation;
(g) incur additional indebtedness for borrowed money except pursuant to
existing lines of credit;
(h) adopt or materially modify any bonus, pension, profit-sharing or
other compensation plan or enter into any contract of employment with any
employee which is not terminable at will without cost or other liability;
(i) adopt, enter into or amend in any material respect any collective
bargaining, employment, severance or termination agreement or arrangement with
any person or make any change in its key management structure, including, but
not limited to, the hiring of additional employees or the termination of
existing employees;
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(j) discharge or satisfy any lien or encumbrance or pay any obligation
or liability (whether accrued, absolute, contingent or otherwise), except
current liabilities incurred in the Ordinary Course of Business;
(k) mortgage, pledge or subject to lien, charge, security interest or
any other encumbrance any of its assets or property;
(l) transfer or lease any of its assets or property except in the
Ordinary Course of Business except as set forth in Schedule 5.4(l);
(m) cancel or compromise any debt or claim other than in the Ordinary
Course of Business in an aggregate amount in excess of $10,000;
(n) waive or release any rights, or settle any claim, in an aggregate
amount which is in excess of $10,000;
(o) transfer or grant any rights under any leases, licenses or other
agreements, other than in the Ordinary Course of Business;
(p) make or grant any general or individual wage or salary increase
to any of its officers;
(q) fail to pay or discharge its accounts payable, debts or liabilities
when due;
(r) suffer any material adverse change in its financial condition,
properties or business;
(s) except in the Ordinary Course of Business, make or enter into any
contract, commitment or transaction which involves an expenditure in excess of
$10,000, or renew, extend, amend or modify any contract, commitment or
transaction involving in excess of $10,000;
(t) enter into or amend any contract, agreement or other transaction
with any of its officers, directors or shareholders, or any affiliate of
such an officer, director or shareholder, on terms that are less favorable than
could be obtained from an unrelated third party on an arm's length basis.
5.5 Full Access to and Provision of Information. Each of STR and DEI will
permit the other Party and its designees to have access to all premises,
properties, personnel, books, records (including Tax records), contracts, and
documents of or pertaining to it and will deliver such other documentation and
information which is reasonably requested in accordance with that certain
Non-Disclosure Agreement, dated as of October 28, 1996, between DEI and STR.
5.6 Notice of Developments. Upon becoming aware of such facts or
circumstances, each Party will give prompt written notice to the other Party of
(a) the occurrence or failure to occur of any event the effect of which is that
any representation and warranty made by such Party herein is
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untrue and (b) the receipt of any notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with the transactions contemplated by this Agreement. To the
extent such facts or circumstances would cause a Schedule to this Agreement to
become incorrect or incomplete, such Schedule shall be amended and delivered
promptly to the other Party (and, in any event, prior to the Closing). No
disclosure by any Party pursuant to this Section 5.6, however, will be deemed
to amend or supplement this Agreement or the Schedules (except to increase the
number of STR Shares outstanding as stated in Section 4.1(d) and to disclose
the sale of STR Shares in Schedule 4.1(g), in each case to the extent STR
Shares are sold under the conditions set forth in Schedule 5.4(c)), or to
prevent or cure any misrepresentation, breach of warranty, or breach of
covenant, unless such misrepresentation or breach is waived in accordance with
Section 11.10; provided, however, that if the Effective Time occurs
notwithstanding such disclosure, the representations and warranties contained
in this Agreement shall be deemed amended to include such disclosure and such
misrepresentation or breach shall be deemed waived.
5.7 Exclusivity. (a) Neither DEI nor any of the DEI Subsidiaries nor any
of their respective officers and directors shall, and DEI and the DEI
Subsidiaries will use their best efforts to cause their employees, agents, and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by DEI) not to, initiate, solicit, encourage or take any
other action to facilitate, directly or indirectly, any inquiries or the making
of any proposal with respect to a merger, consolidation, share exchange or
similar transaction or series of transactions involving DEI or any of DEI
Subsidiary, or any purchase of all or any significant portion of the assets of
DEI (other than DEI's real estate) or any equity interest in DEI other than the
transactions contemplated hereby (an "Acquisition Proposal"), or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal;
provided, however, that the Board of Directors on behalf of DEI may furnish or
cause to be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if (i) the failure to provide such information or participate in such
negotiations and discussions would cause the members of the Board of Directors
to breach its fiduciary duties to DEI's stockholders under applicable law as
advised in writing by counsel or (ii) another Person or group makes a bona fide
offer or proposal with respect to all DEI Shares which, based upon the identity
of the Person making it and the terms thereof, the Board of Directors believes,
in the good faith exercise of its business judgment, could reasonably be
expected to lead to a transaction involving all DEI Shares more favorable to
DEI's stockholders from a financial point of view than the transaction
contemplated hereby; provided, however, that such Person must have required, as
a condition to his or its highest offer or proposal (or to the making thereof),
that DEI terminate this Agreement (in either case, a "Higher Offer"). DEI will
notify STR immediately, orally and in writing, if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with DEI
and will keep STR informed, on a current basis, of the status and terms of any
such proposals and status of any such negotiations or discussions. The
provisions of this Section 5.7(a) shall not prohibit DEI from taking any
position with respect to an Acquisition Proposal pursuant to Rules 14d-9 and
14e-2 under the Exchange Act.
