UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996 Commission File Number 1-8533
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Sylvan Way, Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 898-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ------------------------
Common Stock, $.01 par value American Stock Exchange
8 1/2% Convertible Subordinated Debentures American Stock Exchange
due August 1, 1998
9% Senior Subordinated Convertible Debentures American Stock Exchange
due October 1, 2003
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes [ ] No [X]
The market value of shares of Common Stock held by non-affiliates, based on
the closing prices for such stock on the American Stock Exchange on June 24,
1996, was approximately $57,900,000. The number of shares of Common Stock
outstanding as of June 24, 1996 was 5,505,207 (exclusive of 463,859 shares of
Common Stock held in the treasury).
DOCUMENTS INCORPORATED BY REFERENCE
1. Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal year
ended March 31, 1996), incorporated in Part II.
2. Definitive Proxy Statement, dated June 28, 1996, for the 1996 Annual
Meeting of Stockholders, incorporated in Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The registrant, Diagnostic/Retrieval Systems, Inc. (hereinafter, the
"Company" or "DRS") was incorporated in 1968 and is a diversified,
high-technology company serving global government and commercial markets.
Principally a developer and manufacturer of a variety of sophisticated, leading
edge systems used for the processing, display and storage of data, the Company
provides its customers with a broad range of products, including electronic
sensor, electronic imaging and electro-optical systems, and offers a full
complement of technical support services.
The Company is organized into three operating groups: the Electronic
Systems Group ("ESG"), which primarily designs, manufactures and markets
high-technology computer workstations for military customers and also provides
technical support services; the Electro-Optical Systems Group ("EOSG") which
produces electro-optical sighting and targeting systems for military customers;
and the Media Technologies Group ("MTG"), which designs and manufactures data
storage and media technology products for both military and commercial
customers.
In response to a 1992 mandate by the Joint Chiefs of Staff, the Company
focuses on "Commercial Off-The-Shelf" ("COTS") product designs, whereby
commercial electronic components are integrated, adapted, upgraded and
"ruggedized" for application in harsh military environments. Using COTS designs,
the Company develops and delivers its products with significantly less
development time and expense compared to traditional military product cycles,
generally resulting in shorter lead times, lower costs and the employment of the
latest information and computing technologies. The design and manufacture of
COTS-based products is a complex process requiring specific engineering
capabilities, extensive knowledge of military platforms to which the equipment
will be applied and in-depth understanding of military operating environments
and requirements.
STRATEGY
The Company believes that the nature of modern warfare has changed,
dictating increasing reliance on real-time, accurate battlefield information
derived from increasingly sophisticated defense systems and electronics.
Additionally, the nature of military procurement programs has changed, requiring
suppliers to become more efficient and adaptable to current and future market
needs. In recent years, the Company has restructured its management team and
implemented strategies to exploit the changing nature of military procurement
programs brought on by the end of the Cold War, military budget constraints and
the COTS mandate. In addition to winning contracts for new programs and
supporting existing programs, the Company's strategies include:
o designing new products and adapting existing products for use by all
branches of the military;
o transferring technologies developed in the defense sector to
commercial and industrial markets; and
o acquiring businesses that will further strengthen and complement the
technology, product and market reach in the electronic systems, data
storage systems and electro-optical systems segments of the
marketplaces targeted by the Company.
To effect these strategies, the Company has (i) acquired several businesses
with complementary military and commercial products and technologies over the
last three years; (ii) entered into strategic relationships with other defense
suppliers such as Lockheed-Martin Tactical Defense Systems (formerly, Loral
Corporation) and Northrop-Grumman (formerly, Westinghouse Electric Corporation),
among others; (iii) emphasized the development of COTS-based products, as well
as products and systems that are easily adapted to similar weapons platforms
used by all branches of the military; and (iv) implemented cost reduction
initiatives to reduce its fixed-cost base, to allow for growth and to maintain
the flexibility of its operations. The implementation of these strategies has
resulted in increasing revenues and profits over the last three fiscal years.
Acquisitions. In October 1993, the Company acquired Technology
Applications & Service Company ("TAS"), a designer and supplier of advanced
command and control software and hardware. TAS' business, which
<PAGE>
focuses primarily on radar displays, augments the Company's core expertise in
sonar signal processing, allowing the Company to offer complete command and
control system solutions to its naval customers. In December 1993, the Company
purchased its 80% interest in Laurel Technologies ("Laurel"), then primarily an
assembler of wire harness products for aerospace customers. The addition of
Laurel provided the Company with the opportunity to consolidate the
manufacturing operations of ESG and has enabled the Company to solicit and bid
effectively for long-term system development and manufacturing contracts. Also
in December 1993, the Company acquired the assets of CMC Technology ("CMC")
which provided the Company with a key customer base in the commercial video
recording systems industry. In November 1994, the Company acquired Ahead
Technology Corporation ("Ahead"), now located with CMC in San Jose, California.
Ahead designs and manufactures a variety of consumable magnetic head products
used in the production of computer disk drives.
In July 1995, the Company acquired substantially all of the assets of Opto
Mechanik, Inc., which now constitute OMI Corp. ("OMI"). This acquisition enables
EOSG to expand its electro-optical targeting products and consolidate certain
manufacturing activities in a lower cost facility while adding backlog in
complementary product areas.
In February 1996, the Company acquired substantially all of the assets of
Mag-Head Engineering Company, Inc. ("MEC"), a manufacturer of audio and flight
recorder heads. This acquisition provides the Company with an established
manufacturing capability in the area of magnetic recorder heads and, when
coupled with CMC and Ahead, allows the Company to apply its expertise in
high-technology recorder head products in select commercial markets.
In furtherance of its strategic plan, in February 1996, the Company
acquired a 90% interest in DRS Medical Systems, a partnership formed to develop,
manufacture and market medical ultrasound imaging equipment. The DRS Medical
Systems partnership provides a means for the Company to apply its expertise in
sonar and image processing technology to related commercial applications.
Adaptable Product Designs. The Company's recent focus has been on the
design and development of products that can be used by all branches of the
military. This enables the Company to increase revenues, reduce product costs
and decrease reliance on U.S. Navy procurement programs. The Company's display
systems, originally designed under a U.S. Navy development contract, are
open-architecture information processing workstations that can be adapted for
use in other branches of the military. Similarly, the Company's boresight
products, originally designed for use with the U.S. Army's Apache attack
helicopter, were specifically designed to be adaptable to other air, sea or
land-based weapons platforms. The boresight system has been successfully applied
to the U.S. Marine Corps' Cobra helicopter and to the U.S. Air Force's AC-130
Spectre gunship platforms; recently, proposals have been submitted for its use
on F-15 fixed-wing aircraft.
Cost-Reduction Initiatives. The Company continues to focus on streamlining
its operations and, during fiscal 1996, the Company consolidated several of its
manufacturing facilities.
COMMERCIAL OFF-THE-SHELF (COTS) PRODUCT DESIGNS
The concept of designing and manufacturing military products and systems
through the integration and adaptation of existing commercial and military
products was developed in response to both decreasing military budgets and the
increasing pace of technology. The use of COTS designs entails the purchasing,
refitting, upgrading and "ruggedization" (repackaging, remounting and stress
testing to withstand harsh military environments) of available commercial
components. The Company strives to apply COTS designs to most of its new
products. Management believes that the adaptation of available commercial
components to existing as well as to new military systems and applications
offers two primary advantages over traditional military systems development and
procurement cycles: (i) it has the potential to save significant amounts of time
and expenditures in the area of research
<PAGE>
and development and (ii) as commercial product development and production cycles
become shorter than their military equivalents, the adaptation of commercial
technology to battlefield systems has the potential to shorten military product
cycles.
MARKET OVERVIEW
The Company believes that the market for military electronics and related
equipment will be influenced by two primary factors:
First, the nature of modern warfare dictates increasing reliance on timely
and accurate battlefield information to ensure that increasingly costly assets
are deployed efficiently and to minimize destruction of nonmilitary targets. In
general, military engagements have evolved from large-scale undertakings, where
numerical superiority was the key to dominance, to "surgical strikes" where the
ability to observe and strike accurately and at will from afar has become a
major means of both deterrence and loss minimization. Advancing technology has
been a major factor in increasing the precision strike capability of the U.S.
military and has increased the "per shot" cost of arms. These factors combine to
produce a military, economic and political environment requiring increased
weapons efficiency and accuracy. In addition, real time data is needed for
in-theater evaluation, damage assessment and training, as well as to reduce and
minimize incidents of U.S. casualties due to friendly fire.
Second, it is often more cost-effective to refit and upgrade existing
weapons platforms than to replace them. With the development and unit costs of
new platforms increasing rapidly amid a political and economic environment
demanding decreasing overall military expenditures, Congress and the military
have delayed or canceled the implementation of many proposed weapons systems,
opting instead to improve the performance, and extend the life, of existing
weapons through improved battlefield intelligence and equipment enhancements.
This increasing focus on cost efficiencies has manifested itself in the
military's COTS program.
COMPANY ORGANIZATION AND PRODUCTS
The Company is organized into three operating groups: ESG, EOSG and MTG. A
description of the groups and their products follows below:
ELECTRONIC SYSTEMS GROUP
ESG consists of DRS Military Systems ("Military Systems"), located in
Oakland, New Jersey, TAS, located in Gaithersburg, Maryland, Laurel, located in
Johnstown, Pennsylvania, and DRS Medical Systems, located in Mahwah, New Jersey.
Also, under the direction of TAS is the Technical Services Division ("TSD"),
located in Virginia Beach, Virginia and San Diego, California.
Military Systems designs, manufactures and markets signal processors and
display workstations which are installed on naval ships for antisubmarine
warfare ("ASW") purposes and in land-based surveillance systems used for
underwater surveillance of harbors and coastal locations. These workstations
receive signals from a variety of sonar-type sensors, processing the information
and arranging it in a display format enabling operators to quickly interpret the
data and inform command personnel of potential threats. Major product lines and
contracts include:
o AN/UYQ-65: The AN/UYQ-65 is the first COTS-based tactical workstation
to be qualified by the U.S. Navy and was designed to comply with the
stringent requirements of the Aegis (DDG-51) shipbuilding program.
Replacing the sensor displays in the SQQ-89 ASW Combat Suite, it
employs dual processors enabling simultaneous I/O and graphics
processing. This new approach allows for required high bandwidth
processing, while maintaining response times for opera tor/machine
interfaces. The system architecture can be adapted to meet various
interface, cooling, memory, storage and processing requirements.
o AN/SQR-17A(V)3: The Mobile In-Shore Undersea Warfare (MIUW) system is
deployed in land-based vans, utilizing sonobuoys and anchored passive
detectors for harbor defense, coastal defense and amphibious
operations surveillance, as well as to enhance drug interdiction
efforts. This system currently is being procured for utilization in 22
field installations. Military Systems is under contract to provide
various upgrades to these field installations.
<PAGE>
o AN/SQQ-TIA: This portable training system is used on board MIUW vans
to simulate actual sonar signal processing sets currently used by the
U.S. Navy and is employed primarily for Naval Reserve training.
o Airborne Separation Video Systems ("ASVS"): In fiscal 1996, Military
Systems was selected as the prime contractor on this tri-service
(Army, Navy and Air Force) program to develop ASVS for the test and
evaluation of weapons separation events on board various fixed- and
rotary-wing military aircraft. The systems include an
electronically-shuttered, fast-frame, high-resolution, digital imaging
camera and a high-density, digital data storage device. Military
Systems is also incorporating a color readiness capability and is
miniaturizing the system's high-speed, electronic camera to assure
compatibility with air platforms, such as the Air Force's F-16.
TAS produces tactical (e.g., combat/attack) information systems and
training systems. Major product lines and contracts include:
o AN/UYQ-70: The AN/UYQ-70 is an advanced, open-architecture display
system designed for widespread application through software
modification, and is to be deployed on Aegis and other surface ships,
submarines and airborne platforms. This system was developed for the
U.S. Navy under subcontract with the Government Systems Group of Loral
Corporation (currently, Lockheed- Martin Tactical Defense Systems).
The AN/UYQ-70 is a self-contained, microprocessor-based unit complete
with mainframe interface software offering advanced computing and
graphic capabilities. These units replace previous generation units
that are dependent upon a shipboard mainframe computer at
approximately 25% of the cost of the older units. This program is
currently in the production phase. Based upon the size of the naval
surface fleet and the average number of workstations to be deployed on
each ship, the Company believes that the potential market for this
workstation product may be in excess of 5,000 units over the next
decade.
o Military Display Emulators: These workstations are functionally
identical to existing U.S. Navy shipboard display consoles built to
military specifications, but are manufactured using low cost COTS
components suitable for land-based laboratory environments. These
Military Display Emulators are used in U.S. Navy development, test and
training sites as plug-compatible replacements for the more expensive
shipboard qualified units. The Company is currently delivering these
Military Display Emulators for use in the Aegis and other U.S. Navy
programs.
Laurel, which is 80% owned by DRS through a partnership with Laurel
Technologies, Inc. formed in December 1993, functions as a cost efficient
manufacturing facility and focuses on two areas. First, Laurel provides
manufacturing and product integration services for Military Systems, TAS and
Photronics Corp. ESG's workstation and simulator systems, among other products,
are manufactured in this facility. In addition, in fiscal 1996, Laurel was
awarded a subcontract to manufacture AN/UYQ-70 workstations for Lockheed-Martin
Tactical Defense Systems. Second, Laurel manufactures complex cable and wire
harness assemblies for large industrial customers that are involved in the
military and commercial aerospace industry. These products are then installed by
the customers in a wide variety of rotary-blade and fixed-wing aerial platforms.
DRS Medical Systems is 90% owned by the Company through a partnership with
Universal Sonics Corporation and was formed to develop, manufacture and market
high-quality, low-cost medical ultrasound equipment. DRS Medical Systems
currently manufactures ultrasound and sonographic systems principally for
original equipment manufacturers.
TSD performs field service and depot level repairs for ESG products, as
well as other manufacturers' systems. Principal locations are in close proximity
to U.S. Naval yards in Norfolk, Virginia and San Diego, California. Services,
including equipment and field change installation, configuration audit, repair,
testing and maintenance, are performed for the U.S. Navy and, to a lesser
extent, commercial customers. TSD also has performed work for foreign navies,
including those of Australia, the Republic of China, Egypt, Turkey and Greece.
ELECTRO-OPTICAL SYSTEMS GROUP
EOSG consists of Photronics Corp. ("Photronics"), located in Hauppauge, New
York and OMI located in Palm Bay, Florida.
<PAGE>
Photronics produces boresighting equipment used to align and harmonize the
navigation, targeting, and weapons systems on rotary- and fixed-wing aircraft
and armored vehicles. Multiple Platform Boresighting Equipment (MPBE) is
Photronics' main product line. These products can be used on both rotary- and
fixed-wing aircraft, as well as on armored vehicles. MPBE currently is used on
the Army's Apache helicopters and Apache Longbow helicopters, the Marine Corps'
Cobra helicopters and on the Air Force's AC-130 Spectre gunship, the Company's
first award for this equipment involving fixed-wing aircraft. Proposals have
been submitted to employ the system on the F-15 fighter. This technology is
proprietary to the Company.
Until the latter part of fiscal 1996, Photronics also produced
electro-optical components used in Sidewinder, Stinger and new generation
air-to-air and surface-to-air missiles in its Hauppauge facility. In order to
reduce its production costs, Photronics consolidated its missile component
manufacturing operations to OMI's new facility in Palm Bay, Florida. In
addition, the move created space for the expansion of Photronics' MPBE programs
in Hauppauge.
OMI designs and manufactures electro-optical targeting and sighting systems
and missile components. Major product programs at OMI include:
o Night Vision Binoculars: OMI is currently under contract to develop
and manufacture 1,182 units for the Israeli military. The Night Vision
Binocular is a hand-held viewing binocular that incorporates an image
intensifier tube, laser rangefinder and digital compass in a compact
lightweight system suited for infantry units, special forces and night
operations involving forward observers and reconnaissance patrols. The
Night Vision Binocular displays range and azimuth data in the
soldier's eyepieces, allowing identification of targets and providing
essential fire support data for nighttime engagement. These units have
a range of 20 to 2,000 meters.
o Gunners Auxiliary Sight: This is an electro-optical device used as a
primary or backup sight on M-1 Abrams battle tanks and contains a very
sophisticated electro-optical train and a laser protective filter. OMI
has produced more than 2,000 of these instruments and continues to
operate as a repair and retrofit facility for the M-1A2 upgrade
program, which will continue through 1997, with options through 1999.
o TOW Optical Sight: OMI is currently the only U.S. qualified producer
of this device. This complex electro-optical system is the main
component of the U.S.'s premier antitank weapons system.
o TOW Traversing Unit: This unit provides target tracking accuracy for
the TOW antitank weapon, acting as the mount for the TOW Optical Sight
and the associated missile launch tube. OMI is currently the only
qualified manufacturer of this tightly toleranced assembly, and is
currently working on modification and retrofit programs. OMI has also
been contracted to modify a version for use by an overseas customer.
o Improved TOW Acquisition System: Working with the primary contractor
for the TOW sighting system, this antitank system was developed for
the U.S. Army's HMVE vehicle.
o Day/Night Tank Sighting System: This system was developed in concert
with a major primary contractor. OMI is a major subcontractor,
currently supplying three of the major assemblies.
o Eyesafe Laser Rangefinder: OMI competed against the U.S. Army's
historical primary laser supplier for this contract and was awarded an
initial contract for preproduction units.
o Missile Components: The components originally consisted of primary
mirrors used in the nose-mounted infrared seeker of Sidewinder and
Stinger missiles. Development efforts have resulted in the ability to
provide increased content to include the secondary, tertiary and fold
mirrors, housing and nose dome. The Company is currently under
contract to produce infrared components and subassemblies on many of
the next-generation infrared missile systems.
<PAGE>
MEDIA TECHNOLOGIES GROUP
MTG consists of Precision Echo, Inc. ("PE"), located in Santa Clara,
California, Ahead and CMC, located in San Jose, California and MEC, located in
Golden Valley, Minnesota.
PE manufactures a variety of digital and analog recording systems utilized
for military applications including reconnaissance, ASW and other information
warfare data storage requirements and is a predominant U.S. manufacturer of 8
millimeter military recorders supplied to the U.S. armed forces. PE's products
include:
o AN/USH-42: This system was developed originally for deployment in the
U.S. Navy's A-6E aircraft. PE is currently under contract to modify
the USH-42 for use on the Navy's S-3B ASW aircraft to record radar,
infrared, data bus, navigation and voice data.
o WRR-818: This ruggedized video recorder has been selected for use in
U.S. F/A-18 aircraft and several foreign military aircraft. It also
has been selected by the U.S. Army for use in its Kiowa Warrior
reconnaissance helicopters. A similar recorder, the WRR-812, has been
adapted for use in the Canadian Army's light armored reconnaissance
vehicles. These recorders provide a high-resolution video record of
missing data, operators' displays and external imagery.
o AN/AQH-9 and AN/AQH-12: These products are high quality helicopter
mission recording systems utilized to record sonar and mine hunting
information and other intelligence data.
Ahead manufactures burnish, glide and test heads used in the production of
computer disk drives. These consumable products are used by many U.S. disk drive
manufacturers to hone the surface and ensure the quality of magnetic disks used
in computer hard drives. Customers include most major computer disc drive
manufacturers.
CMC manufactures and refurbishes commercial video recording products for
broadcasters operating worldwide. CMC can refurbish pre-1993 head assemblies
located on these machines at a significant cost savings compared to replacement.
CMC is developing, in conjunction with Ahead, the ability to refurbish post-1993
recorders used by its customer base. Ahead also has the capability to
manufacture recording heads for CMC. In order to foster operational synergies
and to allow space for growth, Ahead and CMC moved into a new joint facility in
fiscal 1996.
MEC designs, manufactures and refurbishes magnetic broadcast audio heads,
magnetic flight recorder heads and magnetic strip card readers for the U.S.
Government, defense and commercial markets.
CUSTOMERS
A significant portion of the Company's products are sold to agencies of the
U.S. Government, primarily the Department of Defense, to foreign government
agencies or to prime contractors or subcontractors thereof. Approximately 78%,
84% and 94% of total consolidated revenues for fiscal 1996, 1995 and 1994,
respectively, were derived directly or indirectly from defense contracts for end
use by the U.S. Government and its agencies. See "Export Sales" below for
information concerning sales to foreign governments.
BACKLOG
The following table sets forth the Company's backlog by major product group
(including enhancements, modifications and related logistics support) at the
dates indicated:
<PAGE>
March 31, March 31, March 31,
1996 1995 1995
------------- ------------- -------------
Government Products:
U.S. Government....... $120,000,000 $115,200,000 $123,700,000
Foreign Government.... 21,200,000 8,600,000 5,800,000
------------ ------------ ------------
141,200,000 123,800,000 129,500,000
Commercial Products......... 4,400,000 2,200,000 5,100,000
------------ ------------ ------------
$145,600,000 $126,000,000 $134,600,000
============ ============ ============
"Backlog" refers to the aggregate revenues remaining to be earned at the
specified date under contracts held by the Company, including, for U.S.