(b) Neither STR nor any of its officers and directors shall, and STR
will use its best efforts to cause its employees, agents, and representatives
(including, without limitation, any
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investment banker, attorney or accountant retained by STR) not to, initiate,
solicit, encourage or take any other action to facilitate, directly or
indirectly, any inquiries or the making of any Acquisition Proposal, or engage
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Acquisition
Proposal; provided, however, that the Board of Directors on behalf of STR may
furnish or cause to be furnished information and may participate in such
discussions and negotiations through its representatives with persons who have
sought the same if (i) the failure to provide such information or participate
in such negotiations and discussions would cause the members of the Board of
Directors to breach its fiduciary duties to STR's stockholders under applicable
law as advised in writing by counsel or (ii) another Person or group makes a
bona fide offer or proposal with respect to all STR Shares which, based upon
the identity of the Person making it and the terms thereof, the Board of
Directors believes, in the good faith exercise of its business judgment, could
reasonably be expected to lead to a transaction involving all STR Shares more
favorable to STR's stockholders from a financial point of view than the
transaction contemplated hereby; provided, however, that such Person must have
required, as a condition to his or its Highest Offer (or to the making
thereof), that STR terminate this Agreement. STR will notify DEI immediately,
orally and in writing, if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with STR and will keep DEI informed, on a
current basis, of the status and terms of any such proposals and status of any
such negotiations or discussions.
5.8 WARN Act. STR agrees that, if requested by DEI, it shall, on behalf
of DEI, issue such notices as are required under the Worker Adjustment and
Retraining Notification Act of 1988 or any similarly applicable state or local
law. No such notices shall be given without the prior approval of DEI.
5.9 Press Releases and Public Announcements. Neither DEI nor STR will
issue any press release or make any public announcement relating to the subject
matter of this Agreement or any Employment Agreement without the prior written
approval of the other party, which approval shall not be unreasonably withheld.
5.10 Registration Statement. DEI and STR will, as promptly as
practicable, prepare and DEI will file with the SEC a Form S-4 registration
statement containing a joint proxy statement/prospectus and forms of proxy in
connection with the vote of DEI's and STR's stockholders with respect to the
Merger and the issuance of the DEI Shares pursuant to the Merger. DEI and STR
will, and will cause their accountants and lawyers to, use their best efforts
to have or cause the Form S-4 registration statement to be declared effective
as promptly as practicable, including, without limitation, causing their
accountants to deliver necessary or required instruments such as opinions and
certificates, and will take any other action required or necessary to be taken
under federal or state securities laws or otherwise in connection with the
registration process. DEI and STR will use their respective best efforts to
cause the joint proxy statement included as part of the Form S-4 registration
statement to be mailed or delivered to stockholders of DEI and STR at the
earliest practicable date and will coordinate and cooperate with respect to the
timing of such meetings and shall use their best efforts to hold such meetings
as soon as practicable after the date hereof.
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5.11 Affiliates of the Company and Parent. Prior to the Effective Time,
DEI and STR (each of which is referred to in this Section as a "Subject
Company") shall deliver to each other a list identifying all persons who, at
the time this Agreement is submitted for approval to the stockholders of the
Subject Company, may be deemed to be Affiliates of the Subject Company. STR
shall use its best efforts to cause each person who is identified as an
Affiliate in the list furnished pursuant to this Section 5.11 to deliver to
DEI, on or prior to the Effective Time, a written agreement, in the form to be
approved by the parties hereto, that such Affiliate will not sell, pledge,
transfer or otherwise dispose of any DEI Shares issued to such Affiliate
pursuant to the Merger, except pursuant to an effective registration statement
or in compliance with Rule 145 or an exemption from the registration
requirements of the Securities Act.
5.12. Representations and Warranties. Except as otherwise expressly
provided by this Agreement, neither STR nor DEI or Merger Sub will take any
action that would cause any of the representations and warranties set forth in
Sections 4.1 or 4.2, as the case may be, not to be true and correct in all
material respects at and as of the Effective Time; provided, that STR shall not
be prohibited from selling STR Shares under the conditions set forth in
Schedule 5.4(c).
5.13 Board of Directors of DEI. Effective at the Effective Time and
conditional upon the consummation of the Merger, William Panschar and Charles
Stanich shall have submitted their resignations as DEI Directors to the DEI
Board of Directors, DEI's Board of Directors shall have resolved to increase
the number of directors on the DEI Board of Directors to seven and DEI's Board
of Directors shall have appointed S. R. Perrino, S. K. Rockwell, James Busey
and Dr. Chuck Bernard to fill the resulting vacancies.
5.14 Amended and Restated Certificate of Incorporation of DEI. If duly
approved by DEI's stockholders as contemplated by Section 5.2, DEI shall,
immediately prior to the Effective Time, execute and file the DEI Amended
Certificate with the Delaware Secretary of State.
6. POST-CLOSING COVENANTS. The Parties agree as follows with respect to the
period following the Closing:
6.1 General. In case at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement or any
Employment Agreement, each of the Parties will, to the extent permitted by law,
take such further action (including the execution and delivery of such further
instruments and documents and obtaining such further consents) as any other
Party may request, all at the sole cost and expense of the requesting Party.
STR acknowledges and agrees that from and after the Closing, DEI will be
entitled to possession of all documents, books, records (including Tax
records), agreements and financial data in STR's possession of any sort
relating to STR.
6.2 Employee Benefit Plans. DEI shall maintain or cause to be maintained
after the Closing all of the Employee Benefit Plans of STR and DEI until such
time as it has determined that termination of any such Employee Benefit Plan is
in DEI's best interest.