Government contracts, the extent of the funded amounts thereunder which have
been appropriated by Congress and allotted to the contract by the procuring
Government agency. Fluctuations in backlog amounts relate principally to the
timing and amount of Government contract awards.
At March 31, 1996, the Company's backlog of orders was approximately $145.6
million compared with $126.0 million at March 31, 1995. The increase in backlog
for the fiscal year was due to the net effect of bookings, partially offset by
revenues, and the addition of approximately $17 million of backlog from the OMI
asset acquisition. New contract awards of approximately $104.3 million were
booked during the fiscal year ended March 31, 1996.
Approximately 60% of the backlog at March 31, 1996 is expected to result in
revenues during the fiscal year ending March 31, 1997.
RESEARCH AND DEVELOPMENT
The military electronics industry is subject to rapid technological
changes, and the Company's future success will depend in large part upon its
ability to improve existing product lines and to develop new products and
technologies in the same or related fields. Thus, the Company's technological
expertise has been an important factor in its growth. A portion of its research
and development activities has taken place in connection with customer-sponsored
research and development contracts. All such customer-sponsored activities are
the result of contracts directly or indirectly with the U.S. Government. The
Company also invests in Company-sponsored research and development. Such
expenditures were $600,000, $800,000 and $500,000 for fiscal 1996, 1995 and
1994, respectively. Revenues recorded by the Company for customer-sponsored
research and development were $12,100,000, $18,800,000 and $27,500,000 for
fiscal 1996, 1995 and 1994, respectively.
CONTRACTS
The Company's contracts are normally for production, service or
development. Production and service contracts are typically of the fixed-price
variety with development contracts currently of the cost-type variety. Because
of their inherent uncertainties and consequent cost overruns, development
contracts historically have been less profitable than production contracts.
Fixed-price contracts may provide for a firm-fixed-price or they may be
fixed-price-incentive contracts. Under the firm-fixed-price contracts, the
Company agrees to perform for an agreed-upon price and, accordingly, derives
benefits from cost savings, but bears the entire risk of cost overruns. Under
the fixed-price-incentive contracts, if actual costs incurred in the performance
of the contracts are less than estimated costs for the contracts, the savings
are apportioned between the customer and the Company. However, if actual costs
under such a contract exceed estimated costs, excess costs are apportioned
between the customer and the Company up to a ceiling. The Company bears all
costs that exceed the ceiling.
Cost-type contracts typically provide for reimbursement of allowable costs
incurred plus a fee (profit). Unlike fixed-price contracts in which the Company
is committed to deliver without regard to performance cost, cost-type contracts
normally obligate the Company to use its best efforts to accomplish the scope of
work within a specified time and a stated contract dollar limitation. In
addition, U.S. Government procurement regulations mandate
<PAGE>
lower profits for cost-type contracts because of the Company's reduced risk.
Under cost-plus-incentive-fee contracts, the incentive may be based on cost or
performance. When the incentive is based on cost, the contract specifies that
the Company is reimbursed for allowable incurred costs plus a fee adjusted by a
formula based on the ratio of total allowable costs to target cost. Target cost,
target fee, minimum and maximum fee and adjustment formula are agreed upon when
the contract is negotiated. In the case of performance-based incentives, the
Company is reimbursed for allowable incurred costs plus an incentive, contingent
upon meeting or surpassing stated performance targets. The contract provides for
increases in the fee to the extent that such targets are surpassed and for
decreases to the extent that such targets are not met. In some instances,
incentive contracts also may include a combination of both cost and performance
incentives. Under cost-plus-fixed-fee contracts, the Company is reimbursed for
costs and receives a fixed fee, which is negotiated and specified in the
contract. Such fees have statutory limits.
The percentages of revenues during fiscal 1996, 1995 and 1994 attributable
to the Company's contracts by contract type were as follows:
Year Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
Firm-fixed-price ........... 87% 74% 65%
Fixed-price-incentive ...... - - 1%
Cost-plus-incentive-fee .... - 6% 17%
Cost-plus-fixed-fee ........ 13% 20% 17%
The increased percentage and continued predominance of fixed-price
contracts is reflective of the fact that production contracts comprise a
significant portion of the Company's U.S. Government contract portfolio.
The Company negotiates for, and generally receives, progress payments from
its customers of between 80-100% of allowable costs incurred on the previously
described contracts. Included in its reported revenues are certain amounts which
the Company has not billed to customers. These amounts, approximately $8.7
million, $7.9 million and $5.9 million as of March 31, 1996, 1995 and 1994,
respectively, consist of costs and related profits, if any, in excess of
progress payments for contracts on which sales are recognized on a
percentage-of-completion basis.
Under generally accepted accounting principles, all U.S. Government
contract costs, including applicable general and administrative expenses, are
charged to work-in-progress inventory and are written off to costs and expenses
as revenues are recognized. The Federal Acquisition Regulations ("FAR"),
incorporated by reference in U.S. Government contracts, provide that
Company-sponsored research and development costs are allowable general and
administrative expenses. To the extent that general and administrative expenses
are included in inventory, research and development costs also are included.
Unallowable costs, pursuant to the FAR, have been excluded from costs
accumulated on U.S. Government contracts. Work-in-process inventory included
general and administrative costs (which include Company-sponsored research and
development costs) of $9.9 million and $6.6 million at March 31, 1996 and 1995,
respectively.
All domestic defense contracts and subcontracts to which the Company is a
party are subject to audit, various profit and cost controls, and standard
provisions for termination at the convenience of the customer. Multi-year U.S.
Government contracts and related orders are subject to cancellation if funds for
contract performance for any subsequent year become unavailable. In addition, if
certain technical or other program requirements are not met in the developmental
phases of the contract, then the follow-on production phase may not be realized.
Upon termination other than for a contractor's default, the contractor normally
is entitled to reimbursement for allowable costs, but not necessarily all costs,
and to an allowance for the proportionate share of fees or earnings for the work
completed. Foreign defense contracts generally contain comparable provisions
relating to termination at the convenience of the foreign government.
<PAGE>
COMPETITION
The military electronics defense industry is characterized by rapid
technological change. The Company's products are sold in markets containing a
number of competitors which are substantially larger than the Company, devote
substantially greater resources to research and development and generally have
greater financial resources. Certain of such competitors are also suppliers to
the Company. The extent of competition for any single project generally varies
according to the complexity of the product and the dollar volume of the
anticipated award. The Company believes that it competes on the basis of the
performance of its products, its reputation for prompt and responsive contract
performance, and its accumulated technical knowledge and expertise. The
Company's future success will depend in large part upon its ability to improve
existing product lines and to develop new products and technologies in the same
or related fields.
In the military sector, the Company competes with many first- and
second-tier defense contractors on the basis of product performance, cost,
overall value, delivery and reputation. As the size of the overall defense
industry has decreased in recent years, there has been an increase in the number
of consolidations and mergers of defense suppliers, and this trend is expected
to continue. As the industry consolidates, the large (first-tier) defense
contractors are narrowing their supplier base and awarding increasing portions
of projects to strategic second- and third-tier suppliers, and in the process
are becoming oriented more toward system integration and assembly.
PATENTS
The Company has patents on many of its recording products and certain
commercial products. The Company does not believe patent protection to be
significant to its current operations; however, future programs may generate the
need for patent protection. Similarly, the Company and its subsidiaries have
certain registered trademarks, none of which are considered significant to
current operations.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing process for its products, excluding optical
products, consists primarily of the assembly of purchased components and testing
of the product at various stages in the assembly process. Purchased components
include integrated circuits, circuit boards, sheet metal fabricated into
cabinets, resistors, capacitors, semiconductors and insulated wire and cables.
In addition, many of the Company's products use machined castings and housings,
motors and recording and reproducing heads. Many of the purchased components are
fabricated to Company designs and specifications. The manufacturing process for
the Company's optics products includes the grinding, polishing and coating of
various optical materials and machining of metal components.
Although materials and purchased components generally are available from a
number of different suppliers, several suppliers are the Company's sole source
of certain components. If a supplier should cease to deliver such components,
other sources probably would be available; however, added cost and manufacturing
delays might result. The Company has not experienced significant production
delays attributable to supply shortages, but occasionally experiences
procurement problems with respect to certain components, such as semiconductors
and connectors. In addition, with respect to the Company's optical products,
certain exotic materials, such as germanium, zinc sulfide and cobalt, may not
always be readily available.
EXPORT SALES
The Company currently sells several of its products and services in the
international marketplace to countries such as Canada, Germany, Australia and
the Republic of China. Foreign sales are derived under export licenses granted
on a case-by-case basis by the United States Department of State. The Company's
foreign contracts are generally payable in United States dollars.
<PAGE>
Executive Officers of the Registrant
The names of the executive officers of the Company, their positions and
offices with the Company, and their ages are set forth below:
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY AGE
- ---- -------------------------- ---
<S> <C> <C>
Mark S. Newman.............. Chairman of the Board, President, Chief Executive Officer 46
and Director
Nancy R. Pitek.............. Vice President, Finance, Treasurer and Secretary 39
Paul G. Casner, Jr.......... Vice President; President of DRS Electronic Systems Group 58
Stuart F. Platt............. Vice President and Director; President of DRS Media 62
Technologies Group
Richard Ross............... Vice President; President of DRS Electro-Optical Systems 41
Group
</TABLE>
Mark S. Newman has been employed by the Company since 1973, was named Vice
President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive
Vice President in 1987. Mr. Newman became a Director of the Company in 1988. In
May 1994, Mr. Newman became the President and Chief Executive Officer of the
Company and in August 1995 became Chairman of the Board.
Nancy R. Pitek joined the Company in 1984 as Manager of Accounting. She
became Assistant Controller in 1985 and Director of Internal Audit in 1988. Ms.
Pitek became Director of Corporate Finance in 1990 and Controller in 1993. In
May 1994, she was appointed to the position of Treasurer and in August 1995
became Secretary. Ms. Pitek was named Vice President, Finance in May 1996.
Paul G. Casner, Jr. joined the Company in 1993 as President of TAS. In
1994, he also became President of DRS Electronic Systems Group and a Vice
President of the Company. Mr. Casner has over 30 years of experience in the
defense electronics industry and has held positions in engineering, marketing
and general management. He was the president of TAS prior to its acquisition by
the Company.
Stuart F. Platt has been a Director of the Company since 1991 and became
the President of Precision Echo in July 1992. He was named Vice President of the
Company in May 1994. Rear Admiral Platt also serves as President of DRS Media
Technologies Group. He is a co-founder and director of FPBSM Industries, Inc., a
holding company and management consulting firm for defense, aerospace and other
technology-based companies. He also serves as director for Harding Associates,
Inc. None of these companies is a parent, subsidiary or affiliate of the
Company. Rear Admiral Platt held various positions as a military officer in the
Department of the Navy, retiring as Competition Advocate General of the Navy in
1986.
Richard Ross was employed by the Company as Assistant Vice President and
Director of Sales in 1986 and Assistant Vice President, Corporate Development in
1987. In 1988, he became Vice President of the Company, and in 1990, he became
President of Photronics. Mr. Ross also serves as President of the DRS
Electro-Optical Systems Group.
Employees
As of March 31, 1996, the Company employed 809 employees. None of the
Company's employees are represented by labor unions, and the Company has
experienced no work stoppages.
There is a continuing demand for qualified technical personnel, and the
Company believes that its future growth and success will depend upon its ability
to attract, train and retain such personnel.
<PAGE>
Item 2. Properties
The Company leases approximately 6,000 square feet of office space for its
corporate headquarters in an office building at 5 Sylvan Way, Parsippany, New
Jersey under a lease that expires in fiscal 2001. The Company leases
approximately 25,000 square feet of space for administrative and engineering
facilities at 138 Bauer Drive, Oakland, New Jersey. The Company leases the
Oakland building from LDR Realty Co., a partnership wholly-owned by Leonard
Newman and David E. Gross, co-founders and former executive officers of the
Company, under a lease which expires in fiscal 1999. The Company believes that
this lease was consummated on terms no less favorable than those that could have
been obtained by the Company from an unrelated third party in a transaction
negotiated on an arms-length basis.
TAS leases 40,000 square feet in a building at 200 Professional Drive,
Gaithersburg, Maryland that houses its executive offices and principal
engineering and manufacturing facilities under a lease which expires in fiscal
2000. It also conducts field service operations from locations in Virginia Beach
and Chesapeake, Virginia and National City, California. These leased facilities,
comprising approximately 15,000 square feet and 1,500 square feet, respectively,
are covered by leases, which, with respect to the Virginia location, expires in
fiscal 1997, and for the California location, expires in fiscal 1999.
Laurel's manufacturing facilities and administrative offices are located in
a 38,000 square foot building at 423 Walters Avenue in Johnstown, Pennsylvania.
The lease for this facility expires in fiscal 1999. DRS Medical Systems operates
from an 8,400 square foot facility in Mahwah, New Jersey, under a month-to-month
lease expiring in April 1997. The Company also leases approximately 2,000 square
feet of office space in Arlington, Virginia under a lease which expires in
fiscal 1998.
Photronics Corp.'s principal facilities are located in a 45,000 square foot
building at 270 Motor Parkway, Hauppauge, New York. The building, which is owned
by the Company, was built in 1983. See Note 10 of Notes to Consolidated
Financial Statements. OMI leases approximately 54,000 square feet in a building
at 2330 Commerce Park Drive, Palm Bay, Florida, for its operations and
administration offices. The related leases expire in fiscal 2006.
Precision Echo's engineering and principal operations are located in a
55,000 square foot building at 3105 Patrick Henry Drive, Santa Clara,
California, under a lease which expires in fiscal 2001. The operations of CMC
and Ahead recently have been consolidated and relocated to a new facility in San
Jose, California, comprising 32,000 square feet pursuant to a five year lease
expiring in fiscal 2001. MEC operates from a 7,000 square foot leased facility
in Golden Valley, Minnesota. This lease expires in January 1997.
Environmental Protection
The Company believes that its manufacturing operations and properties are
in material compliance with existing federal, state and local provisions enacted
or adopted to regulate the discharge of materials into the environment or
otherwise protect the environment. Such compliance has been achieved without
material effect on the Company's earnings or competitive position.
Item 3. Legal Proceedings
The Company is a party to various legal actions and claims arising in the
ordinary course of its business. In the Company's opinion, the Company has
adequate legal defenses for each of the actions and claims and believes that
their ultimate disposition will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On February 7, 1996, the Board of Directors of the Company approved and
recommended for submission to the stockholders of the Company by a majority vote
the consideration and approval of an Amended and Restated Certificate of
Incorporation (the "Restated Certificate"), which amended and restated the
Company's certificate to (i) effect a reclassification (the "Reclassification")
of each share of Class A Common Stock, $.01 par value per share, and each share
of Class B Common Stock, $.01 par value per share, into one share of Common
Stock, $.01 par value per share, of the Company, (ii) provide that action by the
stockholders may be taken only at a duly called annual or special meeting and
not by written consent, and (iii) provide that the stockholders of the Company
would have the right to make, adopt, alter, amend, change or repeal the by-laws
of the Company only upon the affirmative vote of not less than 66 2/3% of the
outstanding capital stock of the Company entitled to vote thereon. On March 26,
1996, the stockholders approved the Restated Certificate. The Restated
Certificate was filed with the Secretary of State of the State of Delaware and
became effective on April 1, 1996.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company has not paid any cash dividends since 1976. The Company intends
to retain future earnings for use in its business and does not expect to declare
cash dividends in the foreseeable future on the Common Stock. The indentures
relating to the Company's 8 1/2% Convertible Subordinated Debentures and 9%
Senior Subordinated Convertible Debentures limit the Company's ability to pay
dividends or make other distributions on its Common Stock. See Note 6 of Notes
to Consolidated Financial Statements for information concerning restrictions on
the declaration or payment of dividends. Any future declaration of dividends
will be subject to the discretion of the Board of Directors of the Company. The
timing, amount and form of any future dividends will depend, among other things,
on the Company's results of operations, financial condition, cash requirements,
plans of expansion and other factors deemed relevant by the Board of Directors.
Item 6. Selected Financial Data
The information required by this item is incorporated by reference herein
to page 19 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the
fiscal year ended March 31, 1996).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated by reference herein
to pages 20 through 23 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual
Report (for the fiscal year ended March 31, 1996).
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference herein
to pages 24 through 39 of the Diagnostic/Retrieval Systems, Inc. 1996 Annual
Report (for the fiscal year ended March 31, 1996).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information required by this Part is incorporated herein by reference
to the Definitive Proxy Statement of the Company, dated June 28, 1996, for the
1996 Annual Meeting of Stockholders. Reference is also made to the information
under "Executive Officers of the Registrant" in Part I of this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
1. Financial Statements
The following financial statements of Diagnostic/Retrieval Systems,
Inc. and subsidiaries have been incorporated by reference to the
Diagnostic/Retrieval Systems, Inc. 1996 Annual Report (for the fiscal
year ended March 31, 1996), pursuant to Item 8 of this report:
1996 Annual
Report Page(s)
--------------
Independent Auditors' Report ....................... 39
<PAGE>
Consolidated Balance Sheets --
March 31, 1996 and 1995 ............................ 24
Consolidated Statements of Earnings --
Years Ended March 31, 1996, 1995 and 1994 .......... 25
Consolidated Statements of Stockholders' Equity --
Years Ended March 31, 1996, 1995 and 1994 .......... 25
Consolidated Statements of Cash Flows --
Years Ended March 31, 1996, 1995 and 1994 .......... 26
Notes to Consolidated Financial Statements ......... 27-38
2. Financial Statement Schedules
See Appendix A hereto.
3. Exhibits
Incorporated by reference to the Exhibit Index at the end of this
report.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the fiscal quarter ended
March 31, 1996:
Form 8-K, Amendment No. 2, dated February 6, 1996, File No. 1-8533,
containing Item 7(a).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996 /s/ MARK S. NEWMAN
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ MARK S. NEWMAN Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
/s/ NANCY R. PITEK Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
/s/ STUART F. PLATT Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
/s/ THEODORE COHN Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
/s/ DONALD C. FRASER Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
/s/ MARK N. KAPLAN Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
/s/ LEONARD NEWMAN Director June 28, 1996
- ------------------------------------
Leonard Newman
Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
Dated: June 28, 1996
------------------
Mark S. Newman, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, President, June 28, 1996
- ------------------------------------ Chief Executive Officer and Director
Mark S. Newman
Vice President, Finance, June 28, 1996
- ------------------------------------ Treasurer and Secretary
Nancy R. Pitek
Vice President, President of DRS Media June 28, 1996
- ------------------------------------ Technologies Group and Director
Stuart F. Platt
Director June 28, 1996
- ------------------------------------
Theodore Cohn
Director June 28, 1996
- ------------------------------------
Donald C. Fraser
Director June 28, 1996
- ------------------------------------
Mark N. Kaplan
Director June 28, 1996
- ------------------------------------
Leonard Newman
/s/ JACK RACHLEFF Director June 28, 1996
- ------------------------------------
Jack Rachleff
</TABLE>
<PAGE>
<TABLE>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Schedule II. Valuation and Qualifying Accounts
Years Ended March 31, 1996, 1995 and 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------
Description Balance at Additions (a) Deductions (b) Balance at
Beginning of ------------------------ ---------------------------- End of
Period (1) (2) (1) Period
Charged to Charged to Credited to Credited to
Costs and Other Costs and Other
Expenses Accounts- Expenses Accounts-
Describe Describe
- ----------------------------------------- -------------------------------------------------------------------------
Inventory Reserve
<S> <C> <C> <C> <C> <C> <C>
Year ended March 31, 1996 .. $1,400,000 $ 670,000 $ -- $ 8,000 $ 993,000 (c) $1,069,000
Year ended March 31, 1995 .. $2,409,000 $ 439,000 $ -- $ 83,000 (d) $1,365,000 (c) $1,400,000
Year ended March 31, 1994 .. $2,620,000 $ 674,000 $ -- $ 885,000 (e) $ -- $2,409,000
Losses & Future Costs
Accrued on Uncompleted
Contracts
Year ended March 31, 1996 .. $4,555,000 $2,026,000 $ 353,000 (c) $ 945,000 $2,139,000 (c) $3,850,000
Year ended March 31, 1995 .. $3,214,000 $2,168,000 $ -- $ 291,000 $ 536,000 (c) $4,555,000
Year ended March 31, 1994 .. $3,722,000 $1,735,000 $ 254,000 (g) $2,497,000 (f) $ -- $3,214,000
Other
Year ended March 31, 1996 .. $ 290,000 $ -- $ -- $ 290,000 $ -- $ 0
Year ended March 31, 1995 .. $ 290,000 $ -- $ -- $ -- $ -- $ 290,000
Year ended March 31, 1994 .. $ 290,000 $ -- $ -- $ -- $ -- $ 290,000
</TABLE>
(a) Represents, on a full-year basis, net credits to reserve accounts.