7. CONDITIONS TO OBLIGATIONS TO CLOSE THE MERGER.
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7.1 Conditions to Obligation of DEI and Merger Sub. The obligation of DEI
and Merger Sub to consummate the transactions to be performed by them in
connection with the Closing is subject to satisfaction or waiver of the
following conditions prior to the Effective Time:
(a) The representations and warranties set forth in Section 4.1 shall
be true and correct at and as of the Closing Date.
(b) STR shall have performed and complied with all of its covenants
under this Agreement in all material respects through the Closing.
(c) This Agreement and the Merger shall have been duly approved by the
holders of the requisite number of the STR Shares in accordance with applicable
law and STR's Articles of Incorporation and Bylaws, and the DEI Amended
Certificate shall have been duly approved by the holders of the requisite
number of the DEI Shares in accordance with applicable law and DEI's
Certificate of Incorporation and Bylaws.
(d) There shall be no more than 35,000 Dissenters' Shares for which
written demand for payment has been made in accordance with the VSCA.
(e) STR and DEI shall each have procured all of the third party
consents required in order for it to consummate the transactions contemplated
by this Agreement.
(f) All required governmental and regulatory approvals for the Merger,
including any approvals required under federal or state securities laws, shall
have been received.
(g) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(i) prevent consummation of any of the transactions contemplated by this
Agreement, (ii) cause any of the transactions as set forth in this Agreement to
be rescinded following consummation, (iii) affect adversely the right of STR
to own its assets and to operate its business as it currently operates, or (iv)
if determined adversely to STR or any director, officer, employee or agent of
STR, have a material adverse effect on the business, financial condition or
prospects of STR and no such injunction, judgment, order, decree, ruling, or
charge described in (i), (ii), (iii) or (iv) shall be in effect.
(h) All actions to be taken by STR in connection with the consummation
of the Merger and all certificates, opinions, instruments, and other documents
delivered at the Closing or required to effect the Merger shall be satisfactory
in form and substance to DEI and its counsel.
(i) STR shall have made, or caused to be made, all of the deliveries
required by Section 8.2(b).
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(j) There shall not have occurred since the date hereof any event which
has had or with the passage of time, is reasonably likely to have a material
adverse effect on the condition (financial or otherwise), assets, liabilities,
results of operations or prospects of STR.
(k) The Form S-4 registration statement containing the joint proxy
statement to be used at the DEI and STR stockholder meetings at which approval
of the Merger is considered shall have become effective, no stop order
suspending the effectiveness of the Form S-4 registration statement shall have
been issued and no proceedings for such purpose shall have been initiated and
be continuing or threatened by the SEC. DEI shall have received all state
securities laws or "blue sky" permits and authorizations necessary to issue DEI
Shares pursuant to the Merger as contemplated by this Agreement.
(l) Each Affiliate of STR shall have executed and delivered to DEI the
letters contemplated by Section 5.11, together with such other documents and
instruments as DEI may reasonably request related to compliance with the
Securities Act.
7.2 Conditions to Obligation of STR to Close the Merger. The obligation
of STR to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction or waiver of the following conditions:
(a) The representations and warranties set forth in Section 4.2 shall
be true and correct at and as of the Closing Date.
(b) DEI and Merger Sub shall have performed and complied with all of
their covenants under this Agreement in all material respects through the
Closing.
(c) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(i) prevent consummation of any of the transactions contemplated by this
Agreement, or (ii) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, and no such injunction, judgment,
order, decree, ruling, or charge described in (i) and (ii) shall be in effect.
(d) DEI and Merger Sub shall have made, or caused to be made, all of
the deliveries required by Section 8.2(a).
(e) This Agreement and the Merger shall have been duly approved by the
holders of the requisite number of the STR Shares in accordance with applicable
law and STR's Articles of Incorporation and Bylaws, and the DEI Amended
Certificate shall have been duly approved by the holders of the requisite
number of the DEI Shares in accordance with applicable law and DEI's
Certificate of Incorporation and Bylaws.
(f) All required governmental and regulatory approvals for the Merger,
including any approvals required under federal or state securities laws, shall
have been received.
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(g) All actions to be taken by DEI and Merger Sub in connection with
the consummation of the Merger and all certificates, opinions, instruments, and
other documents delivered at the Closing or required to effect the Merger shall
be satisfactory in form and substance to STR and its counsel.
(h) There shall not have occurred since the date hereof any event
which has had or with the passage of time, is reasonably likely to have a
material adverse effect on the condition (financial or otherwise),
assets, liabilities, results of operations or prospects of DEI and the DEI
Subsidiaries, taken as a whole.
(i) The Form S-4 registration statement containing the joint proxy
statement to be used at the DEI and STR stockholder meetings at which approval
of the Merger is considered shall have become effective, no stop order
suspending the effectiveness of the Form S-4 registration statement shall have
been issued and no proceedings for such purpose shall have been initiated and
be continuing or threatened by the SEC. DEI shall have received all state
securities laws or "blue sky" permits and authorizations necessary to issue DEI
Shares pursuant to the Merger as contemplated by this Agreement.
8. CLOSING.
8.1 Time and Place. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated by this Agreement (the
"Closing") will take place at such location, on such date and at such time as
the Parties mutually agree at the earliest practicable time after the
satisfaction or waiver of all conditions to the Merger set forth in Article 7
hereof (the "Closing Date").
8.2 Deliveries at the Closing.
(a) At the Closing, DEI will deliver or cause to be delivered to STR
the following:
(i) A certificate of DEI, dated the Closing Date, signed by the
President and the Treasurer of DEI, to the effect that the conditions of
Section 7.2 have been fulfilled;
(ii) The written opinion of Dykema Gossett PLLC, counsel to DEI,
dated the Closing Date, in the form attached as Exhibit 8.2(a)(ii);
(iii) Employment Agreements executed by DEI, Mr. Thomas Ory and
Mr. Charles Stanich; and
(iv) The Articles of Merger executed by Merger Sub.
(b) At the Closing, STR will deliver or cause to be delivered to DEI
the following:
(i) A certificate of STR, dated the Closing Date, signed by the
President and the Treasurer of STR, to the effect that the conditions of
Section 7.1 have been fulfilled;
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(ii) The opinion of Michaels, Wishner & Bonner, P.C., counsel to
STR, dated the Closing Date, in the form attached as Exhibit 8.2(b)(ii);
(iii) The Articles of Merger executed by STR; and
(iv) Such other information, documents or instruments from STR
as DEI may reasonably request for the purpose of effectuating the transactions
contemplated by the Agreement.
9. TERMINATION.
9.1 Termination. Notwithstanding the adoption of this Agreement by DEI,
Merger Sub and STR, this Agreement may be terminated, and the Merger abandoned,
at any time before the Effective Time in any of the following ways:
(a) by the mutual written agreement of the Parties;
(b) by DEI if (i) any of the conditions set forth in Section 7.1 have
not been satisfied at Closing and have not been waived by DEI, (ii) STR shall
have failed to comply in any material respect with any of the covenants,
conditions or agreements contained in this Agreement to be complied with or
performed by STR at or prior to such date of termination and which failure to
comply has not been cured within five business days following receipt by STR of
written notice of such failure to comply, (iii) any representation or warranty
of STR contained in this Agreement shall not be true in all material respects
when made or on and as of the Effective Time as if made on and as of the
Effective Time, (iv) the STR Board of Directors withdraws, modifies or changes
its recommendation of this Agreement or the Merger in a manner adverse to DEI
or shall have resolved to do any of the foregoing, (v) the STR Board of
Directors shall have recommended to the stockholders of STR any Acquisition
Proposal or resolved to do so, or (vi) DEI enters into a definitive agreement
accepting a Higher Offer;
(c) by STR if (i) any of the conditions set forth in Section 7.2 have
not been satisfied at Closing and have not been waived by STR, (ii) DEI shall
have failed to comply in any material respect with any of the covenants,
conditions or agreements contained in this Agreement to be complied with or
performed by DEI at or prior to such date of termination and which failure to
comply has not been cured within five business days following receipt by DEI of
written notice of such failure to comply, (iii) any representation or warranty
of DEI contained in this Agreement shall not be true in all material respects
when made or on and as of the Effective Time as if made on and as of the
Effective Time, (iv) the DEI Board of Directors withdraws, modifies or changes
its recommendation of this Agreement or the Merger in a manner adverse to STR
or shall have resolved to do any of the foregoing, (v) the DEI Board of
Directors shall have recommended to the stockholders of DEI any Acquisition
Proposal or resolved to do so, or (vi) STR enters into a definitive agreement
accepting a Higher Offer; or
(d) by STR or DEI if the Closing Date does not occur on or before May
31, 1998; provided, that the right to terminate this Agreement under this
paragraph (d) shall not be available
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to any Party whose failure to fulfill any obligations under this Agreement has
been the cause of or resulted in the failure of the consummation of the Merger
to occur on or before such date.
A Party desiring to terminate this Agreement must give written notice of such
termination to the other Parties, specifying the paragraph of this Section 9.1
pursuant to which such termination is made and the reason(s) therefor.
9.2 Effect of Termination. In the event this Agreement is terminated and
the Merger abandoned (a) pursuant to Section 9.1(b)(v) or Section 9.1(c)(vi),
or (b) as a result of the failure of STR's stockholders to approve the Merger,
DEI shall be entitled to receive from STR all costs and out-of-pocket expenses
(including reasonable attorneys', accountants and investment banking fees and
expenses related to the Merger and any related financing) which DEI may have
incurred in connection with the negotiation and preparation of this Agreement
and related documentation, due diligence investigations undertaken with respect
to STR and DEI, and the preparation, filing, printing and mailing of the Form
S-4 registration statement and the joint proxy statement included therein and
the response to SEC comments thereon. In the event this Agreement is terminated
and the Merger abandoned (x) pursuant to Section 9.1(c)(v) or Section
9.1(b)(vi), or (y) as a result of the failure of DEI's stockholders to approve
the Merger, STR shall be entitled to receive from DEI all costs and
out-of-pocket expenses (including reasonable attorneys', accountants and
investment banking fees and expenses related to the Merger and any related
financing) which STR may have incurred in connection with the negotiation and
preparation of this Agreement and related documentation, due diligence
investigations undertaken with respect to STR and DEI, and the preparation,
filing, printing and mailing of the Form S-4 registration statement and the
joint proxy statement included therein and the response to SEC comments
thereon. Upon termination of this Agreement (and the Merger) pursuant to
Section 9.1 for any other reason, each Party will be responsible for its
out-of-pocket expenses (including professional fees and expenses) and the cost
of printing the Form S-4 Registration Statement and the related joint proxy
statement shall be borne equally by DEI and STR.
10. SURVIVAL OF REPRESENTATIONS.
10.1 No Survival of Representations and Warranties. The representations
and warranties contained in this Agreement and in any certificate furnished or
to be furnished pursuant hereto shall not survive the Closing Date.