(b) Represents, on a full-year basis, net charges to reserve accounts.
(c) Represents amounts reclassified and credited to related asset accounts.
(d) Represents amounts credited to costs and expenses associated with the
corresponding write-off of related inventory costs.
(e) Includes $801,000 representing amounts credited to costs and expenses
associated with the corresponding write-off of related inventory costs.
(f) Includes $2,302,000 representing amounts credited to costs and expenses
associated with the corresponding write-off of related inventory costs.
(g) Includes an increase to reserves of $111,000 as a result of business
combinations and a charge of $143,000 to revenues.
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*)are filed
herewith. Certain of the following exhibits, designated with a "P", are being
filed on paper, pursuant to a hardship exemption under Rule 202 of Regulation
S-T. The exhibits not so designated have been previously filed with the
Commission and are incorporated herein by reference to the documents indicated
in brackets following the descriptions of such exhibits.
Exhibit Page No.
No. Description Of Paper Filing
--- ----------- ---------------
3.1 - Restated Certificate of Incorporation of
the Company [Registration Statement No. 2-
70062-NY, Amendment No. 1, Exhibit 2(a)]
3.2 - Certificate of Amendment of the Restated
Certificate of Incorporation of the Compa-
ny, as filed July 7, 1983 [Registration
Statement on Form 8-A of the Company, dat-
ed July 13, 1983, Exhibit 2.2]
3.3 - Composite copy of the Restated Certificate
of Incorporation of the Company, as amend-
ed [Registration Statement No. 2-85238,
Exhibit 3.3]
3.4 - Amended and Restated Certificate of Incor-
poration of the Company, as filed April 1,
1996 [Registration Statement No. 33-64641,
Post-Effective Amendment No. 1, Exhibit
3.4]
3.5 - By-laws of the Company, as amended to No-
vember 7, 1994 [Form 10-K, fiscal year
ended March 31, 1995, File No. 1-8533,
Exhibit 3.4]
3.6 - Certificate of Amendment of the Certifi-
cate of Incorporation of Precision Echo
Acquisition Corp., as filed March 10, 1995
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 3.5]
3.7 - Form of Advance Notice By-Laws of the Com-
pany [Form 10-Q, quarter ended December
31, 1995, File No. 1-8533, Exhibit 3]
3.8 - Amended and Restated By-Laws of the Compa-
ny, as of April 1, 1996 [Registration
Statement No. 33-64641, Post-Effective
Amendment No. 1, Exhibit 3.8]
<PAGE>
4.1 - Indenture, dated as of September 22, 1995,
between the Company and The Trust Company
of New Jersey, as Trustee, in respect of
the Company's 9% Senior Subordinated Con-
vertible Debentures Due 2003 [Registration
Statement No.33-64641, Amendment No. 1,
Exhibit 4.1]
4.2 - Form of 9% Senior Subordinated Convertible
Debenture Due 2003 (included as part of
Exhibit 4.1)[Registration Statement No.33-
64641, Amendment No. 1, Exhibit 4.2]
4.3 - Registration Rights Agreement, dated as of
September 22, 1995 between the Company and
Forum Capital Markets L.P.[Registration
Statement No.33-64641, Amendment No. 1,
Exhibit 4.3]
4.4 - Indenture, dated as of August 1, 1983,
between the Company and Bankers Trust Com-
pany, as Trustee [Form 10-Q, quarter ended
September 30, 1983, File No. 1-8533, Ex-
hibit 4.2]
4.5 - Indenture of Trust, dated December 1,
1991, among Suffolk County Industrial De-
velopment Agency, Manufacturers and Trad-
ers Trust Company, as Trustee and certain
bondholders [Form 10-K, fiscal year ended
March 31, 1992, File No. 1-8533, Exhibit
4.2]
4.6 - Reimbursement Agreement, dated December 1,
1991, among Photronics Corp., the Company
and Morgan Guaranty Trust Company of New
York [Form 10-K, fiscal year ended March
31, 1992, File No. 1-8533, Exhibit 4.3]
4.7 - Registration Rights Agreement, dated as of
March 27, 1996, by and between the Company
and Palisade Capital Management L.L.C.,
acting as investment adviser to the ac-
counts named therein [Registration
Statement No. 33-64641, Post-Effective
Amendment No. 1, Exhibit 4.7]
4.8 - First Supplemental Indenture, dated as of
April 1, 1996, to Indenture, dated as of
September 22, 1995, between the Company
and The Trust Company of New Jersey, as
Trustee [Registration Statement No. 33-
64641, Post-Effective Amendment No. 1,
Exhibit 4.8]
<PAGE>
4.9 - First Supplemental Indenture, dated as of
April 1, 1996, to Indenture, dated as of
August 1, 1983, between the Company and
Bankers Trust Company, as Trustee
[Registration Statement No. 33-04929,
Exhibit 4.9]
10.1 - Stock Purchase Agreement, dated as of Au-
gust 6, 1993, among TAS Acquisition Corp.,
Technology Applications and Service Compa-
ny, Paul G. Casner, Jr. and Terrence L.
DeRosa [Form 10-Q, quarter ended December
31, 1993, File No. 1-8533, Exhibit
6(a)(1)]
10.2 - Waiver Letter, dated as of September 30,
1993, among TAS Acquisition Corp., Tech-
nology Applications and Service Company,
Paul G. Casner, Jr. and Terrence L. DeRosa
[Form 10-Q, quarter ended December 31,
1993, File No. 1-8533, Exhibit 6(a)(2)]
10.3 - Joint Venture Agreement, dated as of No-
vember 3, 1993, by and between DRS Systems
Management Corporation and Laurel Technol-
ogies, Inc. [Form 10-Q, quarter ended De-
cember 31, 1993, File No. 1-8533, Exhibit
6(a)(3)]
10.4 - Waiver Letter, dated as of December 13,
1993, by and between DRS Systems Manage-
ment Corporation and Laurel Technologies,
Inc. [Form 10-Q, quarter ended December
31, 1993, File No. 1-8533, Exhibit
6(a)(4)]
10.5 - Partnership Agreement, dated December 13,
1993, by and between DRS Systems Manage-
ment Corporation and Laurel Technologies,
Inc. [Form 10-Q, quarter ended December
31, 1993, File No. 1-8533, Exhibit
6(a)(5)]
10.6 - Lease, dated June 28, 1979, between the
Company and J.L. Williams & Co., Inc.
("Williams") [Registration Statement No.
2-70062-NY, Exhibit 9(b)(4)(i)]
10.7 - Lease, dated as of June 1, 1983, between
LDR Realty Co. and the Company [Form 10-K,
fiscal year ended March 31, 1984, File No.
1-8533, Exhibit 10.7]
10.8 - Renegotiated Lease, dated June 1, 1988,
between LDR Realty Co. and the Company
[Form 10-K, fiscal year ended March 31,
1989, File No. 1-8533, Exhibit 10.8]
<PAGE>
10.9 - Lease, dated July 20, 1988, between Preci-
sion Echo, Inc. and Bay 511 Corporation
[Form 10-K, fiscal year ended March 31,
1991, File No. 1-8533, Exhibit 10.9]
10.10- Amendment to Lease, dated July 1, 1993,
between Precision Echo, Inc. and Bay 511
Corporation [Form 10-K, fiscal year ended
March 31, 1994, File No. 1-8533, Exhibit
10.12]
10.11- Second Amendment to Lease, dated October
17, 1995 between Precision Echo, Inc. and
Bay 511 Corporation [Registration
Statement No.33-64641, Amendment No. 1,
Exhibit 10.11]
10.12- Lease Modification Agreement, dated Febru-
ary 22, 1994, between Technology Applica-
tions and Service Company and Atlantic
Real Estate Partners II [Form 10-K, fiscal
year ended March 31, 1994, File No. 1-
8533, Exhibit 10.13]
10.13- Amendment to Lease Modification, dated
June 1, 1994, between Technology Applica-
tions and Service Company and Atlantic
Estate Partners II [Form 10-K, fiscal year
ended March 31, 1995, File No. 1-8533,
Exhibit 10.11]
10.14- Triple Net Lease, dated October 22, 1991,
between Technology Applications and Ser-
vice Company and Marvin S. Friedberg [Form
10-K, fiscal year ended March 31, 1994,
File No. 1-8533, Exhibit 10.14]
10.15- Lease, dated November 10, 1993, between
DRS Systems Management Corp. and Skateland
Roller Rink, Inc. [Form 10-K, fiscal year
ended March 31, 1994, File No. 1-8533,
Exhibit 10.17]
10.16- Lease, dated March 23, 1992, between Ahead
Technology Corporation and Vasona Business
Park [Form 10-K, fiscal year ended March
31, 1995, File No. 1-8533, Exhibit 10.15]
10.17- Amendment to Lease, dated May 21, 1992,
between Ahead Technology Corporation and
Vasona Business Park [Form 10-K, fiscal
year ended March 31, 1995, File No. 1-
8533, Exhibit 10.16]
10.18- Revision to Lease Modification, dated Au-
gust 25, 1992, between Ahead Technology
Corporation and Vasona Business Park [Form
10-K, fiscal year ended March 31, 1995,
File No. 1-8533, Exhibit 10.17]
<PAGE>
10.19- Lease, dated January 13, 1995, between the
Company and Sammis New Jersey Associates
[Form 10-K, fiscal year ended March 31,
1995, File No.-8533, Exhibit 10.18]
*10.20- Lease, dated April 3, 1996, by and between
the Company and Los Alamos Economic
Development Corporation
10.21- 1991 Stock Option Plan of the Company
[Registration Statement No. 33-42886, Ex-
hibit 28.1]
10.22- Contract No. N00024-92-C-6102, dated Sep-
tember 28, 1992, between the Company and
the Navy [Form 10-K, fiscal year ended
March 31, 1993, File No. 1-8533, Exhibit
10.45]
10.23- Modification No. P00005, dated August 24,
1994, to Contract No. N00024-92-C-6102
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.22]
10.24- Modification No. P00006, dated September
7, 1994, to Contract No. N00024-92-C6102
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.23]
10.25- Contract No. N00024-92-C-6308, dated April
1, 1992, between the Company and the Navy
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.46]
10.26- Modification No. P00001, dated July 30,
1992, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.47]
10.27- Modification No. P00002, dated September
25, 1992, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.48]
10.28- Modification No. P00003, dated October 22,
1992, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.49]
10.29- Modification No. P00004, dated February
24, 1993, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.50]
10.30- Modification No. P00005, dated June 11,
1993, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.26]
<PAGE>
10.31- Modification No. P00006, dated March 26,
1993, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1993, File No. 1-8533, Exhibit 10.51]
10.32- Modification No. P00007, dated May 3,
1993, to Contract No. N00024-92-C-6308
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.28]
10.33- Modification No. PZ0008, dated June 11,
1993, to Contract No. N00024-92-C-6302
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.29]
10.34- Contract No. N39998-94-C-2228, dated No-
vember 30, 1993, between the Company and
the Navy [Form 10-K, fiscal year ended
March 31, 1994, File No. 1-8533, Exhibit
10.30]
10.35- Order No. 87KA-SG-51484, dated December
10, 1993, under Contract No. N00024-93-G-
6336, between the Company and Westinghouse
Electric Corporation Oceanic Division
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.31]
10.36- Purchase Order Change Notice Order No.
87KA-SX-51484-P, dated April 21, 1994,
under Contract No. N00024-93-G-6336, be-
tween the Company and Westinghouse Elec-
tric Corporation Oceanic Division [Form
10-K, fiscal year ended March 31, 1995,
File No. 1-8533, Exhibit 10.35]
10.37- Letter Subcontract No. 483901(L), dated
February 18, 1994, under Contract No.
N00024-94-D-5204, between the Company and
Unisys Government Systems Group [Form 10-
K, fiscal year ended March 31, 1994, File
No. 1-8533, Exhibit 10.32]
10.38- Subcontract No. 483901(D), dated June 24,
1994, under Contract No. N00024-94-D-5204,
between the Company and Unisys Corporation
Government Systems Group [Form 10-K, fis-
cal year ended March 31, 1995, File No. 1-
8533, Exhibit 10.37]
10.39- Contract No. N00019-90-G-0051, dated March
1, 1990, between Precision Echo, Inc. and
the Navy [Form 10-K, fiscal year ended
March 31, 1994, File No. 1-8533, Exhibit
10.35]
10.40- Amendment 1A, dated February 26, 1992, to
Contract No. N00019-90-G-0051 [Form 10-K,
fiscal year ended March 31, 1994, File No.
1-8533, Exhibit 10.36]
<PAGE>
10.41- Amendment 1B, dated April 23, 1993, to
Contract No. N00019-90-G-0051 [Form 10-K,
fiscal year ended March 31, 1994, File No.
1-8533, Exhibit 10.37]
10.42- Contract No. N00019-93-C-0041, dated Janu-
ary 29, 1993, between Photronics Corp. and
the Navy [Form 10-K, fiscal year ended
March 31, 1993, File No. 1-8533, Exhibit
10.54]
10.43- Modification No. P00001, dated March 29,
1993, to Contract No. N00019-93-C-0041
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.39]
10.44- Modification No. PZ0002, dated November
12, 1993, to Contract No. N00019-93-C-0041
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.40]
10.45- Modification No. P00003, dated February 1,
1994, to Contract No. N00019-93-C-0041
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.41]
10.46- Modification No. P00004, dated January 29,
1993, to Contract No. N00019-93-C-0041
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.46]
10.47- Modification No. P00005, dated January 29,
1993, to Contract No. N00019-93-C-0041
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.47]
P10.48- Modification No. P00006, dated March 20,
1996, to Contract No. N00019-93-C-0041
10.49- Contract No. N00019-93-C-0202, dated Au-
gust 30, 1993, between Photronics Corp.
and the Navy [Form 10-K, fiscal year ended
March 31, 1994, File No. 1-8533, Exhibit
10.42]
10.50- Modification No. P00001, dated March 30,
1994, to Contract No. N00019-93-C-0202
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.43]
10.51- Modification No. P00002, dated April 29,
1994, to Contract No. N00019-93-C-0202
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.44]
10.52- Modification No. P00003, dated August 9,
1994, to Contract No. N00019-93-C-0202
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.55]
<PAGE>
10.53- Modification No. P00004, dated March 30,
1994, to Contract No. N00019-93-C-0202
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.56]
10.54- Modification No. P00005, dated August 30,
1993, to Contract No. N00019-93-C-0202
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.53]
10.55- Modification No. P00006, dated August 30,
1993, to Contract No. N00019-93-C-0202
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.54]
10.56- Contract No. N00024-93-C-5204, dated No-
vember 18, 1992, between Technology Appli-
cations and Service Company and the Navy
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.53]
10.57- Modification No. P00001, dated May 6,
1993, to Contract No. N00024-93-C-5204
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.54]
10.58- Modification No. P00002, dated August 24,
1993, to Contract No. N00024-93-C-5204
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.55]
10.59- Modification No. PZ0003, dated September
30, 1993, to Contract No. N00024-93-C-5204
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.56]
10.60- Contract No. N00174-94-D-0006, dated Feb-
ruary 17, 1994, between Technology Appli-
cations & Service Company and the Navy
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.57]
10.61- Modification No. P00001, dated March 7,
1994, to Contract No. N00174-94-D-0006
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.58]
10.62- Modification No. P00003, dated May 19,
1994, to Contract No. N00174-94-D-0006
[Form 10-K, fiscal year ended March 31,
1994, File No. 1-8533, Exhibit 10.59]
10.63- Purchase Order No. 2285, dated June 6,
1994, between Photronics Corp. and Inter-
national Precision Products N.V. [Form 10-
K, fiscal year ended March 31, 1995, File
No. 1-8533, Exhibit 10.73]
P10.64- Amendment No. 1, dated January 30, 1996,
to Purchase Order No. 2285
<PAGE>
10.65- Purchase Order No. 2286, dated June 6,
1994, between Photronics Corp. and Inter-
national Precision Products N.V. [Form 10-
K, fiscal year ended March 31, 1995, File
No. 1-8533, Exhibit 10.75]
10.66- Purchaser Order No. CN74325, dated Decem-
ber 14, 1994, between Precision Echo and
Lockheed Aeronautical Systems Company
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.76]
10.67- Amendment, dated February 14, 1995, to
Purchase Order No. CN74325, between Preci-
sion Echo and Lockheed Aeronautical Sys-
tems Company [Registration Statement
No.33-64641, Amendment No. 1, Exhibit
10.67]
10.68- Amendment, dated April 4, 1995, to Pur-
chase Order No. CN74325, between Precision
Echo and Lockheed Aeronautical Systems
Company [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.68]
10.69- Amendment, dated June 20, 1995, to Pur-
chase Order No. CN74325, between Precision
Echo and Lockheed Aeronautical Systems
Company [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.69]
10.70- Amendment, dated September 28, 1995, to
Purchase Order No. CN74325, between Preci -
sion Echo and Lockheed Aeronautical Sys-
tems Company [Registration Statement
No.33-64641, Amendment No. 1, Exhibit
10.70]
10.71- Amendment, dated November 7, 1995, to Pur-
chase Order No. CN74325, between Precision
Echo and Lockheed Aeronautical Systems
Company [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.71]
10.72- Contract No. N39998-94-C-2239, dated July
26, 1993, between the Company and the Navy
[Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.77]
10.73- Contract No. N00019-95-C-0057, dated De-
cember 16, 1994, between Precision Echo,
Inc. and Naval Air Systems Command [Form
10-K, fiscal year ended March 31, 1995,
File No. 1-8533, Exhibit 10.78]
10.74- Employment, Non-Competition and Termina-
tion Agreement, dated July 20, 1994, be
tween Diagnostic/Retrieval Systems, Inc.
and David E. Gross [Form 10-Q, quarter
ended June 30, 1994, File No. 1-8533, Ex-
hibit 1]
<PAGE>
10.75- Stock Purchase Agreement, dated as of July
20, 1994, between Diagnostic/Retrieval
Systems, Inc. and David E. Gross [Form 10-
Q, quarter ended June 30, 1994, File No.
1-8533, Exhibit 2]
10.76- Asset Purchase Agreement, dated October
28, 1994, Acquisition by PE Acquisition
Corp., a subsidiary of Precision Echo,
Inc. of all of the Assets of Ahead Tech-
nology Corporation [Form 10-Q, quarter
ended December 31, 1994, File No. 1-8533,
Exhibit 1]
10.77- Amendment to Agreement for Acquisition of
Assets, dated July 5, 1995, between
Photronics Corp. and Opto Mechanik, Inc.
[Form 8-K, Amendment No. 1, July 5, 1995,
File No. 1-8533, Exhibit 1]
10.78- Contract No. N00421-95-D-1067, dated Sep-
tember 30, 1995, between the Company and
the Navy [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.78]
10.79- Lease, dated August 17, 1995, between
Ahead Technology, Inc. and South San Jose
Interests [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.79]
10.80- Contract No. DAAH01-95-C-0308, dated July
21, 1995, between Photronics Corp. and the
Army [Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.80]
P10.81- Modification No. PZ0001, dated January 24,
1996, to Contract No. DAAH01-95-C-0308
P10.82- Modification No. P00002, dated February
24, 1996, to Contract No. DAAH01-95-C-0308
P10.83- Modification No. P00003, dated March 28,
1996, to Contract No. DAAH01-95-C-0308
10.84- Lease, dated May 25, 1995, between Tech-
nology Applications and Service Company
and Sports Arena Village, Ltd., L.P.
[Registration Statement No.33-64641,
10.85- Contract No. 2025, dated December 20,
1993, between Opto Mechanik, Inc. and the
Government of Israel, Ministry of Defense
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.82]
10.86- Amendment to Contract No. 2025, dated Au-
gust 31, 1995 between Opto Mechanik, Inc.
and the Government of Israel, Ministry of
Defense [Registration Statement No.33-
64641, Amendment No. 1, Exhibit 10.83]
<PAGE>
10.87- Lease, dated August, 1995, by and between
OMI Acquisition Corp. and Fred E. Sutton
and Harold S. Sutton d/b/a Sutton Proper-
ties [Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.84]
10.88- Lease, dated August, 1995, by and between
OMI Acquisition Corp. and Fred E. Sutton
and Harold S. Sutton d/b/a Sutton Proper-
ties [Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.85]
10.89- Lease, dated August, 1995, by and between
OMI Acquisition Corp. and Fred E. Sutton
and Harold S. Sutton d/b/a Sutton Proper-
ties [Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.86]
10.90- Memorandum of Lease, dated August, 1995,
by and between OMI Acquisition Corp. and
Fred E. Sutton and Harold S. Sutton d/b/a
Sutton Properties [Registration Statement
No.33-64641, Amendment No. 1, Exhibit
10.87]
10.91- Master Lease, dated August 31, 1995, be-
tween OMI Acquisition Corp. and General
Electric Capital Corp. [Registration
Statement No. 33-64641, Post-Effective
Amendment No. 1, Exhibit 10.88]
10.92- Schedule No. 001, dated September 1, 1995,
to Master Lease between OMI Acquisition
Corp. and General Electric Capital Corp.