11. MISCELLANEOUS.
11.1 Complete Agreement; Amendment. This Agreement and the Employment
Agreements, including the Exhibits, the Schedules and other writings referred
to in or delivered pursuant to or simultaneously with this Agreement, contain
the entire understanding of the Parties with respect to the transactions
contemplated by this Agreement. No representation, inducement, agreement,
promise or understanding altering, modifying, taking from or adding to the
terms and conditions hereof will have any force and effect unless the same is
in writing and validly executed by the Parties hereto.
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11.2 Notices. All notices or other communications required or permitted
hereunder will be in writing and will be deemed to have been duly given if sent
by registered or certified mail, postage prepaid and return receipt requested,
addressed as follows:
(a) if to DEI or Merger Sub, to:
Mr. Thomas R. Ory, President
Daedalus Enterprises, Inc.
300 Parkland Plaza
Ann Arbor, Michigan 48106
with a copy to:
Mark A. Metz, Esq.
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
(b) If to STR, to:
S. R. Perrino, President
S. T. Research Corporation
8419 Terminal Road
Newington, Virginia 22122
with a copy to:
Mark Wishner, Esq.
Michaels, Wishner & Bonner, P.C.
Suite 900
1140 Connecticut Avenue
Washington, D.C. 20036
or to such other address as will be furnished in writing by any Party, and any
such notice or communication will be deemed to have been given as of the date
so mailed. Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication will be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Party notice in the manner herein set forth.
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11.3 Expenses. Accept as otherwise provided in this Agreement, each Party
will be responsible for the payment of the fees and expenses which he or it
incurs for counsel, accountants, brokers and otherwise in connection with this
Agreement.
11.4 Assignment. This Agreement will be binding upon and inure to the
benefit of, and be enforceable by, the Parties hereto and their respective
successors and assigns, provided that neither this Agreement nor any of the
rights, interests or obligations under this Agreement will be assigned by STR
without the prior written consent of DEI; and further provided, that DEI may
assign, in its sole discretion, any or all of its rights, interests and
obligations under this Agreement to any direct or indirect wholly owned
subsidiary of DEI.
11.5 Counterparts. This Agreement may be executed in counterparts, all of
which together will be deemed an original of this Agreement.
11.6 Governing Law. This Agreement will be governed by the laws of the
State of Delaware without regard to its rules regarding choice of law.
11.7 Interpretation. The titles of the Sections have been inserted as a
matter of convenience and reference only and will not control or affect the
meaning or construction of this Agreement. References to Sections refer to
Sections of this Agreement unless otherwise stated. Words such as "herein",
"hereof", "hereby" and "hereunder", and words of similar import, unless the
context requires otherwise, refer to this Agreement. As used in this
Agreement, the masculine, feminine and neuter genders shall be deemed to
include the others if the context requires.
11.8 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof. References to this Agreement herein shall be construed as
references to the Agreement with all Exhibits and Schedules.
11.9 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement will be construed
as if drafted jointly by the Parties and no presumption or burden of proof will
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement.
11.10 Waivers. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, will
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence. Any waiver of
any obligation contained in this Agreement is freely, knowingly and voluntarily
given by each Party, without any duress or coercion, after each Party has had
opportunity to consult with its counsel and has carefully and completely read
all of the terms and provisions of this Agreement. No Party will be deemed to
have made any waiver unless it has been made in writing and signed by the Party
to be charged with having made such waiver.
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IN WITNESS WHEREOF, the duly authorized officers of DEI and STR have
hereunto set their hands and delivered this Agreement as of the date and year
first above written.
DAEDALUS ENTERPRISES, INC. S. T. RESEARCH CORPORATION
By: /s/ Thomas R. Ory By: /s/ S. R. Perrino
- --------------------------- -----------------------
Thomas R. Ory S. R. Perrino
Its: President Its: President
DEI MERGER SUB, INC.
By: /s/ Thomas R. Ory
- ---------------------------
Its: President
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Schedules to the Agreement:
4.1(b)(i) Organization, qualification and corporation power
4.1(b)(ii) Subsidiaries and former subsidiaries
4.1(d) Capitalization
4.1(e) Equity interests
4.1(f) STR Financial Statements
4.1(g) Subsequent Events
4.1(k) Litigation
4.1(l) Intellectual property
4.1(m) Exceptions to tangible assets owned
4.1(n) Contracts
4.1(o) Setoffs and Counterclaims
4.1(q) Insurance
4.1(t) Employee benefits
4.1(u) Insider interests
4.2(b)(i) List of jurisdictions in which DEI is qualified as
a foreign corporation
4.2(d) Options and Warrants
4.2(g) Subsequent Events
4.2(j) Taxes
4.2(k) Litigation
4.2(l) Intellectual property
4.2(m) Exceptions to tangible assets owned
4.2(n) Contracts
4.2(q) Insurance
4.2(t) Employee benefits
4.2(v) Broker fees
5.4(c) Sales
5.4(l) Asset transfer
Exhibits to the Agreement:
5.2 Form of DEI Amended Certificate
8.2(a)(ii) Form of Opinion of Dykema Gossett PLLC
8.2(a)(iii) Form of Employment Agreement
8.2(b)(ii) Form of Opinion of Michaels, Wishner & Bonner, P.C.
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ANNEX B
December 23, 1997
Board of Directors
Daedalus Enterprises, Inc.
300 Parkland Plaza Rd.
Ann Arbor, Michigan 48103
Gentlemen:
We understand that Daedalus Enterprises, Inc. ("Daedalus" or the "Company")
intends to enter into a strategic merger with S.T. Research Corporation ("S.T.
Research") pursuant to the Agreement and Plan of Merger by and among Daedalus,
DEI Merger Sub, Inc. and S.T. Research datxed December 23, 1997 (referred to as
the "Agreement"). Under the proposed terms contained in the Agreement,
Daedalus will exchange 2.58 shares of its common stock for each outstanding
share of S.T. Research common stock (the "Consideration"). Daedalus will be
the surviving entity with a new name to be determined. You have requested that
Roney & Co. render an opinion to you as to whether the Consideration as
proposed under the Agreement is fair, from a financial point of view, to the
shareholders of Daedalus.
Roney & Co. is a regional investment banking firm of recognized standing. As
part of our investment banking services, we are regularly engaged in the
valuation of corporate entities in connection with public offerings and merger
and acquisition transactions.
In arriving at the opinion as set forth below, we have, among other things:
I. Reviewed the Annual Reports and related financial information for the
fiscal years ended 1993 to 1997 for Daedalus;
II. Reviewed the audited financial statements for the fiscal years ended
1992 to 1997 for S.T. Research;
III. Reviewed 1998 budgets for both Daedalus and S.T. Research;
IV. Reviewed the Agreement
V. Relied upon the appraisal of Daedalus' facility prepared by Gerald
Alcock Company, LLC as of June 30, 1995;
VI. Relied upon the fair market value of ESOP shares of S.T. Research
prepared by Corporate Finance of Washington as of December 31, 1996;
VII. Researched current industry conditions and trends concerning the terms
of recent comparable mergers and acquisitions as we deemed relevant;
and
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Daedalus Enterprises, Inc.
December 23, 1997
VIII. Conducted discussions with members of senior management of Daedalus
and S.T. Research concerning their respective business and prospects
and the benefits of the Agreement.
In preparing our opinion, we have relied on and assumed the accuracy and
completeness of all financial and other information supplied or otherwise made
available to us. We have not assumed any responsibility for independent
verification of such information or any independent appraisal of the
information. With respect to the financial forecasts furnished to us, we have
assumed, without any further independent investigations and analysis by Roney,
that they have been reasonably prepared and reflect the best currently
available estimates and judgment of Daedalus' and S.T. Research's management as
to their respective expected future financial performance.
In our analyses, we have made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of Daedalus and S.T. Research. Any estimates contained
in our analyses are not necessarily indicative of future results or value,
which may be significantly more or less favorable than such estimates.
Estimates of values of companies do no purport to be appraisals or necessarily
reflect the price at which companies or their securities actually may be sold.
No company or transaction utilized in our analyses was identical to Daedalus or
the proposed transaction. Accordingly, such analyses are not based solely on
arithmetic calculations, rather, they involve complex considerations and
judgments concerning differences in financial and operating characteristics of
the relevant companies, the timing of the relevant transactions and prospective
buyer interests, as well as other factors that could affect companies to which
they are being compared. None of the analyses performed by us was assigned a
greater significance than any other.
It should be noted that this opinion is based on economic and market conditions
and other circumstances existing on, and information made available as of, the
date hereof. In addition, our opinion is, in any event, limited to the
fairness to Daedalus and its shareholders, from a financial point of view, of
the Consideration and does not address Daedalus' underlying business decision
to effect the Transaction or any other terms of the Transaction.
Our opinion is directed to the Board of Directors of Daedalus and does not
constitute a recommendation to the Board of Directors of Daedalus in connection
with any matter relating to the Agreement and has been prepared for the use of
the Board of Directors and senior management of Daedalus and will not be
reproduced, summarized, described or referred to or given to any other person
without our prior written consent. Notwithstanding the
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Daedalus Enterprises, Inc.
December 23, 1997
foregoing, this opinion may be included in the registration statement or
prospectus and proxy statement filed in connection with the Agreement, provided
that this opinion will be reproduced in full, and any description of or
reference to us or summary of the opinion in such registration statement or
prospectus and proxy statement will be in a form acceptable to us and our
counsel.
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of the date hereof, the Consideration, as proposed by the Agreement, is fair to
the shareholders of Daedalus, from a financial point of view.
Sincerely,
RONEY & CO.
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ANNEX C
TITLE 13.1. CORPORATIONS
CHAPTER 9. VIRGINIA STOCK CORPORATION ACT
ARTICLE 15. DISSENTERS' RIGHTS
Section 13.1-729. Definitions.
In this article:
"Corporation" means the issuer of the shares held by a dissenter
before the corporate action, except that (i) with respect to a merger,
"corporation" means the surviving domestic or foreign corporation or
limited liability company by merger of that issuer, and (ii) with respect to a
share exchange, "corporation" means the acquiring corporation by share
exchange, rather than the issuer, if the plan of share exchange places the
responsibility for dissenters' rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 13.1-730 and who exercises that right
when and in the manner required by Sections 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
Section 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment of
the fair value of his shares in the event of, any of the following
corporate actions:
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1. Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by Section
13.1-718 or the articles of incorporation and the shareholder is entitled to
vote on the merger or (ii) if the corporation is a subsidiary that is merged
with its parent under Section 13.1-719;
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation if the shareholder was entitled to
vote on the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that such
dissenter's rights shall not apply in the case of (i) a sale or exchange
pursuant to court order, or (ii) a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder or
the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
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corporation or limited liability company which, at the record date fixed to
determine the shareholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or share exchange is to be acted on, were
either listed subject to notice of issuance on a national securities exchange or
held of record by at least 2,000 record shareholders or members; or
c. A combination of cash and shares or membership interests as set forth
in subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is not
approved by a majority of "disinterested directors" as such terms are defined
in Section 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair value
of his shares shall terminate upon the occurrence of any one of the following
events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
Section 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
he asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his
other shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
1. He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
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Section 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights under
Section 13.1-730 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
B. If corporate action creating dissenters' rights under Section
13.1-730 is taken without a vote of shareholders, the corporation, during the
ten-day period after the effectuation of such corporate action, shall notify in
writing all record shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Section
13.1-734.