[Registration Statement No. 33-64641,
Post-Effective Amendment No. 1, Exhibit
10.89]
10.93- Schedule No. 002, dated October 20, 1995,
to Master Lease between OMI Acquisition
Corp. and General Electric Capital Corp.
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.90]
10.94- Joint Venture Agreement, dated as of Feb-
ruary 6, 1996, by and among DRS/MS, Inc.,
Universal Sonics Corporation, Ron Hadani,
Howard Fidel and Thomas S. Soulos
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.91]
10.95- Partnership Agreement, dated as of Febru-
ary 6, 1996, by and between DRS/MS, Inc.
and Universal Sonics Corporation
[Registration Statement No.33-64641,
Amendment No. 1, Exhibit 10.92]
<PAGE>
10.96- Asset Purchase Agreement, dated as of Feb-
ruary 9, 1996, by and among Mag-Head Engi-
neering, Company, Inc. and Ahead Technolo-
gy Acquisition Corporation, a subsidiary
of Precision Echo, Inc. [Registration
Statement No. 33-64641, Post-Effective
Amendment No. 1, Exhibit 10.93]
10.97- Employment, Non-Competition and Termina-
tion Agreement, dated March 28, 1996, be-
tween the Company and Leonard Newman
[Registration Statement No. 33-64641,
Post-Effective Amendment No. 1, Exhibit
10.94]
P10.89- Contract No. N00024-95-G-5609, dated
January 25, 1996, between Technology
Applications and Service Company and the
Navy
*11 - Computation of earnings per share
*13 - Portions of the 1996 Annual Report to
Stockholders of the Company
*21 - List of subsidiaries of the Company as of
March 31, 1996
*23.1 - Consent of KPMG Peat Marwick LLP
*23.2 - Independant Auditors' Report Consolidated Financial
Statement schedule.
LEASE AGREEMENT
This LEASE AGREEMENT is entered into this 3rd day of April, 1996, by and
between LOS ALAMOS ECONOMIC DEVELOPMENT CORPORATION, a New Mexico corporation
(Landlord) and DRS, INC. (Tenant).
WHEREAS, Landlord owns the land and building located at the Small Business
Center-Annex, 127 Eastgate Drive, Los Alamos, New Mexico (the Property);
WHEREAS, Tenant desires to lease certain space within the Property for the
purposes described herein;
WHEREAS, the parties are willing to enter into a Lease Agreement upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereby agree as follows:
i) LEASE. Landlord hereby leases to Tenant and Tenant hereby hires and
takes from Landlord that certain space more particularly described in attached
Exhibit A incorporated herein by reference (the Leased Premises) together with a
right to the non-exclusive use, in common with the other Tenants, of the common
areas of the property provided, however, that Tenant agrees to abide by all
reasonable rules and regulations instituted by or on behalf of Landlord in
relation to the common areas.
ii) TERM. The term of this lease shall be for a period of 6 MONTHS
commencing On JUNE 1, 1996 and terminating at midnight NOVEMBER 30, 1996 both
dates inclusive, unless sooner terminated as herein provided. Tenant will give
Landlord 30 days written notice before expiration of this Lease Agreement
regarding vacating Leased Premises or negotiation of new Lease.
iii) RENT. Tenant agrees to pay a total rent of seven thousand five hundred
seventy-eight Dollars ($7,578) in lawful money of the United States of America
in equal monthly installments of one thousand two hundred sixty-three Dollars
($1,263) due the first day of each and every month in advance to Landlord.
iv) LATE PAYMENT CHARGES. Tenant shall be assessed a late payment penalty
by Landlord according to the following schedule:
LEASE AGREEMENT - Page 1
<PAGE>
(a)(a) Should Tenant fail to tender to Landlord its rent payment by the
fifth day of the month, a late payment penalty equal to 5% of the monthly rent
shall be assessed against Tenant by Landlord which late payment penalties shall
accompany the rental payment; and
(b)(b) Should Tenant fail to tender to Landlord its rent payment by the
fifteenth day of the month, a late payment penalty equal to 25% of the monthly
rent shall be assessed against Tenant by Landlord which late payment penalties
shall accompany the rental payment.
v) SECURITY DEPOSIT. Tenant has paid to Landlord a total security deposit
equal to $1,263 which shall be held by Landlord as security for the payment of
any rents owed and any other sums of money, repairs and renovation on account of
damages for which the tenant is responsible under the terms and conditions of
this Lease. Upon termination of this Lease, any balance of the security deposit
remaining after deduction by Landlord shall be refunded, without interest, to
Tenant within a reasonable period of time following termination of the Lease. A
statement of all expenditures made by Landlord pursuant to this paragraph shall
be furnished to Tenant within a reasonable period of time following termination
of this Lease.
vi) USE OF PREMISES. Tenant agrees to operate and maintain the Leased
Premises throughout the term of this Lease during ordinary business hours as
office space, which shall include the performance of such services as are
usually appropriate to such business. Tenant further agrees to conduct no
incidental business on the Leased Premises without the prior written consent of
Landlord.
(a) Tenant further agrees to use the Leased Premises during the term of
this Lease only for lawful purposes. Tenant agrees:
(b)(a) not to suffer or permit the Leased Premises or the improvements
thereon or any part thereof, to be used for any purpose or use violation of any
law, ordinance, or regulation of any governmental entity, or in any manner that
would constitute a nuisance or any unreasonable annoyance to the owners or
occupants of adjoining or neighboring property, or for any extrahazardous
purpose or in any manner that might violate any policy or policies of insurance
at any time carried on the building by Landlord;
(c)(b) not to keep or permit to be kept thereon any gasoline or other
combustible petroleum product without first obtaining the written consent of
Landlord and all insurance companies carrying fire insurance, rental insurance
or other insurance on the Property;
LEASE AGREEMENT - Page 2
<PAGE>
(d)(c) not to suffer or permit the Leased Premises or the improvements
thereon or the part thereof to be used in any manner that will injure or impair
the structural strength of any building or improvement construction thereon; and
(e)(d) not to suffer or permit to be installed or used on the property or
in any of the improvements any machinery or apparatus the weight or vibration of
which would tend to injure or impair the structural strength of such
improvements.
vii) POSSESSION. If Landlord is unable to give possess of the Leased
Premises to Tenant on the commencement date of the Lease as provided for in
paragraph 2 of this Lease, because of:
(a)(a) the holding over or retention of possession by any Tenant, Tenants
or occupants;
(b)(b) fire, acts of God or other events not under control of the Landlord;
or
(c)(c) for any other reason, the Landlord shall not be subject to liability
to Tenant for the failure to five possession on commencement date. If Landlord
is unable to give Tenant possession of the Leased Premises, the rent payments
due Landlord by Tenant shall not commence until the Leased Premises are
available for occupancy by Tenant. No such failure to give possession at the
commencement on the date of this Lease shall affect the validity of this Lease
or the obligations of Tenant hereunder, except as to abatement of rent during
any such period of non-occupancy, nor shall the same be construed to extend the
term of this Lease.
viii) SERVICES. Landlords shall provide to or on behalf of Tenant, subject
to rules and regulations promulgated by or on behalf of Landlord from time to
time, the following described services:
(a)(a) A receptionist during regular business hours for directing visitors
to the Leased Premises;
(b)(b) The use by Tenant of the conference room located on the Property for
the total period of two hours per month which period shall be non-cumulative;
(c)(c) A photocopier machine which shall be available to Tenant on a first
come, first serve basis subject to a per copy charge;
(d)(d) A telephone system as more particularly described in attached
Exhibit B incorporated herein by reference (It is understood that the Tenant is
not obligated to utilize the telephone system provided by Landlord;
LEASE AGREEMENT - Page 3
<PAGE>
however, the Landlord's system must be utilized by Tenant if Tenant desires to
have its phone answered by Landlord's receptionist which answering service shall
be subject to the charges set forth in Exhibit (B); and
(e)(e) Landlord may, from time to time, provide such other services to
Tenant as Landlord, in its sole and absolute discretion shall determine.
ix) UTILITIES. Tenant shall be responsible for all utilities allocable to
the use of the Leased Premises and such utilities shall be paid to Landlord by
Tenant in accordance with the option selected by Tenant below (mark out the
options that are not applicable):
(a)(a) ____X___(a) The cost of utilities, including gas, electric, water,
sewer and municipal garbage removal charges, is incorporated within the Tenant's
rent as set forth in paragraph 3 of this Agreement. (SEE EXHIBIT C)
x) MAINTENANCE AND REPAIRS. Tenants shall take care of the interior of the
Leased Premises and the fixtures and appurtenances therein and at its sole cost
and expense make all repairs thereto as and when needed to preserve them in good
working order and condition. All damage or injury to the Leased Premises and to
its fixtures, glass, appurtenances and equipment caused by Tenant moving
property in or out of the Property or by installation or removal of furniture,
fixtures, or other property, or resulting by fire, explosion, air conditioning
unit or systems, short circuits, leakage of water, stream, or any other cause of
any other kind or nature whatsoever due to carelessness, omission, neglect,
improper conduct or other cause of Tenant, its servants, employees, agent,
visitors, or licensees shall be repaired, restored or replaced promptly by
Tenant at its sole cost and expense to the satisfaction of Landlord. All the
aforesaid repairs, restorations and replacements shall be in good quality and
class equal to the original work or installation and shall be done in a good and
workmanlike manner. If Tenant fails to make such repairs, restorations, or
replacements, the same may be made by Landlord at the expense of Tenant and all
sums to be spent and expenses incurred by Landlord shall be collectable as
additional rent and shall be paid by Tenant within thirty (30) days after
rendition of the bill or statement therefore to Tenant by Landlord. Tenant
further agrees that it shall, at its own expense, furnish all necessary
janitorial and cleaning services which are appropriate for the maintenance of
the Leased Premises.
xi) ALTERATIONS. Tenant shall make no major alterations, decorations,
additions or improvements in or to the Leased Premises without the Landlord's
prior written consent, but Landlord agrees that such consent shall not be
unreasonably withheld. As a condition precedent to the Landlord's consent,
Tenant shall deliver to Landlord written plans and specifications for all such
work. Tenant shall comply with all
LEASE AGREEMENT - Page 4
<PAGE>
governmental rules and regulations in connection with such work and shall
prevent any lien or obligation from being created against or imposed upon the
Leased Premises and will discharge all liens or charges for services rendered or
material furnished immediately after said liens occur or said charges become due
and payable.
(a) All alterations, additions, erections or improvements on or in the
Leased Premises at the expiration of this Lease, except trade fixtures shall, at
the option of Landlord, become a part of the Leased Premises, and shall remain
upon and be surrendered with the Leased Premises as part thereof at the
termination of the Lease. Should Tenant fail to remove any furniture or fixtures
or personal property of any kind, then the same shall be considered as abandoned
and become the property of Landlord. In the event Landlord requests Tenant to
remove additions or alterations, Tenant, at its expense, shall, upon expiration
of the term of this Lease, restore the Leased Premises to the same and as good
an order and condition as when the same when entered upon by Tenant, ordinary
wear and tear excepted; and in default thereof, Landlord may affect such
removals and repairs and Tenant shall pay Landlord the cost thereof as
additional rent, with interest at a rate of 10% per annum from the date of
payment by Landlord.
xii) LANDLORD'S RIGHT OF ACCESS. Landlord or Landlord's agents shall have
the right to enter the Leased Premises at all reasonable hours to examine the
same, to show the Leased Premises to prospective purchasers or lessees of the
Leased Premises and to make such decorations, repairs, alterations,
improvements, or additions as Landlord may deem necessarily desirable either to
the Property or to the Leased Premises without unreasonable interruption of
Tenant's business in the Leased Premises, and Landlord shall be allowed to take
all material into and upon the Leased Premises that may be required therefore
without the same constituting an eviction of Tenant in whole or in part and the
rent shall be in no way abate while the decorations, repairs, alterations,
improvements, or additions are being made, by reason of loss or interruption of
business of the Tenant because of the prosecutions of any such work, or
otherwise.
xiii) ASSIGNMENT AND SUBLETTING. Tenant shall not transfer, assign, sublet,
enter into license or concession agreements, change ownership, mortgage or
hypothecate this lease of the Tenant's interest in and to the Leased Premises
without the prior written consent of Landlord. Any attempt to transfer, assign,
sublet, license or concession agreement, change of ownership, mortgage or
hypothecation without the Landlord's consent shall be void and confer no rights
upon any third party. Without in any way limiting the Landlord's right to refuse
to give consent for any other reason or reasons, the Landlord reserves the right
to refuse to give such consent, if in Landlord's reasonable business judgment
the financial worth of the new Tenant is less than that of the Tenant executing
this Lease. Nothing herein contained shall relieve Tenant from its covenants and
obligations for the term of this Lease. Tenant agrees to reimburse Landlord's
reasonable attorneys' fees incurred in connection with the processing and
documentation of any such requested transfer, assignment, subletting, licensing
or concession agreement, change of ownership mortgage or hypothecation of this
Lease or Tenant's interest in or to the Leased Premises. Each transfer,
LEASE AGREEMENT - Page 5
<PAGE>
assignment, subletting, license, concession agreement, mortgage or hypothecation
of this Lease or Tenant's interest in or to the Leased Premises. Each transfer,
assignment, subletting, license, concession agreement, mortgage or hypothecation
to which there has been consent shall be by an instrument in writing and in form
satisfactory to Landlord.
xiv) INSURANCE AND INDEMNITY
(a)(a) Duty of Landlord. The Landlord, at its own cost and expense, shall
keep the Property insured during the term of this Lease against loss or damage
by fire or other hazard. Landlord shall further maintain, at its own cost,
liability insurance on the common areas.
(b)(b) Duty of Tenant. Tenant may, during the term of the Lease hereof keep
in full force and effect a policy of public liability and property damage
insurance with respect to the Leased Premises, its contents and the business
conducted by Tenant in the Leased Premises. All property of all kind that may be
on or in the Leased Premises during the term of this Lease shall be at the sole
risk of Tenant, Landlord shall not be liable to Tenant or any other person from
any injury, loss or damage to the Property of or to any person on the Leased
Premises.
(c)(c) Indemnification of Landlord. Tenant will indemnify Landlord and save
him harmless from and against any and all claims, actions, damages, liability
and expenses in connection with the loss of life, personal injury in/or damage
to the property arising from or out of any occurrence in, upon or at the Leased
Premises or the occupancy or use by Tenant of the Leased Premises, in common
areas or any part thereof, or occasioned wholly or in part by any act or
omission by Tenant, its agents, contractors, employees, servants, lessees. In
case Landlord shall, without fault on its own part, be made a party to any
litigation commenced by or against Tenant, then Tenant shall protect and hold
Landlord harmless and shall pay all costs and reasonable attorneys' fees
incurred or paid by Landlord in connection with such litigations. Tenant shall
also pay all costs, expenses and reasonable attorneys' fees that may be incurred
or paid by Landlord in enforcing the convenants and agreements of this Lease.
xv) QUIET ENJOYMENT. Landlord represents that:
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<PAGE>
(a)(a) Landlord is rightful owner of the Property and the Leased Premises
and has the right to make this Lease.
(b)(b) Tenant, upon paying the rent herein reserved and upon performance of
all terms and conditions of this Lease, shall at all times during the term of
this Lease, peacefully and quietly have, hold and enjoy the Leased Premises.
xvi) SURRENDER. Tenant shall surrender and deliver the Leased Premises,
together with all fixtures and improvements presently in the Leased Premises, at
the expiration of this Lease or sooner termination of the term, in good repair
and condition, broom-clean and free of Tenant's property. It is agreed that if,
after the expiration of this Lease, Tenant shall, with the Landlord's written
consent remain in the possession of the Leased Premises and shall continue to
pay rent, such Tenant shall be regarded as a Tenant from month-to-month, any
monthly rental, payable in advance, equivalent to one hundred fifty percent
(150%) of the monthly rental installments called for hereunder or any extensions
hereof and shall otherwise be subject to all the terms and conditions of this
Lease. Landlord or Tenant may terminate this month-to-month tenancy with 30 day
written notice to the other party.
xvii) EVENT OF DEFAULT. If any one or more of the following happen
(hereinafter called and Event or Events of Default):
(a)(a) If default shall be made in the punctual payment of rent payable
under this Lease when and as the same shall become due and payable, and such
default shall continue for a period of ten (10) days after written notice of
default is sent to Tenant; or
(b)(b) If default shall be made by Tenant in the performance or compliance
with any of the covenants, agreements, terms, or conditions contained in this
Lease other than that referred to in the foregoing subparagraph (a), and such
default shall continue for a period of ten (10) days after written notice is
sent thereof from Landlord to Tenant, or in the case of default for a
contingency which cannot with due diligence be cured within such period of ten
(10) days, Tenant fails to proceed promptly and with all due diligence to cure
the same and hereafter to prosecute the curing of such default with all due
diligence (it being intended that in connection with the default not susceptible
to being cured with due diligence within ten (10) days that the time of Tenant
in which to cure the same shall be extended for such period as may be necessary
to complete the same with all due diligence); or
LEASE AGREEMENT - Page 7
<PAGE>
(c)(c) If Tenant shall file a voluntary petition in bankruptcy or shall be
adjudicated bankrupt or insolvent, or shall file any petition or answer seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under the present or any future federal
bankruptcy code or any other present or any future federal bankruptcy code or
any other statutory law, or shall seek to consent to or acquiesce in the
appointment of any receiver, or liquidator of Tenant or of all or any
substantial part of its properties or of the Leased Premises; or
(d)(d) If within sixty (60) days after the commencement of any proceeding
against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under the present or
any future applicable federal, state or other statutory law, such proceeding
shall not have been dismissed, or within sixty (60) days after the appointment
without the consent or acquiescence of Tenant, or of any Trustee, receiver or
liquidator of Tenant or of all or any substantial part of its properties or the
Leased Premises, such appointment shall not have been vacated or stayed on
appeal or otherwise, or if within sixty (60) days after the expiration of any
such stay, such appointment shall not have been vacated;
(e) THEN, AND IN ANY SUCH event Landlord, at any time thereafter, may give
notice to Tenant specifying such Event of Default or Events of Default and
stating that this Lease and the term thereof shall expire and terminate on the
date specified in such notice which shall be ten (10) days after the giving of
such notice, and upon the date specified in such notice, this Lease and the Term
thereof shall expire and terminate and Tenant shall remain liable as hereinafter
provided, unless before any such notice of termination of this Lease is mailed
to, or served Tenant, all arrears of rent and other amounts payable under this
Lease, together in each case with interest thereon at the rate of ten (10%) per
annum from the date when the same became due and payable and all costs and
expenses incurred by or on behalf of Landlord in regard to the Leased Premises,
including reasonable attorneys' fees, shall be then fully paid for on behalf of
Tenant, and all other defaults at the time existing under this Lease shall have
been fully cured and made good or secured to the satisfaction of Landlord, in
which event the consequences of such Event of Default shall be deemed to be
annulled.
(f) Upon any such expiration or termination of this Lease, Tenant shall
quietly and peacefully surrender the Leased Premises to Landlord, without any
payment therefor by Landlord, then Landlord upon or at any time after such
expiration or termination, may without further notice, enter upon or re-enter
the Leased Premises and possess and repossess itself thereof, by force, summary
proceedings, ejectment, or otherwise, and may dispossess Tenant and remove
Tenant and all other persons and property from the Leased Premises without being
liable to prosecution therefor.
LEASE AGREEMENT - Page 8
<PAGE>
xviii) NOTICE. All and any notice required to be given hereunder by the
parties shall be either hand delivered or properly mailed, postage prepaid to
the parties as follows:
(a)
(b) Landlord: Los Alamos Economic Development
(c) Post Office Box 715
(d) Los Alamos, NM 87544
(e)
(f) Tenant: DRS, INC.
(g) 127 Eastgate Drive
(h) Los Alamos, NM 87544
xix) PARKING. Tenant, its business invitees and licensees shall have the
right to use, in common with the other tenants, during normal business hours,
the parking lots located on the Property. Tenant shall respect the right of
other tenants, their business invitees and licensees to use the parking lot and
under no circumstances shall Tenant have the right to park vehicles overnight in
the parking lot. Vehicles in violation of this provision shall be towed and
their owners shall assume all risk and expense for such towing. No vehicles,
including motorcycles, shall be parked in driveways, sidewalks, or patios.