Section 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under
Section 13.1-730 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (i) shall deliver to the
corporation before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated and (ii) shall not
vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of
subsection A of this section is not entitled to payment for his shares
under this article.
Section 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under
Section 13.1-730 is authorized at a shareholders' meeting, the corporation,
during ten-day period after the effectuation of such corporate action, shall
deliver a dissenters' notice in writing to all shareholders who satisfied the
requirements of Section 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and
when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership of
the shares before or after that date;
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4. Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty nor more than
sixty days after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
Section 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in Section
13.1-734 shall demand payment, certify that he acquired beneficial
ownership of the shares before or after the date required to be set
forth in the dissenters' notice pursuant to subdivision 3 of
subsection B of Section 13.1-734, and, in the case of certificated
shares, deposit his certificates in accordance with the terms of the
notice.
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
Section 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
Section 13.1-737. Payment.
A. Except as provided in Section 13.1-738, within thirty days after receipt
of a payment demand made pursuant to Section 13.1-735, the corporation shall
pay the dissenter the amount the corporation estimates to be the fair value of
his shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this
Commonwealth, where its registered office is located or (ii) at the election of
any dissenter residing or having its principal office in the Commonwealth, by
the circuit court in the city or county where the dissenter resides or has its
principal office. The court shall dispose of the complaint on an expedited
basis.
B. The payment shall be accompanied by:
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1. The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the effective date of the
corporate action creating dissenters' rights, an income statement for
that year, a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair
value of the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment
under Section 13.1-739; and
4. A copy of this article.
Section 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by
Section 13.1-737 from a dissenter unless he was the beneficial owner of the
shares on the date of the first publication by news media or the first
announcement to shareholders generally, whichever is earlier, of the terms of
the proposed corporate action, as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and
shall offer to pay this amount to each dissenter who agrees to accept it in
full satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under Section 13.1-739.
Section 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under Section 13.1-737), or reject
the corporation's offer under Section 13.1-738 and demand payment of the fair
value of his shares and interest due, if the dissenter believes that the amount
paid under Section 13.1-737 or offered under Section 13.1-738 is less than the
fair value of his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for his shares.
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Section 13.1-740. Court action.
A. If a demand for payment under Section 13.1-739 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the circuit court in the city or county
described in subsection B of this section to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or
county where its principal office is located, or, if none in this Commonwealth,
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this Commonwealth, it shall commence
the proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not
residents of this Commonwealth, whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties shall be
served with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
a decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or
(ii) for the fair value, plus accrued interest, of his after-acquired shares
for which the corporation elected to withhold payment under Section 13.1-738.
Section 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under Section
13.1-740 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable,
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to the extent the court finds the dissenters did not act in good faith in
demanding payment under Section 13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts,excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of Sections 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed did not act in good faith with respect to the
rights provided by this article.
C. If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly
situated, the court may award to these counsel reasonable fees to be paid out
of the amounts awarded the dissenters who were benefited.
D. In a proceeding commenced under subsection A of Section 13.1-737
the court shall assess the costs against the corporation, except that the court
may assess costs against all or some of the dissenters who are parties to
the proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the
proceeding.
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ANNEX D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Daedalus Enterprises, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Daedalus Enterprises, Inc. Daedalus
Enterprises, Inc. was originally incorporated under the same name, and the
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on January 13, 1969.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation, and has been duly adopted in accordance with
Sections 242 and 245.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
FIRST. The name of the corporation is Sensys Technologies Inc.
SECOND. Its registered office in the State of Delaware is located at No.
100 West Tenth Street, in the City of Wilmington, County of New Castle. The
name and address of its registered agent is The Corporation Trust Company,
No. 100 West Tenth Street, Wilmington, Delaware.
THIRD. The nature of the business and its purpose is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware, including, without limitation, research,
development and manufacturing.
FOURTH. The total number of shares of Common Stock which the corporation
shall have authority to issue is five million (5,000,000) and the par value
of each of such shares is $0.01, amounting to fifty thousand dollars
($50,000.00).
FIFTH. [RESERVED]
SIXTH. [RESERVED]
SEVENTH. The corporation is to have perpetual existence.
EIGHTH. The private property of the stockholders shall not be subject to
the payment of corporate debts to any extent whatever.
NINTH. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
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To make, alter or repeal the bylaws of the corporation.
To authorize and cause to be executed mortgages and liens upon the real and
personal property of the corporation.
To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
By resolution passed by a majority of the whole board, to designate one or
more committees, each committee to consist of two or more of the directors of
the corporation, which, to the extent provided in the resolution or in the
bylaws of the corporation, shall have and may exercise the powers of the board
of directors in the management of the business and affairs of the corporation,
and may authorize the seal of the corporation to be affixed to all papers
which may require it. Such committee or committee shall have such name or
names as may be stated in the bylaws of the corporation or as may be
determined from time to time by resolution adopted by the board of directors.
When and as authorized by the affirmative vote of the holders of a majority
of the stock issued and outstanding having voting power given at a
stockholders' meeting duly called for that purpose, or when authorized by the
written consent of the holders of a majority of the voting stock issued and
outstanding, to sell, lease or exchange all of the property and assets of the
corporation, including its good will and its corporate franchises, upon such
terms and conditions and for such consideration, which may be in whole or in
part shares of stock in, and/or other securities of, any other corporation or
corporations, as its board of directors shall deem expedient and for the best
interests of the corporation.