Bicycles should not be parked where they affect pedestrian movement, and shall
not be left in common areas of the property.
xx) COMMON AREAS. Landlord shall keep the common area in good repair and in
clean condition. Landlord shall specifically provide all necessary janitorial
and cleaning services, care and maintenance of the common areas, including
wiring and plumbing for the property.
LEASE AGREEMENT - Page 9
<PAGE>
xxi) SIGNS. Landlord shall provide, at its own expense, signs on the doors
of the Leased Premises. Any additional signs which the Tenant may wish to erect
shall only be permitted with the prior written consent of the Landlord.
xxii) MISCELLANEOUS.
(a) Unenforceable Provisions. If any provisions of this Lease shall be
declared invalid or unenforceable, the remainder of this Lease shall continue in
full force and effect.
(b) Successors or Assigns. The covenants and agreements herein contained
shall, subject to the provisions of this Lease, bind and inure to the benefit of
the Landlord, its successors and assigns and of Tenant, its successors and
assigns except as otherwise provided herein.
(c) Expenses of Default; Reasonable Attorneys' Fees. All expenses,
including reasonable attorneys' fees occasioned by the default of a party
hereunder shall be borne by the defaulting party. Should any legal proceedings
be necessary with regard to this Lease, the prevailing party shall be entitled
to reasonable attorneys' fees and costs awarded by the court as part of any
judgment recovered therein.
(d) Additional Provisions. Additional provisions regarding the use,
possession and occupancy of the Leased Premises are set forth in attached
Exhibit C to this Lease which are incorporated herein by reference. If there is
a conflict between the terms and conditions of this Lease and the Additional
Provisions, the Additional Provisions shall control.
(e) Non-Waiver of Default. The failure of Landlord to take any action with
respect to any default by Tenant under this Lease, shall not constitute a waiver
by Landlord of any of its respective rights under this Lease.
(f) Amendment. This Lease constitutes the total understanding of the
parties and no modification hereof shall be effective except when in writing and
signed by all parties hereto.
(g) Nondiscrimination. There shall be no discrimination based on race,
color, creed, national origin or gender in the use and occupancy of the Leased
Premises.
LEASE AGREEMENT - Page 10
<PAGE>
(h) Governing Law. This Lease is made in the State of New Mexico and its
validity and the rights and obligations of the parties hereunder shall be
determined in accordance with the laws of the State of New Mexico.
LEASE AGREEMENT - Page 11
<PAGE>
EXHIBIT A
SECOND FLOOR
FIRST FLOOR
LOS ALAMOS
SMALL BUSINESS CENTER
LEASE AGREEMENT - Page 12
<PAGE>
ANNEX
LEASE AGREEMENT - Page 13
<PAGE>
EXHIBIT B
Tenant will provide their own telephone system.
LEASE AGREEMENT - Page 14
<PAGE>
EXHIBIT C
If Landlord determines that tenant usage substantially exceeds nominal
operations per unit area utility usage, it will be necessary to review lease
rates to compensate for such usage. Tenant agrees to negotiate with Landlord to
determine a reasonable surcharge to cover the extraordinary utility usage. If an
agreement as to a reasonable surcharge cannot be reached between the Landlord
and Tenant, the Landlord shall have the option of having the Tenant's usage
metered separately. In such a situation, the Landlord would reduce Tenant's
rental rate by $1.00 per square foot per year and the Tenant would assume
responsibility for the utility bill for its leased space.
LEASE AGREEMENT - Page 15
<PAGE>
ACKNOWLEDGMENTS
STATE OF NEW MEXICO )
) ss.
COUNTY OF LOS ALAMOS )
This Lease was acknowledged before me this _______ day of _____________,
19____, by James M. Greenwood, Executive Director of the Los Alamos Economic
Development Corporation, a New Mexico Corporation, on behalf of said
Corporation.
---------------------------------------
Notary Public
My Commission expires:
------------------------
ACKNOWLEDGMENT FOR CORPORATION
STATE OF NEW MEXICO )
) ss.
COUNTY OF LOS ALAMOS )
This Lease was acknowledged before me this _______ day of _____________,
19____, by __________________ (Name of Officer) of ____________________ a
____________________ Corporation, on behalf of said Corporation.
---------------------------------------
Notary Public
My Commission expires:
-----------------------
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day
and year above written.
LANDLORD:
Los Alamos Economic Development Corporation
By:___________________________________________
Its Executive Director
Tenant:_______________________________________
Its Executive Director
<TABLE>
<CAPTION>
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
Computation of Earnings per Share Exhibit 11
Years Ended March 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ ------------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
---------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares:
Weighted average number of shares of Class A and
Class B Common Stock outstanding ................ 5,470,028 5,470,028 5,108,296 5,108,296 5,334,477 5,334,477
Effect of dilutive common stock options ......... 177,475 186,486 123,038 131,613 55,836 62,935
Effect of 8 1/2% convertible subordinated
debentures (1) ................................ -- -- -- -- -- --
Effect of 9% senior subordinated convertible
debentures .................................... -- 1,373,839 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Adjusted shares ........................... 5,647,503 7,030,353 5,231,334 5,239,909 5,390,313 5,397,412
========== ========== ========== ========== ========== ==========
Net Earnings:
Net earnings for the year ....................... $4,103,000 $4,103,000 $2,604,000 $2,604,000 $1,615,000 $1,615,000
Effect of assumed conversion of 8 1/2%
convertible subordinated debentures (2) ......... -- -- -- -- -- --
Effect of assumed conversion of 9%
senior subordinated convertible debentures ...... -- 748,000 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Adjusted net earnings ....................... $4,103,000 $4,851,000 $2,604,000 $2,604,000 $1,615,000 $1,615,000
========== ========== ========== ========== ========== ==========
Earnings per share (adjusted net earnings
divided by adjusted shares) ..................... $ 0.73 $ 0.69 $ 0.50 $ 0.50 $ 0.30 $ 0.30
========== ========== ========== ========== ========== ==========
</TABLE>
(1) The 8 1/2% convertible subordinated debentures are excluded from the
calculation of fully diluted earnings per share for fiscal years 1996, 1995
and 1994, as they would have an antidilutive effect on earnings per share.
<TABLE>
SELECTED FINANCIAL DATA
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
Years Ended March 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues $101,454,000 $69,930,000 $57,820,000 $47,772,000 $28,925,000
Costs and Expenses 92,907,000 64,836,000 54,372,000 45,461,000 37,032,000
------------ ----------- ----------- ----------- -----------
Operating Income (Loss) 8,547,000 5,094,000 3,448,000 2,311,000 (8,107,000)
Interest and Related Expenses (2,681,000) (1,372,000) (1,574,000) (1,735,000) (2,198,000)
Other Income, Net 861,000 534,000 834,000 1,224,000 944,000
------------ ----------- ----------- ----------- -----------
Earnings (Loss) before Income Taxes (Benefit) 6,727,000 4,256,000 2,708,000 1,800,000 (9,361,000)
Income Taxes (Benefit) 2,624,000 1,652,000 1,093,000 715,000 (4,006,000)
------------ ----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 4,103,000 $ 2,604,000 $ 1,615,000 $ 1,085,000 $(5,355,000)
- ---------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA*
Primary Earnings (Loss) per Share $ .73 $ .50 $ .30 $ .20 $ (1.01)
Fully Diluted Earnings (Loss) per Share $ .69 $ .50 $ .30 $ .20 $ (1.01)
Book Value per Share $ 4.86 $ 4.16 $ 3.70 $ 3.40 $ 3.20
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL POSITION
Working Capital $ 33,990,000 $20,317,000 $19,803,000 $17,994,000 $17,747,000
Net Property, Plant and Equipment $ 16,191,000 $ 9,849,000 $ 8,893,000 $ 9,768,000 $11,602,000
Total Assets $ 97,251,000 $64,590,000 $58,836,000 $51,948,000 $53,904,000
Long-Term Debt, Excluding Current Installments $ 32,608,000 $11,732,000 $14,515,000 $17,290,000 $19,958,000
Net Stockholders' Equity $ 26,566,000 $22,509,000 $19,759,000 $18,115,000 $17,047,000
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pretax Return on Revenues 6.6% 6.1% 4.7% 3.8% (32.4)%
After Tax Return on Revenues 4.0% 3.7% 2.8% 2.3% (18.5)%
Return on Average Stockholders' Equity 16.7% 12.3% 8.5% 6.2% (27.2)%
Current Ratio 2.0 1.9 2.1 2.4 2.3
Long-Term Debt, Excluding Current
Installments, to Capitalization 55.1% 34.3% 42.3% 48.8% 53.9%
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
Capital Expenditures $ 6,331,000 $ 2,543,000 $ 988,000 $ 922,000 $ 882,000
Depreciation and Amortization $ 3,170,000 $ 2,480,000 $ 2,558,000 $ 3,202,000 $ 3,714,000
Company-Sponsored Research and Development $ 649,000 $ 795,000 $ 537,000 $ 470,000 $ 661,000
Employees** 809 565 548 296 294
Revenues per Employee*** $ 137,000 $ 130,000 $ 137,000 $ 164,000 $ 91,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* No cash dividends have been distributed in any of the years in the five-year
period ended March 31, 1996.
** Indicates the number of employees at March 31 for each of the fiscal years
presented. Included in fiscal 1996, 1995 and 1994 are approximately 155, 46
and 260 employees, respectively, from new operations. (See Note 11 of Notes
to Consolidated Financial Statements.)
*** Based upon average number of employees.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth items in the Consolidated Statements of Earnings
as a percentage of revenues and the percentage increase or decrease of those
items as compared with the prior period.
Percent of Revenues Percent Changes
------------------------- -------------------
1996 vs. 1995 vs.
Fiscal Years 1996 1995 1994 1995 1994
- -----------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 45.1% 20.9%
Costs and Expenses 91.6 92.7 94.0 43.3 19.2
------ ------ ------
Operating Income 8.4 7.3 6.0 67.8 47.7
Interest and
Related Expenses (2.6) (2.0) (2.7) 95.4 (12.8)
Other Income, Net .8 .8 1.4 61.2 (36.0)
------ ------ ------
Earnings before
Income Taxes 6.6 6.1 4.7 58.1 57.2
Income Taxes 2.6 2.4 1.9 58.8 51.1
------ ------ ------
Net Earnings 4.0% 3.7% 2.8% 57.6% 61.2%
- -----------------------------------------------------------------------------
BUSINESS OVERVIEW
In recent years, the Company has faced the increasing challenge of achieving
growth and improving its financial performance, while operating in an industry
characterized by consolidation, reduced spending and technological transition.
The Company has met this challenge with a four-part strategy aimed at expanding
its core technological capabilities in electronic display, data storage and
electro-optical systems; winning new programs for products in these areas;
transferring technology from the defense to the commercial sector; and acquiring
businesses which provide a strategic complement to the Company's existing
customers and products. The implementation of this strategy has resulted in
increasing revenues and profits over the last four fiscal years.
Since the beginning of fiscal 1994, the Company has acquired seven businesses
with complementary military and commercial products and technologies. The
businesses of Technology Applications & Service Company (TAS), CMC Technology
(CMC) and Laurel Technologies (Laurel) joined the Company in the latter part of
fiscal 1994. In November 1994, the Company acquired Ahead Technology Corporation
(Ahead), now located with CMC in San Jose, California. In July 1995, the Company
formed a new subsidiary, OMI Acquisition Corp. (OMI), which acquired
substantially all of the assets of Opto-Mechanik, Inc. (Opto). In addition, in
February 1996, the Company acquired substantially all of the assets of Mag-Head
Engineering Company, Inc. (MEC) and also formed a new partnership, DRS Medical
Systems (DRS/MS). All of these businesses have become an integral part of the
Company.
COMPARISON OF FISCAL 1996 WITH FISCAL 1995
Revenues for the fiscal year ended March 31, 1996 increased 45% to $101.5
million from $69.9 million in fiscal 1995. The revenue growth was due primarily
to increased shipments of data storage, display workstation and electro-optical
systems, the latter as a result of the acquisition of substantially all of the
assets of Opto on July 5, 1995 (the OMI Asset Acquisition), as well as to
increases in commercial product sales.
Operating income for the fiscal year ended March 31, 1996 increased 68% to
$8.5 million from $5.1 million in fiscal 1995. Operating income as a percentage
of revenues was 8% for the fiscal year ended March 31, 1996, as compared with 7%
for the comparable prior-year period. Higher operating income was due primarily
to the overall increase in revenues, together with higher margins on the
Company's commercial product lines.
Interest and related expenses increased 95% to $2.7 million for the fiscal
year ended March 31, 1996, as compared with $1.4 million in the prior fiscal
year. The increase for the period was primarily due to the private placement
during the year of $25.0 million aggregate principal amount of 9% Senior
Subordinated Convertible Debentures due 2003 (the 9% Debentures), offset in part
by a reduction in interest resulting from repurchases of the Company's 8-1/2%
Convertible Subordinated Debentures due 1998 (the 8-1/2% Debentures), in
satisfaction of the August 1, 1995 sinking fund requirement for this debt.
Other income, net, increased 61% to $.9 million for the fiscal year ended
March 31, 1996 from $.5 million in the prior year. This increase was due
primarily to interest earned on higher average cash balances this fiscal year,
mainly as a result of the net proceeds from the 9% Debentures.
The Company's effective tax rate for the fiscal years ended March 31, 1996
and 1995 was 39%. The provision for income taxes includes all estimated income
taxes payable to federal and state governments, as applicable.
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Revenues for fiscal 1995 increased 21% to $69.9 million from $57.8 million in
fiscal 1994. The increase during fiscal 1995 was primarily attributable to
revenues from the display, manufacturing and video broadcast product lines of
TAS, CMC and Laurel, which were included in the Company's results for the full
year. In addition, commercial revenues increased $4.3 million to approximately
$6.4 million in fiscal 1995, primarily as a result of the Company's November
1994 acquisition of Ahead, which contributed approximately $2.7 million in
revenues for the fiscal 1995 period. Revenues from the Company's core signal
processing, display, data storage and optical product lines experienced a slight
decrease during fiscal 1995, as development efforts on several major programs
were substantially completed, and the receipt of certain new awards was delayed
into the latter part of the year.
20
<PAGE>
Operating income for fiscal 1995 increased 48% to $5.1 million from $3.4
million in fiscal 1994. Operating income as a percentage of revenues was 7% for
fiscal 1995, as compared with 6% in fiscal 1994. Such increases were
attributable to higher fiscal 1995 revenues, the contribution of higher-margin
commercial products to the Company's business base and the positive impact of
management's continuing cost reduction efforts.
Interest and related expenses for fiscal 1995 decreased 13% to $1.4 million
from $1.6 million in fiscal 1994. The decrease was a result of the reduction in
the Company's long-term debt. The Company repurchased approximately $2.7 million
of its 8-1/2% Debentures during fiscal 1995, which was used principally to
satisfy the August 1, 1994 mandatory sinking fund requirement for this debt.
Other income, net, for fiscal 1995 decreased 36% to $.5 million from $.8
million in fiscal 1994. This decrease was primarily attributable to lower gains
from the redemptions of 8-1/2% Debentures of $.2 million. Substantially all of
the 8-1/2% Debentures redeemed during fiscal 1995 were at prices approximating
par value.
The Company's effective income tax rate in fiscal 1995 and 1994 was 39% and
40%, respectively.
FINANCIAL CONDITION AND LIQUIDITY
CASH AND CASH FLOW: Cash and cash equivalents at March 31, 1996 and March 31,
1995 represented approximately 23% and 17%, respectively, of total assets.
During the fiscal year ended March 31, 1996, cash increased $11.6 million. This
increase was primarily due to the addition of approximately $23 million in net
proceeds (after underwriters' discounts and related expenses) from the issuance
of the 9% Debentures. In addition, approximately $4.9 million was generated from
fiscal 1996 operations, and approximately $2.6 million was generated from sales
of certain fixed assets, primarily in connection with the OMI Asset Acquisition.
These contributions to cash were offset by uses of: (i) approximately $4.7
million for acquisitions and related activities; (ii) approximately $8.3 million
for repayments of long-term debt obligations and (iii) approximately $5.9
million for capital expenditures.
Working capital as of March 31, 1996 was approximately $34.0 million, as
compared with $20.3 million at March 31, 1995. The increase was primarily due to
higher cash balances resulting from the 9% Debenture offering. On May 31, 1996,
the Company entered into a revolving line of credit loan agreement with Mellon
Bank, N.A. for a three-year $15 million unsecured revolving line of credit (the
Line of Credit). The Line of Credit will be used for working capital, letters of
credit and to refinance certain existing debt obligations of the Company at more
favorable interest rates. Interest on borrowings under the Line of Credit will
be charged at the prime rate or at the London Interbank Offered Rate plus 175
basis points.
The Company continues to seek acquisition opportunities consistent with its
business strategy. In June 1996, the Company acquired substantially all of the
assets of Vikron, Inc. (see "Acquisitions and Related Activities") and is
engaged in preliminary discussions regarding several other potential
acquisitions. There can be no assurance, however, that definitive agreements
will be reached or that any acquisition will be consummated. The Company
believes that its current working capital position and available financing are
sufficient to support operational needs, as well as its near-term business
objectives.
ACCOUNTS RECEIVABLE AND INVENTORIES: Accounts receivable were $22.9 million at
March 31, 1996, an increase of approximately $5.5 million from the prior fiscal
year. This increase was primarily attributable to additional accounts receivable
from entities acquired during fiscal 1996 and to increased volume of shipments
at year-end. The Company receives progress payments on certain contracts from
the U.S. Government of between 80-100% of allowable costs incurred. The
remainder, including profits and incentive fees, is billed to its customers
based upon delivery and final acceptance of all products. In addition, the
Company may bill its customers based upon units delivered. Generally, there are
no contract provisions for retainage, and all accounts receivable are expected
to be collected within one year.
The net inventory balance at March 31, 1996 was $19.4 million, an increase of
approximately $7.7 million from the prior fiscal year. This increase was
primarily the result of higher material procurement related to production
activity on certain display workstation programs. The increase in net
inventories was also due, in part, to acquisitions.
LONG-TERM DEBT: Long-term debt outstanding increased by approximately $20.9
million during the fiscal year ended March 31, 1996 to $32.6 million, primarily
due to the 9% Debenture offering and, to a lesser extent, from the addition of
acquisition-related debt. These increases in long-term debt were offset in part
by the early redemption in February 1996 of approximately $5.0 million aggregate
principal amount of 8-1/2% Debentures.
STOCKHOLDERS' EQUITY: Net stockholders' equity increased by $4.1 million during
the fiscal year ended March 31, 1996 to $26.6 million, primarily as a result of
net earnings generated for the fiscal year.
In July 1994, pursuant to a stock purchase agreement between the Company and
David E. Gross, its former President and Chief Technical Officer, the Company
purchased 659,220 shares of its Class A Common Stock and 45,179 shares of its
Class B Common Stock owned by Mr. Gross at a price of $4.125 and $4.00 per
share, respectively, totaling approximately $2.9 million in cash (the Buy-back).
Pursuant to a registration statement filed with the Securities and Exchange
Commission (the SEC) relating to these shares, the Company sold 650,000 shares
of its Class A Common Stock and 45,000 shares of its Class B Common Stock at
prices of $4.125 and $4.00 per share, respectively, totaling approximately $2.9
million.
21
<PAGE>
BACKLOG: At March 31, 1996, the Company's backlog of orders was
approximately $145.6 million, as compared with $126.0 million at March 31, 1995.
The increase in backlog for the fiscal year was due to the net effect of
bookings, partially offset by revenues, and the addition of approximately $17
million of backlog from the OMI Asset Acquisition. New contract awards of
approximately $104.1 million were booked during the fiscal year ended March 31,
1996, including approximately $12.3 million of new commercial orders.
Significant awards received during the year included approximately $19 million
in production and engineering contracts relating to the AN/UYQ-70 Advanced
Display System; an additional $11.3 million for the AN/USH-42 Mission Recording
Systems; $10.6 million for upgraded Captive Boresight Harmonization Kits and
$10.2 million for the design and production of Night Vision Binoculars.
Approximately 78%, 84% and 94% of revenues in fiscal 1996, 1995 and 1994,
respectively, were derived directly or indirectly from contracts or subcontracts
with the U.S. Government, principally the U.S. Navy. Included in revenues for
fiscal 1996, 1995 and 1994 were $12.1 million, $18.8 million and $27.5 million,
respectively, of customer-sponsored research and development, which were the
result of contract agreements directly or indirectly with the U.S. Government.
CONTINGENCIES: The books and records of the Company are subject to audit and
post-award review by the Defense Contract Audit Agency. The Company is not
currently a party to any legal proceedings with the U.S. Government.
CERTAIN AGREEMENTS: On March 28, 1996, the Company entered into an employment,
non-competition and termination agreement with Leonard Newman, a co-founder,
former Chairman and Chief Executive Officer of the Company (the Newman
Agreement). Pursuant to the Newman Agreement, Mr. Newman received a lump sum
payment of approximately $2.0 million. Under the terms of the Newman Agreement,
Mr. Newman has agreed to provide consulting services, as required from time to
time, to the Company for a five-year period and also has agreed not to compete
with the Company during this same period. This agreement supersedes a previous
deferred compensation agreement with the Company.
In March 1996, Mr. Leonard Newman and certain members of his immediate family
sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as an
investment adviser to several accounts. In connection with this sale, the
Company entered into a registration rights agreement with the buyer and filed a
registration statement with the SEC relating to these shares.
INFLATION: The Company has experienced the effects of inflation through
increased costs of labor, services and raw materials. Although a majority of the
Company's revenues are derived from long-term contracts, the selling prices of
such contracts generally reflect estimated costs to be incurred in the
applicable future periods.
ACCOUNTING STANDARDS
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: In December 1991, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" (SFAS 107). SFAS 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Cash and cash equivalents, accounts
receivable, accounts payable and certain debt reported in the Consolidated
Balance Sheets equal or approximate fair values. The market values as of March
31, 1996 of the Company's 8-1/2% Debentures and 9% Debentures, which are
convertible into shares of the Company's Common Stock, have been disclosed in
the Notes to the Consolidated Financial Statements.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS: In
March 1995, the FASB issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). The Company will adopt SFAS 121 effective April 1,
1997, and its adoption is not expected to have a material impact on the
Company's consolidated results of operations or financial position.
ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The Company, as permitted by SFAS 123, has not yet
adopted the recognition provisions of this statement. Pursuant to SFAS 123, the
Company may continue to apply the existing accounting rules in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
provided, however, that the Company then also provides certain disclosures of
pro forma net income and earnings per share, presented as if the recognition
provisions of SFAS 123 had been applied. The Company has not yet determined
whether it will adopt the recognition provisions of SFAS 123 and believes that
any requirements in connection with SFAS 123 will not have a material impact on
the Company's consolidated results of operations or financial position.
ACQUISITIONS AND RELATED ACTIVITIES
On October 1, 1993, the Company acquired, through TAS Acquisition Corp., a
wholly-owned subsidiary of the Company, a 95.7% equity interest in TAS, a
Maryland corporation, pursuant to a stock purchase agreement (the TAS Agreement)
dated as of August 6, 1993. TAS, headquartered in Gaithersburg, Maryland, was a
privately-held company incorporated in early 1991. Under the terms of the TAS
Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and
outstanding shares of common stock, par value $.01 per share, of TAS. On
September 30, 1993, the Company, in anticipation of the acquisition, advanced
$1.8 million to TAS pursuant to a demand promissory note. Such advance was
converted to an intercompany liability
22
<PAGE>
on the date of the acquisition and was eliminated in consolidation. Cash paid by
the Company in connection with this transaction was obtained from working
capital. On November 1, 1993, Articles of Merger were filed in order to merge
TAS into TAS Acquisition Corp. The name TAS Acquisition Corp. was changed to
Technology Applications & Service Company.
The acquisition has been accounted for using the purchase method of
accounting. The excess of cost over the estimated fair value of net assets
acquired was approximately $.4 million, which was capitalized as goodwill and is
being amortized on a straight-line basis over 30 years, or $14,000 annually.
On December 13, 1993, the Company, through its wholly-owned subsidiary, DRS
Systems Management Corporation (DRSSMC) entered into a partnership with Laurel
Technologies, Inc. of Johnstown, Pennsylvania. Pursuant to a Joint Venture
Agreement dated November 3, 1993 and a Partnership Agreement dated December 13,
1993, between DRSSMC and Laurel Technologies, Inc., Laurel was formed for the
purposes of electronic cable and harness manufacturing, military-quality circuit
card assembly and other related activities. The Company's contribution to Laurel
consisted of cash, notes and equipment valued at approximately $.6 million,
representing an 80% controlling interest in Laurel. As a result, the financial
position and results of operations of Laurel since December 13, 1993 have been
consolidated with those of the Company's. The related minority interest in
Laurel has been included in Other Liabilities and Other Income, Net,
respectively, in the Company's consolidated financial statements.
Also during December 1993, the Company acquired certain assets of CMC,
located in Santa Clara, California, for approximately $.4 million. CMC primarily
refurbishes magnetic video recording rotary-head scanner assemblies for
post-production facilities and television broadcast stations worldwide. This
acquisition provides the Company with a key customer base in the commercial
video recording systems industry.
On November 17, 1994, the Company acquired, through a wholly-owned subsidiary
of Precision Echo (Precision Acquisition), the net assets of Ahead, pursuant to
an asset purchase agreement (the Ahead Asset Purchase Agreement), dated October
28, 1994. Under the terms of the Ahead Asset Purchase Agreement, Precision
Acquisition paid, on the date of acquisition, approximately $1.1 million for the
net assets of Ahead. In addition, Precision Acquisition entered into a Covenant
and Agreement Not to Compete (the Covenant Agreement), dated October 28, 1994,
with the chairman of the board of Ahead. Under the terms of the Covenant
Agreement, the total cash consideration to be paid by Precision Acquisition
consisted of approximately $.4 million payable at the acquisition date and an
additional $.5 million, payable in equal monthly installments over a period of
five years from the acquisition date.
The acquisition has been accounted for using the purchase method of
accounting and, therefore, Ahead's financial statements are included in the
consolidated financial statements of the Company from the date of acquisition.
The excess of cost over the estimated fair value of net assets acquired was
approximately $.9 million and will be amortized on a straight-line basis over
five years, or approximately $.2 million annually.
On July 5, 1995 (the OMI Closing Date), Photronics Corp., a wholly-owned
subsidiary of the Company, acquired (through OMI, a wholly-owned subsidiary of
Photronics Corp.) substantially all of the assets of Opto, pursuant to an
Agreement for Acquisition of Assets dated May 24, 1995, as amended July 5, 1995,
between Photronics Corp. and Opto (the OMI Agreement), and approved by the
United States Bankruptcy Court for the Middle District of Florida on June 23,
1995. OMI, now located in Palm Bay, Florida, designs and manufactures
electro-optical sighting and targeting systems used primarily in military fire
control devices and in various weapons systems.
Pursuant to the OMI Agreement, the Company paid a total of $5.5 million,
consisting of $3.7 million in cash and $1.8 million in notes. Professional fees
and other costs associated with the acquisition were capitalized as part of the
total purchase price. Total cash consideration paid in the acquisition was
obtained from the Company's working capital.
The acquisition of the assets of Opto has been accounted for under the
purchase method. The cost of the acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and the liabilities
assumed. The operating results of OMI, the acquiring corporation, have been
included in the Company's reported operating results since the date of
acquisition.
On February 6, 1996, pursuant to a Joint Venture Agreement, dated February 6,
1996, by and among DRS/MS, a wholly-owned subsidiary of the Company, Universal
Sonics Corporation (Universal Sonics) and the shareholders of Universal Sonics,
and a Partnership Agreement, dated February 6, 1996, by and between DRS/MS and
Universal Sonics, the Company entered into a partnership with Universal Sonics
(the Partnership) for the purpose of developing, manufacturing and marketing
medical ultrasound imaging equipment. The Company's contribution to the
Partnership consisted of $.4 million in cash and certain managerial expertise
and manufacturing capabilities, representing a 90% interest in the Partnership.
On February 9, 1996, Precision Echo acquired (through Ahead Technology
Acquisition Corporation (Ahead Acquisition), a wholly-owned subsidiary of
Precision Echo), certain assets and assumed certain liabilities (principally,
obligations under property leases) of Mag-Head Engineering Company, Inc.
(Mag-Head), pursuant to an Asset Purchase Agreement, dated as of February 9,
1996, by and among Mag-Head and Ahead Acquisition for approximately $.4 million
in cash. Mag-Head produces audio and flight recorder heads.
In June 1996, a second-tier subsidiary of Precision Echo acquired
substantially all of the assets of Vikron, Inc. (Vikron) for approximately $3.7
million. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and
recording heads.
23
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
March 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $22,785,000 $11,197,000
Accounts Receivable (Notes 2 and 6) 22,942,000 17,432,000
Inventories, Net of Progress Payments (Note 3) 19,449,000 11,724,000
Other Current Assets 1,464,000 2,445,000
----------- -----------
TOTAL CURRENT ASSETS 66,640,000 42,798,000
----------- -----------
Property, Plant and Equipment, at Cost (Notes 4 and 6) 41,935,000 33,661,000
Less Accumulated Depreciation and Amortization 25,744,000 23,812,000
----------- -----------
Net Property, Plant and Equipment 16,191,000 9,849,000
----------- -----------
Intangible Assets, Less Accumulated Amortization of $4,027,000 and $3,457,000
in 1996 and 1995, Respectively 8,498,000 8,920,000
Other Assets 5,922,000 3,023,000
----------- -----------
TOTAL ASSETS $97,251,000 $64,590,000
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Installments of Long-Term Debt (Notes 6 and 11) $ 726,000 $ 2,492,000
Accounts Payable and Accrued Expenses (Note 5) 31,924,000 19,989,000
----------- -----------
TOTAL CURRENT LIABILITIES 32,650,000 22,481,000
Long-Term Debt, Excluding Current Installments (Notes 6 and 11) 32,608,000 11,732,000
Deferred Income Taxes (Note 8) 2,607,000 4,605,000
Other Liabilities (Notes 10 and 11) 2,820,000 3,263,000
----------- -----------
TOTAL LIABILITIES 70,685,000 42,081,000
----------- -----------
STOCKHOLDERS' EQUITY (NOTES 6 AND 9):
Class A Common Stock, $.01 par Value per Share. Authorized 10,000,000 Shares;
Issued 3,739,963 and 3,699,963 Shares at March 31, 1996 and 1995, Respectively 37,000 37,000
Class B Common Stock, $.01 par Value per Share. Authorized 20,000,000 Shares;
Issued 2,223,603 and 2,163,253 Shares at March 31, 1996 and 1995, Respectively 22,000 22,000
Additional Paid-in Capital 13,639,000 13,435,000
Retained Earnings 15,022,000 10,919,000
----------- -----------
28,720,000 24,413,000
Treasury Stock, at Cost: 432,639 Shares of Class A Common Stock at March 31, 1996,
and 1995; 65,795 and 21,619 Shares of Class B Common Stock at March 31, 1996 and
1995, Respectively (1,918,000) (1,617,000)
Unamortized Restricted Stock Compensation (236,000) (287,000)
----------- -----------
NET STOCKHOLDERS' EQUITY 26,566,000 22,509,000
----------- -----------
Commitments and Contingencies (Note 10)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,251,000 $64,590,000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
Years Ended March 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $101,454,000 $69,930,000 $57,820,000
Costs and Expenses (Note 3) 92,907,000 64,836,000 54,372,000
------------ ----------- -----------
Operating Income 8,547,000 5,094,000 3,448,000
Interest and Related Expenses (2,681,000) (1,372,000) (1,574,000)
Other Income, Net (Notes 7 and 11) 861,000 534,000 834,000
------------ ----------- -----------
Earnings before Income Taxes 6,727,000 4,256,000 2,708,000
Income Taxes (Note 8) 2,624,000 1,652,000 1,093,000
------------ ----------- -----------
NET EARNINGS $ 4,103,000 $ 2,604,000 $ 1,615,000
- -----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF CLASS A
AND CLASS B COMMON STOCK
PRIMARY $ .73 $ .50 $ .30
FULLY DILUTED $ .69 $ .50 $ .30
- -----------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares of Class A
and Class B Common Stock Outstanding
Primary 5,648,000 5,231,000 5,390,000
Fully Diluted 7,030,000 5,240,000 5,397,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
Common Stock
------------------------------------ Unamortized
Class A Class B Additional Restricted Net
Years Ended March 31,1996, ----------------- ---------------- Paid-in Retained Treasury Stock Stockholders'
1995 and 1994 Shares Amount Shares Amount Capital Earnings Stock Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1993 3,674,963 $37,000 2,094,528 $21,000 $12,945,000 $ 6,700,000 $(1,579,000) $ (9,000) $18,115,000
Net Earnings -- -- -- -- -- 1,615,000 -- -- 1,615,000
Stock Options Exercised -- -- 11,000 -- 2,000 -- -- -- 2,000
Compensation Relating to
Stock Options, Net -- -- -- -- 23,000 -- -- 4,000 27,000
--------- ------- --------- ------- ----------- ----------- ----------- --------- -----------
BALANCES AT MARCH 31, 1994 3,674,963 37,000 2,105,528 21,000 12,970,000 8,315,000 (1,579,000) (5,000) 19,759,000
Net Earnings -- -- -- -- -- 2,604,000 -- -- 2,604,000
Stock Options Exercised 25,000 -- 57,725 1,000 188,000 -- -- -- 189,000
Compensation Relating to
Stock Options, Net -- -- -- -- 388,000 -- -- (282,000) 106,000
Purchase of Treasury Stock -- -- -- -- -- -- (2,900,000) -- (2,900,000)
Sale of Treasury Stock -- -- -- -- (111,000) -- 2,862,000 -- 2,751,000
--------- ------- --------- ------- ----------- ----------- ----------- --------- -----------
BALANCES AT MARCH 31, 1995 3,699,963 37,000 2,163,253 22,000 13,435,000 10,919,000 (1,617,000) (287,000) 22,509,000
Net Earnings -- -- -- -- -- 4,103,000 -- -- 4,103,000
Stock Options Exercised 40,000 -- 60,350 -- 250,000 -- -- -- 250,000
Compensation Relating to
Stock Options, Net -- -- -- -- 30,000 -- -- 51,000 81,000
Other -- -- -- -- (76,000) -- (301,000) -- (377,000)
--------- ------- --------- ------- ----------- ----------- ----------- --------- -----------
BALANCES AT MARCH 31, 1996 3,739,963 $37,000 2,223,603 $22,000 $13,639,000 $15,022,000 $(1,918,000) $(236,000) $26,566,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
Years Ended March 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings $ 4,103,000 $ 2,604,000 $ 1,615,000
Adjustments to Reconcile Net Earnings to Cash Flows from
Operating Activities:
Depreciation and Amortization 3,170,000 2,480,000 2,558,000
Deferred Income Taxes (159,000) 26,000 (15,000)
Other, Net (1,003,000) (77,000) (233,000)
Changes in Assets and Liabilities, Net of Effects from
Business Combinations:
(Increase) Decrease in Accounts Receivable (4,640,000) (1,415,000) 1,443,000
(Increase) Decrease in Inventories (4,926,000) (6,408,000) 2,069,000
Increase in Other Current Assets (265,000) (7,000) (133,000)
Increase in Accounts Payable and Accrued Expenses 8,630,000 3,640,000 2,928,000
Other, Net (59,000) 1,643,000 (62,000)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,851,000 2,486,000 10,170,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (5,942,000) (2,543,000) (988,000)
Sales of Capital Assets 2,638,000 255,000 11,000
Payments Pursuant to Business Combinations, Net of Cash Acquired (4,669,000) (1,514,000) (696,000)
Cash Advanced to Company Acquired for Repayment of Debt
Prior to Acquisition -- -- (1,800,000)
Other, Net -- 8,000 --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,973,000) (3,794,000) (3,473,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long-Term Debt (1,112,000) (275,000) (168,000)
Repurchases of Convertible Subordinated Debentures (7,212,000) (2,667,000) (2,354,000)
Net Proceeds from Issuance of Senior Subordinated
Convertible Debentures 23,127,000 -- --
Other Borrowings (Repayments), Net (163,000) 20,000 325,000
Purchase of Treasury Stock -- (2,900,000) --
Sale of Treasury Stock -- 2,862,000 --
Other, Net 70,000 -- --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,710,000 (2,960,000) (2,197,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,588,000 (4,268,000) 4,500,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,197,000 15,465,000 10,965,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $22,785,000 $11,197,000 $15,465,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of
Diagnostic/Retrieval Systems, Inc., its subsidiaries, all of which are wholly
owned, a joint venture consisting of an 80% controlling partnership interest and
a joint venture consisting of a 90% controlling parnership interest (the
Company). All significant intercompany transactions and balances have been
eliminated in consolidation.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
In fiscal 1996, the Company obtained a standby letter of credit to secure
progress payments received under a certain contract. As of March 31, 1996, this
letter of credit was collateralized by $1.2 million in cash.
C. REVENUE RECOGNITION
Revenues related to long-term, firm fixed-price contracts, which principally
provide for the manufacture and delivery of finished units, are recognized as
shipments are made. The estimated profits applicable to such shipments are
recorded pro rata based upon estimated total profit at completion of the
contracts.
Revenues on contracts with significant engineering as well as production
requirements are recorded using the percentage-of-completion method measured by
the costs incurred on each contract to estimated total contract costs at
completion (cost-to-cost) with consideration given for risk of performance and
estimated profit.
Revenues related to incentive-type contracts also are determined on a
percentage-of-completion basis measured by the cost-to-cost method. Revenues
from cost-reimbursement contracts are recorded, together with the fees earned,
as costs are incurred.
Revenues recognized under the cost-to-cost percentage-of-completion basis
during fiscal 1996, 1995 and 1994 approximated 10%, 16% and 26% of total
revenues, respectively, with remaining revenues recognized as delivery of
finished units is made, or as costs are incurred under cost-reimbursement
contracts. Included in revenues for fiscal 1996, 1995 and 1994 are $12,051,000,
$18,771,000 and $27,496,000, respectively, of customer-sponsored research and
development.
Revisions in profit estimates are reflected in the year in which the facts,
which require the revisions, become known, and any estimated losses and other
future costs are accrued in full.
Approximately 78%, 84% and 94% of the Company's revenues in fiscal 1996,
1995 and 1994, respectively, were derived directly or indirectly from
defense-industry contracts with the United States Government (principally the
U.S. Navy).
D. INVENTORIES
Costs accumulated under contracts are stated at actual cost, not in excess of
estimated net realizable value, including, for long-term government contracts,
applicable amounts of general and administrative expenses, which include
research and development costs, where such costs are recoverable under customer
contracts.
In accordance with industry practice, inventories include amounts relating
to contracts having production cycles longer than one year, and a portion
thereof will not be realized within one year.
E. DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization have been provided on the straight-line method.
The ranges of estimated useful lives are: office furnishings, motor vehicles and
equipment, 3-10 years; building and building improvements, 15-40 years; and
leasehold improvements, over the shorter of the estimated useful lives or the
life of the lease.
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. The cost of assets retired, sold or otherwise
disposed of are removed from the accounts, and any gains or losses thereon are
reflected in operations.
F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
Intangibles resulting from acquisitions represent the excess of cost of the
investments over the fair-market values of the underlying net assets at the
dates of investment. All intangibles are being amortized on the straight-line
method over five to thirty years. The carrying value of intangible assets
periodically is reviewed by the Company, and impairments are recognized when the
expected undiscounted future operating cash flows derived from such intangible
assets are less than their carrying value.
G. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance is
provided when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Effective April 1, 1993, the Company adopted SFAS 109. The cumulative
effect of adopting SFAS 109 was not material to the Company's consolidated
results of operations or financial position. Deferred tax expense represents the
change in the liability for deferred taxes from year to year.
27
<PAGE>
H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). The Company adopted
SFAS 106 during the first quarter of fiscal 1994, and its adoption did not have
a material impact on the Company's consolidated results of operations or
financial position.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" (SFAS 107). SFAS 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Cash and cash equivalents, accounts
receivable, accounts payable and certain debt reported in the Consolidated
Balance Sheets equal or approximate fair values. The market values as of March
31, 1996 of the Company's 8-1/2% Debentures and 9% Debentures, which are
convertible into shares of the Company's Common Stock, have been disclosed in
the Notes to the Consolidated Financial Statements.
J. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112). The Company adopted SFAS 112 during the
first quarter of fiscal 1995, and its adoption did not have a material impact on
the Company's consolidated results of operations or financial position.
K. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
L. EARNINGS PER SHARE
Earnings per share of common stock is computed by dividing net earnings by the
weighted average number of shares of Class A and Class B Common Stock
outstanding during each period. In fiscal 1996, 1995 and 1994, the computation
of primary earnings per share included approximately 178,000, 123,000 and 56,000
shares, respectively, from the assumed exercise of dilutive stock options
computed using the treasury stock method. The computation of fully diluted
earnings per share in fiscal 1996, 1995 and 1994 included approximately 186,000,
132,000 and 63,000 shares, respectively, from the assumed exercise of dilutive
stock options computed using the treasury stock method. In addition, the fully
diluted earnings per share computation for fiscal 1996 included approximately
1,374,000 shares from the assumed conversion of the Company's 9% Senior
Subordinated Convertible Debentures due 2003 (the 9% Debentures). For purposes
of the computation, net earnings were increased by approximately $748,000, net
of tax, relating to interest expense and amortization of debt issuance costs
associated with these debentures. Additional shares assumed to be outstanding
applicable to the Company's 8-1/2% Convertible Subordinated Debentures (the
8-1/2% Debentures) are not included for any of the periods presented, because
their effect on earnings per share was antidilutive.