TENTH. Meetings of stockholders may be held outside the State of Delaware,
if the bylaws so provide. The books of the corporation may be kept (subject
to any provision contained in the statutes) outside the State of Delaware
at such place or places as may be designated from time to time by the
board of directors or in the bylaws of the corporation. Elections of
directors need not be by ballot unless the bylaws of the corporation shall so
provide.
ELEVENTH. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TWELFTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
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application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of section 279 or Title 8
of the Delaware Code order a meeting of the creditors or class of creditors
and/or of the stockholders or class of stockholders of this corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
this corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
corporation, as the case may be, and also on this corporation.
THIRTEENTH: A Director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, as the same exists or hereafter may
be amended, or (iv) for any transaction from which the Director derived an
improper personal benefit. If the General Corporation Law of the State of
Delaware hereafter is amended to authorize the further elimination or
limitation of the liability of Directors, then the liability of a Director of
the corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended
Delaware General Corporation Law of the State of Delaware. Any repeal or
modification of this Article THIRTEENTH by the stockholders of the
corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a Director of the corporation
existing at the time of such repeal or modification.
IN WITNESS WHEREOF, the undersigned corporation has executed, signed and
acknowledged this Amended and Restated Certificate of Incorporation
this ___ day of _______, 1998.
___________________________________
Thomas R. Ory
President (authorized officer)
Acknowledged:
______________________________
Lloyd A. Semple, Secretary
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ANNEX E
[CORPORATE FINANCE OF WASHINGTON, INC. LETTERHEAD]
December 23, 1997
Board of Directors
S.T. Research Corporation
Newington, Virginia
You have asked our opinion of fairness from a financial point of view to the
shareholders of S.T. Research Corporation ("STR") of the Agreement and Plan of
Merger dated 12/23/97 between S.T. Research and Daedalus Enterprises, Inc.
This Agreement provides, in part, that Daedalus will exchange 2.58 shares of
its Common Stock to acquire each share of STR.
In arriving at our opinion, we have analyzed: (1) the merger agreement, (2)
financial information concerning the assets, operations, and prospects of S.T.
Research and Daedalus as furnished by their respective managements, (3) the
trading history of Daedalus' common stock, (4) the financial effects of the
merger upon the Daedalus shares to be exchanged for S.T. Research shares, and
(5) the market price ratios of defense electronics manufacturers. We have
visited the STR facilities and have discussed with its management the
operations, financial condition and prospects and the potential strategic
benefits of the merger to both companies. We have relied upon the accuracy and
completeness of the financial and other information provided to us by the
respective managements.
In brief, our analysis shows a reduction in revenues per STR share but a per
share enhancement of assets, working capital, estimated EBITDA (earnings before
interest, depreciation and amortization), and expected market price.
In our opinion, the exchange of shares by Daedalus Enterprises, Inc. for the
shares of S.T. Research Corporation pursuant to the Merger Agreement is fair
from a financial point of view to S.T. Research Corporation and its
stockholders.
Corporate Finance of Washington, Inc.
By: /s/ Peter Gavian
---------------------
Peter Gavian
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides that a corporation may indemnify its officers, directors,
employees and agents (or persons who have served, at the corporation's request,
as officers, directors, employees or agents of another corporation) against the
expenses, including attorneys' fees, actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors, officers, employees or agents, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceedings, had no reason to believe his conduct was unlawful, except that if
such action shall be in the right of the corporation, no such indemnification
shall be provided as to any claims, issue or matter as to which such person
shall have been adjudged to have been liable to the corporation unless and only
to the extent that the Court of Chancery of the State of Delaware, or any other
court in which the suit was brought, shall determine upon application that in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Item 21. Exhibits
A list of exhibits included as part of this Registration Statement is
set forth in the Exhibit Index which immediately precedes such exhibits and is
incorporated herein by reference.
Item 22. Undertakings
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement (notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration fee" table in the effective
registration statement); (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(b) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of post-effective
amendment any of the foregoing securities being registered which remain unsold
at the termination of the offering.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the
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Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a Registrant
of expenses incurred or paid by a director, officer or controlling person of
such Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant against which such claim is asserted
will, unless in the opinion of its counsel the mater has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
3. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 14 of this Form S-4, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
4. The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE> 207
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
requirements for filing on Form S-4 and has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Ann Arbor, State of Michigan on the date
indicated below.
DAEDALUS ENTERPRISES, INC.
Dated: May 11, 1998 By: /s/ Thomas R. Ory
--------------------------------------
Thomas R. Ory
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment No. 3 to Registration Statement has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated, in the City of Ann Arbor, State of Michigan.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas R. Ory President, Chief Executive Officer and Director May 11, 1998
- --------------------------- (Principal Executive Officer)
Thomas R. Ory
* Vice President - Finance and Treasurer May 11, 1998
- --------------------------- (Principal Financial and Accounting Officer)
Jane E. Barrett
* Vice President, Chief Operating Officer and May 11, 1998
- --------------------------- Director
Charles G. Stanich
* Director and Chairman of the Board May 11, 1998
- ---------------------------
John D. Sanders
* Director May 11, 1998
- ---------------------------
William S. Panschar
* Director May 11, 1998
- ---------------------------
Philip H. Power
* By /s/ Thomas R Ory
---------------------
Thomas R. Ory
Attorney-in-fact
</TABLE>