NOTE 2. ACCOUNTS RECEIVABLE
The component elements of accounts receivable are as follows:
March 31, 1996 1995
- -------------------------------------------------------------------------------
U.S. GOVERNMENT:
Amounts Billed $ 6,126,000 $ 5,885,000
Recoverable Costs and Accrued
Profit on Progress Completed,
Not Billed 2,200,000 7,264,000
----------- -----------
8,326,000 13,149,000
----------- -----------
OTHER DEFENSE CONTRACTS:
Amounts Billed 5,224,000 2,316,000
Recoverable Costs and Accrued
Profit on Progress Completed,
Not Billed 6,453,000 639,000
----------- -----------
11,677,000 2,955,000
----------- -----------
OTHER AMOUNTS: 2,939,000 1,328,000
----------- -----------
TOTAL $22,942,000 $17,432,000
- -------------------------------------------------------------------------------
Generally, no accounts receivable arise from retainage provisions in contracts.
The Company receives progress payments on certain contracts from the U.S.
Government of between 80-100% of allowable costs incurred; the remainder,
including profits and incentive fees, if any, is billed upon delivery and final
acceptance of the product. In addition, the Company may bill based upon units
delivered.
28
<PAGE>
NOTE 3. INVENTORIES
Inventories are summarized as follows:
March 31, 1996 1995
- -------------------------------------------------------------------------------
Work-in-Process $44,795,000 $23,017,000
Raw Material 3,680,000 2,573,000
----------- -----------
48,475,000 25,590,000
Less Progress Payments (29,026,000) (13,866,000)
----------- -----------
TOTAL $19,449,000 $11,724,000
- -------------------------------------------------------------------------------
General and administrative costs included in work-in-process were $9,865,000 and
$6,584,000 at March 31, 1996 and 1995, respectively. General and administrative
costs included in costs and expenses amounted to $21,956,000, $17,681,000 and
$16,896,000 in fiscal 1996, 1995 and 1994, respectively. Included in those
amounts are expenditures for Company-sponsored independent research and
development, amounting to approximately $649,000, $795,000 and $537,000 in
fiscal 1996, 1995 and 1994, respectively.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1996 and 1995 are summarized as
follows:
March 31, 1996 1995
- -------------------------------------------------------------------------------
Land $ 1,350,000 $ 1,350,000
Building and Building
Improvements 2,389,000 2,384,000
Office Furnishings and
Equipment 3,916,000 3,621,000
Laboratory and Production
Equipment 19,946,000 15,639,000
Motor Vehicles 226,000 235,000
Computer Equipment 7,534,000 7,246,000
Leasehold Improvements 6,574,000 3,186,000
----------- -----------
TOTAL $41,935,000 $33,661,000
- -------------------------------------------------------------------------------
Depreciation and amortization of plant and equipment amounted to $2,311,000,
$1,833,000 and $2,061,000 in fiscal 1996, 1995 and 1994, respectively.
In fiscal 1996, the Company financed approximately $389,000 of capital
expenditures with long-term notes.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The component elements of accounts payable and accrued expenses are as follows:
March 31, 1996 1995
- -------------------------------------------------------------------------------
Payrolls, Other Compensation and
Related Expenses $ 3,955,000 $ 2,643,000
Income Taxes Payable 1,887,000 1,821,000
Losses and Future Costs Accrued
on Uncompleted Contracts 3,850,000 4,555,000
Other 6,474,000 3,004,000
----------- -----------
16,166,000 12,023,000
Accounts Payable 15,758,000 7,966,000
----------- -----------
TOTAL $31,924,000 $19,989,000
- -------------------------------------------------------------------------------
NOTE 6. LONG-TERM DEBT
A summary of long-term debt is as follows:
March 31, 1996 1995
- -------------------------------------------------------------------------------
9% Senior Subordinated Convertible
Debentures, Due 2003 $25,000,000 $ --
8-1/2% Convertible Subordinated
Debentures, Due 1998 4,992,000 12,209,000
Variable Rate Industrial Revenue
Bonds, Due 1998 1,695,000 1,895,000
Other Obligations 1,647,000 120,000
----------- -----------
33,334,000 14,224,000
Less Current Installments of
Long-Term Debt 726,000 2,492,000
----------- -----------
TOTAL $32,608,000 $11,732,000
- -------------------------------------------------------------------------------
On September 29, 1995 (the 9% Debenture Closing Date), the Company issued
$20,000,000 in aggregate principal amount of the Company's 9% Debentures
pursuant to a private placement. Net proceeds from the private placement of
these 9% Debentures were approximately $19,000,000. On November 3, 1995, the
Company issued an additional $5,000,000 in aggregate principal amount of the 9%
Debentures, upon exercise of the over-allotment option pursuant to the Purchase
Agreement between the Company and Forum Capital Markets L.P. (Forum), dated
September 22, 1995. Net proceeds from the exercise of the over-allotment option
were approximately $4,750,000. Subsequently, the 9% Debentures and the shares of
Common Stock which are issuable from time to time upon conversion of the 9%
29
<PAGE>
Debentures were registered with the Securities and Exchange Commission (the
SEC). In connection with these transactions, the Company incurred approximately
$625,000 of professional fees and other costs. These costs, together with
Forum's commissions totaling $1,250,000, have been capitalized and are being
amortized ratably through the maturity date of the 9% Debentures.
Interest on the 9% Debentures is computed on the basis of a 360-day year of
twelve 30-day months. The 9% Debentures are convertible at their face amount any
time prior to maturity into shares of Common Stock (see Note 9), unless
previously redeemed, at a conversion price of $8.85 per share, subject to
adjustment under certain circumstances. As of October 1, 1998, the 9% Debentures
will be redeemable at the option of the Company, in whole or in part, together
with accrued interest to the redemption date, at a redemption price of 105% of
face value, diminishing by one percent each year to 100% on or after the fifth
anniversary of such initial redemption date. There is no sinking fund
requirement associated with the 9% Debentures.
The 9% Debentures are subordinated to the prior payment of principal and
interest on all senior indebtedness of the Company, and are senior in right of
payment to the Company's 8-1/2% Debentures. The indenture for the 9% Debentures
contains certain restrictions, including (i) the issuance of additional debt of
the Company, (ii) the payment of dividends on the capital stock of the Company,
(iii) certain transactions with affiliates, (iv) incurrence of liens, (v)
issuance of preferred stock by the Company or its subsidiaries, (vi) stock
splits, consolidations and reclassifications, and (vii) sales of assets and
subsidiary stock. The indenture also prohibits certain restrictions on
distributions from subsidiaries. All these limitations and prohibitions are
subject to a number of qualifications, as set forth in the indenture. Under the
indenture, the Company also is required to maintain a minimum level of
consolidated net worth, as defined therein. As of March 31, 1996, the Company
was in compliance with this covenant.
The 8-1/2% Debentures are convertible at their face amount any time prior
to maturity into shares of Common Stock of the Company (see Note 9), unless
previously redeemed, at a conversion price of $15.00 per share, subject to
adjustment under certain conditions. The 8-1/2% Debentures are redeemable at the
option of the Company, in whole or in part, at face value, together with
interest accrued to the redemption date. As of August 1, 1990 and on August 1 of
each year thereafter, to and including August 1, 1997, the Company is required
to provide for the retirement of the 8-1/2% Debentures by mandatory redemption
(sinking fund) in the aggregate annual principal amount of $2,500,000. As of
March 31, 1996, the Company had repurchased $20,008,000 of the 8-1/2% Debentures
and has satisfied all sinking fund requirements through August 1, 1997. The
Consolidated Statements of Earnings for fiscal years 1996, 1995 and 1994 reflect
gains resulting from these repurchases of $5,000, $13,000 and $257,000,
respectively.
The 8-1/2% Debentures are subordinate to the prior payment in full of the
principal and interest on all senior indebtedness of the Company, which amounted
to $28,342,000 at March 31, 1996. The indenture contains certain dividend and
other restrictions. Under such provisions, the Company may not distribute
dividends or purchase, redeem or otherwise acquire or retire any of its capital
stock in excess of an aggregate amount which, at March 31, 1996, was
approximately $6,400,000.
The 8-1/2% Debentures and the 9% Debentures are listed for trading in
public markets. As of March 31, 1996, the aggregate market values of the
principal amount of the outstanding 8-1/2% Debentures and 9% Debentures were
approximately $5,017,000 and $27,000,000, respectively, based on closing prices.
On December 19, 1991, the Suffolk County Industrial Development Agency
(Agency) issued variable rate demand industrial development revenue refunding
bonds (Bonds) in the amount of $2,395,000 to refinance a prior bond issue which
provided funds for the construction of the manufacturing facilities of
Photronics Corp. (Photronics), a wholly-owned subsidiary of the Company. All
property, plant and equipment acquired or constructed from the proceeds of the
original bonds collateralizes the obligation, and payment of the principal and
interest and premium (if any) on the Bonds is further secured by the
unconditional guaranty of the Company. The Bonds are supported by an
irrevocable, direct-pay letter of credit in an amount equal to the principal
balance plus interest thereon for 45 days. At March 31, 1996, the contingent
liability of the Company as guarantor under the letter of credit was
approximately $1,726,000. The Company has collateralized the letter of credit
with accounts receivable and also has agreed to certain financial covenants,
including the maintenance of: (i) a certain minimum ratio of consolidated
tangible net worth to total debt (Debt Ratio), (ii) a certain minimum quarterly
ratio of earnings before interest and taxes to interest (Interest Ratio), and
30
<PAGE>
(iii) a certain minimum balance of billed and unbilled accounts receivable
(Eligible Receivables), all as defined in the related agreements. The financial
covenants also require that the Company realize a certain level of profits
during each quarter of fiscal 1997 in order to be in compliance. A default under
the Bonds constitutes a default on the 8-1/2% Debentures and the 9% Debentures.
As a result of the issuance of the $25,000,000 aggregate principal amount
of 9% Debentures, the Debt Ratio at March 31, 1996 was below the required
minimum ratio. The Company has obtained a waiver, renewable quarterly, from the
bank of the required debt ratio and is in compliance with all covenants under
the letter of credit.
Commencing February 1, 1992 and on the first business day of each month
thereafter, interest on the Bonds is payable at that daily rate determined to be
necessary under prevailing market conditions to enable the Bonds to be sold at a
price equal to 100% of the principal amount thereof plus accrued interest. Such
rate was 3.1% at March 31, 1996. At the option of the Company, the interest rate
payable on the Bonds may be changed to a weekly or fixed rate.
Commencing February 1, 1992 and until such time as the Bonds may be
converted to fixed-rate obligations, the Bonds are subject to redemption, in
whole or in part, at the option of the Company at a price equal to their
principal amount plus accrued interest. On or after the second anniversary of a
conversion, Bonds bearing interest at a fixed rate are subject to the
redemption, in whole on any date or in part on any interest payment date, at the
option of the Company at an annual redemption rate of 102% at the second
anniversary of such conversion and diminishing by one percent each year to 100%
on or after the fourth anniversary of such conversion. Commencing January 1,
1993 and on each January 1 thereafter, to and including January 1, 1998, the
Bonds are subject to a schedule of mandatory sinking fund redemptions at a price
equal to 100% of the principal amount of the Bonds redeemed plus accrued
interest. The principal amount of the Bonds redeemed at January 1, 1996 was
$200,000.
Cash payments for interest during fiscal 1996, 1995 and 1994 were
$1,169,000, $1,237,000 and $1,448,000, respectively.
The aggregate maturities of long-term debt for the five years ending March
31, 2001 are as follows: 1997, $726,000; 1998, $2,054,000; 1999, $5,394,000;
2000, $160,000; and 2001, $0.
NOTE 7. OTHER INCOME, NET
Other income, net includes:
Years Ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Interest Income $679,000 $439,000 $370,000
Royalty Income 51,000 63,000 157,000
Gains on Repurchases
of 8-1/2% Debentures 5,000 13,000 257,000
Other 126,000 19,000 50,000
-------- -------- --------
TOTAL $861,000 $534,000 $834,000
- -------------------------------------------------------------------------------
NOTE 8. INCOME TAXES
Income tax expense consists of:
Years Ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
CURRENT:
Federal $2,421,000 $1,498,000 $ 884,000
State 362,000 128,000 224,000
---------- ---------- ----------
2,783,000 1,626,000 1,108,000
---------- ---------- ----------
DEFERRED:
Federal 602,000 172,000 33,000
State (761,000) (146,000) (48,000)
---------- ---------- ----------
(159,000) 26,000 (15,000)
---------- ---------- ----------
TOTAL $2,624,000 $1,652,000 $1,093,000
- -------------------------------------------------------------------------------
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effects of temporary differences that
gave rise to significant portions of the deferred tax assets and deferred tax
liabilities at March 31, 1996 and 1995 are as follows:
31
<PAGE>
March 31, 1996 1995
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
State Net Operating Loss
Carryforwards $ 2,786,000 $ 3,977,000
Inventory Capitalization 2,316,000 1,687,000
Costs Accrued on Uncompleted
Contracts 1,470,000 2,627,000
Other 1,063,000 2,287,000
----------- ------------
Total Gross Deferred Tax Assets 7,635,000 10,578,000
Less Valuation Allowance (1,419,000) (2,279,000)
----------- ------------
NET DEFERRED TAX ASSETS 6,216,000 8,299,000
----------- ------------
DEFERRED TAX LIABILITIES:
Depreciation and Amortization (3,834,000) (5,048,000)
General and Administrative Costs (4,035,000) (4,325,000)
Federal Impact of the State
Benefits (731,000) (1,136,000)
Other (495,000) (828,000)
----------- ------------
Total Gross Deferred Tax
Liabilities (9,095,000) (11,337,000)
----------- ------------
NET DEFERRED TAX LIABILITIES $ 2,879,000 $ 3,038,000
- -------------------------------------------------------------------------------
A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company has
established a valuation allowance for a portion of the deferred tax asset
attributable to state net operating loss carryforwards, due to the uncertainty
of future Company earnings attributable to various states and the status of
applicable statutory regulation that could limit or preclude utilization of
these benefits in future periods. A deferred tax liability of $272,000 is
included in Accounts Payable and Accrued Expenses in the Consolidated Balance
Sheet. A deferred tax asset of $1,567,000 is included in Other Current Assets in
the Consolidated Balance Sheet at March 31, 1995. Approximately $36,121,000 of
state net operating loss carryforwards were available in various tax
jurisdictions at March 31, 1996, which will expire between fiscal years 1997 and
2011.
A reconciliation of the statutory Federal income tax rate to the effective
tax rate follows:
Years Ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Statutory Tax Rate 34% 34% 34%
State Income Tax, Net of Federal
Income Tax Benefit 4 3 4
Amortization of Intangible Assets 1 1 2
Other -- 1 --
--- --- ---
TOTAL 39% 39% 40%
- -------------------------------------------------------------------------------
The provision for income taxes includes all estimated income taxes payable to
federal and state governments, as applicable.
Cash payments for income taxes during fiscal 1996, 1995 and 1994 amounted
to $2,809,000, $1,723,000 and $311,000, respectively.
NOTE 9. COMMON STOCK, STOCK OPTION PLANS AND EMPLOYEE BENEFIT PLANS
Until March 31, 1996, the Company had three authorized classes of stock: a class
consisting of 10,000,000 shares of Class A Common Stock, a class consisting of
20,000,000 shares of Class B Common Stock, and a class consisting of 2,000,000
shares of Preferred Stock (none of which has been issued). The holders of Class
A and Class B Common Stock were entitled to one vote per share and one-tenth
vote per share, respectively.
On February 7, 1996, the Board of Directors (Board) of the Company approved
and recommended for submission to the stockholders of the Company by a majority
vote the consideration and approval of an Amended and Restated Certificate of
Incorporation (the Restated Certificate), which amended and restated the
Company's certificate to (i) effect a reclassification (the Reclassification) of
each share of Class A and Class B Common Stock into one share of Common Stock of
the Company, (ii) provide that action by the stockholders may be taken only at a
duly called annual or special meeting and not by written consent, and (iii)
provide that the stockholders of the Company would have the right to make,
adopt, alter, amend, change or repeal the by-laws of the Company only upon the
affirmative vote of not less than 66 2/3% of the outstanding capital stock of
the Company entitled to vote thereon. On March 26, 1996, the stockholders
approved the Restated Certificate. The Restated Certificate was filed with the
Secretary of State of the State of Delaware and became effective April 1, 1996.
Accordingly, future Consolidated Balance Sheets of the Company will not present
Class A and Class B Common Stock, but rather the new, single class of Common
Stock.
32
<PAGE>
As a result of the Reclassification, the 8-1/2% Debentures and 9%
Debentures are now convertible into an equivalent number of shares of Common
Stock. Also, options granted under the Company's 1991 Stock Option Plan (Stock
Option Plan) are now exercisable for an equivalent number of shares of Common
Stock.
On February 7, 1991, the Board of Directors (Board) adopted the 1991 Stock
Option Plan (Stock Option Plan), which authorized the issuance of up to 600,000
shares of Class B Common Stock. The Stock Option Plan was approved by the
Company's stockholders on August 8, 1991. The Stock Option Plan is the successor
to the Company's 1981 Non-Qualified Stock Option Plan (Non-Qualified Plan) that
expired on May 12, 1991 and to the 1981 Incentive Stock Option Plan (Incentive
Plan) that expired on October 31, 1991. Under the terms of the Stock Option
Plan, options to purchase shares of Class B Common Stock may be granted to key
employees, directors and consultants of the Company. Options granted under the
Stock Option Plan are at the discretion of the Board (Stock Option Committee)
and may be incentive stock options or non-qualified stock options, except that
incentive stock options may be granted only to employees. The option price is
determined by the Stock Option Committee and must be a price per share which is
not less than the par value per share of the Class B Common Stock, and in the
case of an incentive stock option, may not be less than the fair-market value of
the Common Stock on the date of the grant. Options may be exercised during the
exercise period, as determined by the Stock Option Committee, except that no
option may be exercised within six months of its grant date, and in the case of
an incentive stock option, generally, the exercise period may not exceed ten
years from the date of the grant. At March 31, 1996, 129,850 shares of Class B
Common Stock were reserved for future grants under the Stock Option Plan.
The Non-Qualified Plan, as amended, provided for the grant of options to
purchase a total of 100,000 shares of Class A Common Stock and 50,000 shares of
Class B Common Stock through May 12, 1991. Under the Non-Qualified Plan, the
Stock Option Committee had discretion to grant options to employees, consultants
and directors of the Company. The exercise price of an option granted under the
Non-Qualified Plan was the price, as determined by the Stock Option Committee,
but was not less than the aggregate par value of the shares subject to the
option. Options granted under the Non-Qualified Plan were exercisable in
accordance with the terms of the grant during a specified period, which did not
exceed five years. Upon the expiration of the Non-Qualified Plan, a total of
87,600 shares of Class A Common Stock and a total of 10,300 shares of Class B
Common Stock remained ungranted. As of March 31, 1996, there were no options
outstanding under the Non-Qualified Plan.
The Incentive Plan, as amended, provided for the grant of options to
purchase a total of 150,000 shares of Class A Common Stock and 475,000 shares of
Class B Common Stock through October 31, 1991. Under the Incentive Plan, options
were granted at the discretion of the Stock Option Committee only to employees
of the Company. Options are exercisable in accordance with the terms of the
grant within a specified period, which may not exceed ten years. Each option
granted provided for the purchase of a specified number of shares of Class A
Common Stock or Class B Common Stock, or both, at an exercise price not less
than the fair-market value of the shares subject to the option on the date of
grant. Upon the expiration of the Incentive Plan, options representing a total
of 23,665 shares of Class A Common Stock and a total of 269,832 shares of Class
B Common Stock remained ungranted. As of March 31, 1996, there were no options
outstanding under the Incentive Plan.
Under the Stock Option Plan, pursuant to the terms of exercise under the
grant, the excess of the fair-market value of shares under option at the date of
grant over the option price may be charged to unamortized restricted stock
compensation or to earnings as compensation expense and credited to additional
paid-in capital. The unamortized restricted stock compensation, if any, is
charged to expense as the options become exercisable, in accordance with the
terms of the grant. The amount of compensation charged to earnings in fiscal
1996, 1995 and 1994 was $81,000, $106,000 and $27,000, respectively.
When stock is issued on exercise of options, the par value of each share
($.01) is credited to common stock and the remainder of the option price is
credited to paid-in capital. No charge is made to operations.
A summary of all transactions under the Stock Option, Incentive and
Non-Qualified Plans follows:
33
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares of Class A Option Price Shares of Class B Option Price
Common Stock per Share Common Stock per Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT MARCH 31, 1993
(of Which 32,500 Shares and 111,925 Shares of
Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 174,850 $ .01-4.75
Granted -- -- 142,750 $ .01-3.63
Exercised -- -- (11,000) $ .01-2.25
Expired -- -- (32,250) $ 2.13-2.25
------- ----- ------- -----------
OUTSTANDING AT MARCH 31, 1994
(of Which 48,750 Shares and 111,163 Shares of
Class A and Class B, Respectively, Were Exercisable) 65,000 $2.61 274,350 $ .01-4.75
Granted -- -- 150,000 $ .01-4.95
Exercised (25,000) $2.61 (57,725) $ .01-3.63
Expired -- -- (17,000) $ .01-3.63
------- ----- ------- -----------
OUTSTANDING AT MARCH 31, 1995
(of Which 40,000 Shares and 145,425 Shares of
Class A and Class B, Respectively, Were Exercisable) 40,000 $2.61 349,625 $ .01-4.95
Granted -- -- 159,000 $ 4.75-7.75
Exercised (40,000) $2.61 (60,350) $ 2.06-4.75
Expired -- -- (11,475) $ 2.13-7.75
------- ----- ------- -----------
OUTSTANDING AT MARCH 31, 1996
(of Which 137,100 Shares Were Exercisable) -- -- 436,800 $ .01-7.75
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also maintains defined contribution plans covering substantially all
full-time eligible employees. The Company's contributions to these plans for
fiscal 1996, 1995 and 1994 amounted to $414,000, $365,000 and $203,000,
respectively.
On February 1, 1996, the Company established a Supplemental Executive
Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant
to the SERP, the Company will provide retirement benefits to each key executive,
based on years of service and final average annual compensation as defined
therein. In addition, the Company will advance premiums for life insurance
policies providing a death benefit equal to five times the participants' salary
at time of death. In the event of a change in control, as defined therein,
benefits become fully vested. The SERP is non-contributory and unfunded.
Benefits under the SERP are currently being funded from working capital. As of
March 31, 1996, the Company's liability for benefits accrued under the SERP was
approximately $876,000, and is included in Other Liabilities in the Consolidated
Balance Sheet. Charges of $45,000 relating to the SERP were included in the
results of operations for fiscal 1996.
NOTE 10. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
At March 31, 1996, the Company was party to various noncancelable operating
leases (principally for administration, engineering and production facilities)
with minimum rental payments as follows:
- ------------------------------------------------------------------------------
1997 $ 2,717,000
1998 2,600,000
1999 2,340,000
2000 2,215,000
2001 1,213,000
Thereafter 1,675,000
-----------
TOTAL $12,760,000
- ------------------------------------------------------------------------------
34
<PAGE>
It is not certain as to whether the Company will negotiate new leases as
existing leases expire. Determinations to that effect will be made as existing
leases approach expiration and will be based on an assessment of the Company's
capacity requirements at that time.
Total rent expense aggregated $3,115,000, $2,490,000 and $1,703,000 in
fiscal 1996, 1995 and 1994, respectively.
In April 1984, the Board of Directors approved a lease agreement with LDR
Realty Co. (wholly owned by the former Chairman of the Board of Directors and
former President) for additional office and manufacturing space for the Company.
The LDR lease, which expired on May 31, 1988, was renegotiated for a ten-year
term commencing June 1, 1988 at a net annual rental of $233,000. The Company is
required to pay all real-estate taxes, maintenance and repairs to the facility.
Effective July 20, 1994, the Company entered into an Employment,
Non-Competition and Termination Agreement (the Gross Agreement) and a Stock
Purchase Agreement (the Stock Purchase Agreement) with David E. Gross, who
retired as President and Chief Technical Officer of the Company on May 12, 1994.
Under the terms of the Gross Agreement, Mr. Gross will receive a total of
$600,000 as compensation for his services under a five-year consulting agreement
with the Company and a total of $750,000 as consideration for a five-year
non-compete arrangement. The payments will be charged to expense over the term
of the Gross Agreement as services are performed and obligations are fulfilled
by Mr. Gross. He also will receive, at the conclusion of such initial five-year
period, an aggregate of approximately $1.3 million payable over a nine-year
period as deferred compensation. The approximate net present value of the
payments to be made to Mr. Gross, pursuant to the deferred compensation portion
of the Gross Agreement, is included in Other Liabilities in the Consolidated
Balance Sheets. On July 28, 1994, pursuant to the Stock Purchase Agreement, the
Company purchased 659,220 shares of Class A Common Stock and 45,179 shares of
Class B Common Stock owned by Mr. Gross for $4.125 and $4.00 per share,
respectively, totaling approximately $2.9 million in cash (the Buy-back). The
Stock Purchase Agreement also includes certain provisions regarding the sale and
voting of Mr. Gross' remaining shares of stock in the Company, as well as the
adjustment which would have been made in the purchase price paid to Mr. Gross
pursuant to the Buy-back should a change in control of the Company occur within
three years from the date of the Stock Purchase Agreement.
Subsequent to the Buy-back, the Company offered to sell 650,000 shares of
its Class A Common Stock at a purchase price of between $3.92 per share and
$4.33 per share and 45,000 shares of its Class B Common Stock at a purchase
price of between $3.80 per share and $4.20 per share, pursuant to a related
registration statement filed with the SEC. As of March 31, 1995, all shares of
Class A and Class B Common Stock offered for sale under the registration
statement had been sold at a price of $4.125 per share and $4.00 per share,
respectively, totaling approximately $2.9 million.
On March 28, 1996, the Company entered into an Employment, Non-Competition
and Termination Agreement with Leonard Newman, a co-founder, former Chairman and
Chief Executive Officer of the Company (the Newman Agreement). Pursuant to the
Newman Agreement, Mr. Newman received a lump sum payment of approximately $2.0
million, of which approximately $1.5 million was charged to operations in fiscal
1995. Under the terms of the Newman Agreement, Mr. Newman has agreed to provide
consulting services, as required from time to time, to the Company for a
five-year period and also has agreed not to compete with the Company during this
same period. This agreement supersedes a previous deferred compensation
agreement with Mr. Newman.
In March 1996, Mr. Leonard Newman and certain members of his immediate
family sold an aggregate of 885,924 shares of Common Stock to a buyer, acting as
an investment adviser to several accounts. In connection with this sale, the
Company entered into a registration rights agreement with the buyer and filed a
registration statement relating to these shares.
The Company is a party to various legal actions and claims arising in the
ordinary course of its business. In management's opinion, the Company has
adequate legal defenses for each of the actions and claims and believes that
their ultimate disposition will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Since a substantial amount of the Company's revenues are derived from
contracts or subcontracts with the U.S. Government, future revenues and profits
will be dependent upon continued contract awards, Company performance and volume
of Government business. The books and records of the Company are subject to
audit and post-award review by the Defense Contract Audit Agency.
35
<PAGE>
NOTE 11. BUSINESS COMBINATIONS
On October 1, 1993, the Company acquired (through TAS Acquisition Corp., a
wholly-owned subsidiary) a 95.7% equity interest in Technology Applications and
Service Company (TAS), a Maryland corporation, pursuant to a Stock Purchase
Agreement (the Agreement) dated as of August 6, 1993. Under the terms of the
Agreement, the Company paid $15.10 in cash for a total of 97,317 issued and
outstanding shares of common stock, par value $.01 per share, of TAS. TAS,
headquartered in Gaithersburg, Maryland, was a privately-held company
incorporated in 1991. It applies state-of-the-art technology to produce
emulators that can replace display consoles and computer peripherals used by the
military. TAS also produces simulators, stimulators and training products used
primarily for testing and training at military land-based sites, as well as
provides technical services to both Department of Defense and commercial
customers. On September 30, 1993, the Company, in anticipation of the
acquisition, advanced $1,800,000 to TAS pursuant to a demand promissory note.
Such advance was converted to an intercompany liability on the date of the
acquisition and is eliminated in consolidation. On November 1, 1993, Articles of
Merger were filed in order to merge TAS into TAS Acquisition Corp. The name TAS
Acquisition Corp. was changed to Technology Applications & Service Company
(TAS).
The acquisition has been accounted for using the purchase method of
accounting; the Consolidated Statements of Earnings include the operations of
TAS from October 1, 1993.
On December 13, 1993, pursuant to a Joint Venture Agreement dated November
3, 1993 and a Partnership Agreement dated December 13, 1993, by and between DRS
Systems Management Corporation, a wholly-owned subsidiary of the Company, and
Laurel Technologies, Inc. (Laurel) of Johnstown, Pennsylvania, the Company
entered into a partnership with Laurel (the Partnership) for the purposes of
electronic cable and harness manufacturing, military-quality circuit card
assembly and other related activities. The Company's contribution to the
Partnership consisted of cash, notes and equipment valued at approximately
$600,000, representing an 80% controlling interest in the Partnership. As a
result, the financial position of the Partnership has been consolidated with
that of the Company's, and the Consolidated Statements of Earnings include the
operations of Laurel from December 13, 1993. The related minority interest in
the Partnership has been included in Other Liabilities and Other Income, Net,
respectively, in the Company's consolidated financial statements.
The Company also made one other asset acquisition in December 1993 which
was not significant to the Company's consolidated financial statements.
On November 17, 1994, Precision Echo, Inc., a wholly-owned subsidiary of
the Company, acquired, through its wholly-owned subsidiary (Precision Echo), the
net assets of Ahead Technology Corporation (Ahead), pursuant to an Asset
Purchase Agreement dated October 28, 1994. Under the terms of the Asset Purchase
Agreement, Precision Echo paid, on the date of acquisition, approximately
$1,100,000 for the net assets of Ahead. In addition, Precision Echo entered into
a Covenant and Agreement Not to Compete (Covenant), dated October 28, 1994, with
the chairman of the board of Ahead. Under the terms of the Covenant, the total
cash consideration to be paid by Precision Echo consisted of approximately
$400,000 payable at the acquisition date, and an additional $540,000 payable in
equal monthly installments over a period of five years from the acquisition
date. Ahead, now located in San Jose, California, designs and manufactures a
variety of consumable magnetic head products used in the production of computer
disk drives. Its products include burnish heads, glide heads and specialty test
heads.
The acquisition has been accounted for using the purchase method of
accounting, and, therefore, Ahead's financial statements are included in the
consolidated financial statements of the Company from the date of acquisition.
The excess of cost over the estimated fair value of net assets acquired was
approximately $940,000 and will be amortized on a straight-line basis over five
years, or approximately $188,000 annually. The financial position and results of
operations of Ahead were not significant to those of the Company's at the date
of acquisition.
On July 5, 1995 (the OMI Closing Date), Photronics, a wholly-owned
subsidiary of the Company, acquired, through OMI Acquisition Corp. (OMI), a
wholly-owned subsidiary of Photronics, substantially all of the assets of
Opto-Mechanik, Inc. (Opto), pursuant to an Agreement for Acquisition of Assets
dated May 24, 1995, as amended July 5, 1995, between Photronics and Opto (the
OMI Agreement), and approved by the United States Bankruptcy Court for the
Middle District of Florida on June 23, 1995. OMI, now located in Palm Bay,
Florida, designs and manufactures electro-optical sighting and targeting systems
used primarily in military fire control devices and in various weapons systems.
36
<PAGE>
Pursuant to the OMI Agreement, the Company paid a total of $5,450,000
consisting of (i) $1,150,000 in cash to PNC Bank, Kentucky, Inc. (PNC), (ii) a
note to PNC in the principal amount of $1,450,000 payable in forty-eight equal
monthly installments of principal and interest commencing with the first day of
the month subsequent to the OMI Closing Date (the PNC Note), (iii) $2,550,000 in
cash to MetLife Capital Corporation and (iv) a note in the principal amount of
$300,000 to Opto payable in six equal monthly installments of principal and
interest commencing on August 5, 1995 (the Opto Note). The PNC Note bears
interest at a floating rate equal to the lesser of (i) PNC's stated prime
interest rate plus 0.5% or (ii) the prime rate as reported by the Wall Street
Journal plus 0.5%. The Opto Note bears interest at a rate of 9.5% per annum.
Professional fees and other costs associated with the acquisition were
capitalized as part of the total purchase price. Total cash consideration paid
in connection with the acquisition was obtained from the Company's working
capital.
The acquisition of the assets of Opto has been accounted for under the
purchase method. The cost of the acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and the liabilities
assumed. The operating results of OMI, the acquiring corporation, have been
included in the Company's reported operating results since the date of
acquisition.
On February 6, 1996, pursuant to a Joint Venture Agreement, dated February
6, 1996, by and among DRS/MS, Inc. (DRS/MS), a wholly-owned subsidiary of the
Company, Universal Sonics Corporation (Universal Sonics), and the shareholders
of Universal Sonics, and a Partnership Agreement, dated February 6, 1996, by and
between DRS/MS and Universal Sonics, the Company entered into a partnership with
Universal Sonics (the DRS/MS Partnership) for the purpose of developing,
manufacturing and marketing medical ultrasound imaging equipment. The Company's
contribution to the DRS/MS Partnership consisted of $400,000 in cash and certain
managerial expertise and manufacturing capabilities, representing a 90% interest
in the DRS/MS Partnership.
On February 9, 1996, Precision Echo acquired, through Ahead Technology
Acquisition Corporation (Ahead Acquisition), a wholly-owned subsidiary of
Precision Echo, certain assets and assumed certain liabilities (principally,
obligations under property leases) of Mag-Head Engineering Company, Inc.
(Mag-Head), pursuant to an Asset Purchase Agreement, dated as of February 9,
1996, by and among Mag-Head and Ahead Acquisition for approximately $400,000 in
cash. Mag-Head produces audio and flight recorder heads.
NOTE 12: SUBSEQUENT EVENTS (UNAUDITED)
On May 31, 1996, the Company entered into an agreement with Mellon Bank, N.A.
(Mellon Bank) for a three-year $15 million unsecured revolving line of credit.
The line of credit will be used for working capital, letters of credit, and to
refinance certain existing debt obligations of the Company at more favorable
interest rates. Interest on borrowings under the line of credit will be charged
at the prime rate or at the London Interbank Offered Rate plus 175 basis points.
The Company has agreed to maintain certain financial covenants, including the
maintenance of: (i) a certain minimum quarterly ratio of liquid assets to
current liabilities, (ii) a certain minimum interest coverage ratio, calculation
on a rolling four-quarter basis, and (iii) a certain maximum quarterly ratio of
total liabilities to tangible net worth, as defined in the agreement.
In June 1996, a second-tier subsidiary of Precision Echo acquired
substantially all of the assets of Vikron, Inc. (Vikron) for approximately $3.7
million. Vikron, located in St. Croix Falls, Wisconsin, manufactures data and
recording heads.
37
<PAGE>
NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
fiscal 1996 and 1995:
First Quarter
1996 1995
- -------------------------------------------------------------------------------
Revenues $17,279,000 $16,012,000
Operating Income $ 1,314,000 $ 1,076,000
Income Taxes $ 420,000 $ 382,000
Net Earnings $ 656,000 $ 508,000
Net Earnings per Share of
Common Stock
Primary $ .12 $ .10
Fully Diluted $ .12 $ .10
- -------------------------------------------------------------------------------
Second Quarter
1996 1995
- -------------------------------------------------------------------------------
Revenues $22,786,000 $15,650,000
Operating Income $ 1,844,000 $ 1,180,000
Income Taxes $ 584,000 $ 335,000
Net Earnings $ 915,000 $ 570,000
Net Earnings per Share of
Common Stock
Primary $ .16 $ .12
Fully Diluted $ .16 $ .12
- -------------------------------------------------------------------------------
Third Quarter
1996 1995
- -------------------------------------------------------------------------------
Revenues $25,563,000 $15,742,000
Operating Income $ 2,181,000 $ 1,005,000
Income Taxes $ 590,000 $ 425,000
Net Earnings $ 924,000 $ 634,000
Net Earnings per Share of
Common Stock
Primary $ .16 $ .13
Fully Diluted $ .16 $ .13
- -------------------------------------------------------------------------------
Fourth Quarter
1996 1995
- -------------------------------------------------------------------------------
Revenues $35,826,000 $22,526,000
Operating Income $ 3,208,000 $ 1,833,000
Income Taxes $ 1,030,000 $ 510,000
Net Earnings $ 1,608,000 $ 892,000
Net Earnings per Share of
Common Stock
Primary $ .28 $ .16
Fully Diluted $ .23 $ .16
- -------------------------------------------------------------------------------
COMMON STOCK
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
FISCAL 1996 FISCAL 1995
- -------------------------------------------------------------------------------
CLASS A CLASS A
As Traded on the American ------------- -------------
Stock Exchange HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
First Quarter 6-5/8 4-3/4 5-1/4 3-5/8
Second Quarter 7-13/16 6-3/16 4-3/4 3-3/4
Third Quarter 8 7 4-5/16 3-15/16
Fourth Quarter 8-11/16 7-7/16 5-1/4 4
- -------------------------------------------------------------------------------
CLASS B CLASS B
As Traded on the American ------------- -------------
Stock Exchange HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
First Quarter 6-13/16 4-7/8 5-1/8 3-3/4
Second Quarter 7-7/8 5-3/4 4-5/8 3-3/4
Third Quarter 7-7/8 6-3/4 4-3/8 3-7/8
Fourth Quarter 8-3/4 7-3/8 5-1/2 3-7/8
- -------------------------------------------------------------------------------
Effective April 1, 1996, the stockholders of the Company approved a
reclassification of each share of the Company's Class A and Class B Common Stock
into one share of Common Stock (the Reclassification). (See Note 9 of Notes to
the Consolidated Financial Statements.)
The purpose of the Reclassification was to simplify the Company's capital
structure, streamline the Company's voting procedures and enhance the
marketability and liquidity of and maximize investor interest in the Company's
capital stock. In addition, the Company believes that, as a result of the
Reclassification, the Company is in a more flexible position to raise capital
and effect mergers and acquisitions using its common stock. However, there can
be no assurance that the Reclassification will have such effects.
As of May 23, 1996, the Common Stock of the Company was held by 346
stockholders of record.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
KPMG Peat Marwick LLP
To the Board of Directors and Stockholders, Diagnostic/Retrieval Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and
1995, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the years in the three-year period ended March 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1996 in conformity with generally
accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
Short Hills, New Jersey
May 17, 1996
39
Exhibit 21
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY
MARCH 31, 1996
Subsidiary State of Incorporation
- ---------- ----------------------
Precision Echo, Inc. Delaware
Photronics Corp. New York
Technology Applications & Service Company Delaware
DRS Systems Management Corporation Delaware
Ahead Technology, Inc. Delaware
OMI Acquisition Corp. Delaware
Ahead Technology Acquisition Corp. Delaware
DRS/MS, Inc. Delaware
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Diagnostic/Retrieval Systems, Inc.:
We consent to the incorporation by reference in the registration statements (No.
2-87303, No. 2-99986, No. 33-33125, No. 2-97784 and No. 33-42886) on Form S-8
and Form S-3 Diagnostic Retrieval Systems, Inc. of our reports dated May 17,
1996, relating to the consolidated balance sheets of Diagnostic/Retrieval
Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related
statements of earnings, stockholders' equity, and cash flows and related
schedule for each of the years in the three year period ended March 31, 1996,
which reports appear or are incorporated by reference in the March 31, 1996
Annual Report on Form 10-K of Diagnostic/Retrieval Systems, Inc.
KPMG Peat Marwick LLP
Short Hills, New Jersey
June 28, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Diagnostic/Retrieval Systems, Inc.:
Under date of May 17, 1996, we reported on the consolidated balance sheets of
Diagnostic/Retrieval Systems, Inc. and subsidiaries as of March 31, 1996 and
1995, and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended March 31,
1996, as contained in the 1996 Annual Report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
Annual Report on Form 10-K for the fiscal year 1996. In connection with our
audits of the aforementioned consolidated financial statements we also have
audited the related consolidated financial statement schedule as listed in the
accompanying index. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Short Hills, New Jersey
May 17, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM DIAGNOSTIC/RETRIEVAL
SYSTEMS, INC. FORM 10-K FOR THE ANNUAL PERIOD ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 22,785,000
<SECURITIES> 0
<RECEIVABLES> 22,942,000
<ALLOWANCES> 0
<INVENTORY> 19,449,000
<CURRENT-ASSETS> 66,640,000
<PP&E> 41,935,000
<DEPRECIATION> 25,744,000
<TOTAL-ASSETS> 97,251,000
<CURRENT-LIABILITIES> 32,650,000
<BONDS> 32,608,000
0
0
<COMMON> 59,000
<OTHER-SE> 26,507,000
<TOTAL-LIABILITY-AND-EQUITY> 97,251,000
<SALES> 101,454,000
<TOTAL-REVENUES> 101,454,000
<CGS> 92,907,000
<TOTAL-COSTS> 92,907,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,681,000
<INCOME-PRETAX> 6,727,000
<INCOME-TAX> 2,624,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,103,000
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.69
</TABLE>
