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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
COMMISSION FILE NUMBER 1-8533
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DRS TECHNOLOGIES, INC.
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DELAWARE 13-2632319
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
(973) 898-1500
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
<S> <C>
Common Stock, $.01 par value American Stock Exchange
9% Senior Subordinated Convertible Debentures due October 1, 2003 American Stock Exchange
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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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The market value of shares of common stock held by non-affiliates, based on
the closing prices for such stock on the American Stock Exchange on June 21,
1999, was approximately $85,000,000. The number of shares of common stock
outstanding as of June 21, 1999 was 9,231,669 (exclusive of 385,164 shares of
common stock held in the treasury.)
DOCUMENTS INCORPORATED BY REFERENCE
1. 1999 Annual Report (for the fiscal year ended March 31, 1999), incorporated
in Part II.
2. Definitive Proxy Statement, dated June 28, 1999, for the Annual Meeting of
Stockholders, incorporated in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
DRS Technologies, Inc. (DRS) is a leading supplier of defense electronic
systems. We provide advanced technology products and services to government and
commercial niche markets worldwide. Our company develops and manufactures a
broad range of mission critical products--from rugged computers and peripherals
to systems and components in the areas of communications, data storage, digital
imaging, electro-optics, flight safety and space. Our defense electronics
systems and subsystems are sold to all branches of the U.S. military, selected
U.S. Government intelligence agencies, major aerospace/defense prime
contractors, international military forces and a wide range of commercial
customers. We also offer a full complement of technical support and advanced
manufacturing services.
DRS was incorporated in 1968 and has served the defense industry for over
thirty years. We have increased our annual revenues at a compound annual growth
rate of approximately 36% over the last five years, and are currently a leading
provider of infrared night vision devices, combat display workstations,
electronic sensor systems, mission recorders and deployable flight incident
recorders. Our operating results directly reflect our strategies of maintaining
our reputation for technical excellence, focusing on the development of
long-term contracts and acquiring businesses that complement or extend our
product lines.
We design and manufacture electronic systems for several of the U.S.
military's well-funded programs and high-profile platforms. We are organized
into four operating groups, three of which compete in the defense industry:
o The Electronic Systems Group (ESG) is the leading provider of naval
computer workstations used to process and display integrated combat
information. ESG produces rugged computers and peripherals,
surveillance, radar and tracking systems, acoustical signal processing
and display equipment, and combat control systems for U.S. and
international military organizations. ESG products are used on
front-line platforms, including Aegis destroyers and cruisers,
aircraft carriers, submarines and surveillance aircraft. ESG's
products are also used in the U.S. Army's ongoing battlefield
digitization programs.
o The Electro-Optical Systems Group (EOSG) produces systems and
subsystems for infrared night vision and targeting products used in
some of the U.S. Army's most important battlefield platforms,
including the Abrams Main Battle Tank, Bradley Infantry Fighting
Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV)
scout vehicle. EOSG designs, manufactures and markets products that
allow operators to detect, identify and target objects based upon
their infrared signatures regardless of the ambient light level. The
effectiveness of the previous generation of these products was
recognized in Operation Desert Storm. This Group is also a
leading designer and manufacturer of eye-safe laser range finders and
multiple-platform weapons calibration systems for such diverse air
platforms as the Apache attack helicopter and AC-130U gunship. EOSG is
leveraging its technology base by expanding into related non-defense
markets and is a leading producer of ultra high-speed digital imaging
systems.
o The Flight Safety and Communications Systems Group (FSCG) is a
leading manufacturer of deployable flight emergency or "black box"
recording equipment used by military and search and rescue aircraft.
FSCG also manufactures shipboard communications and infrared
surveillance systems for the U.S., Canadian and other navies. This
Group uses advanced commercial technology in the design and
manufacture of multi-sensor digital, analog and video data capture and
recording products, as well as high-capacity data storage devices for
the harsh environments of aerospace and defense applications. FSCG,
recognized for its technical expertise and capabilities, also provides
advanced manufacturing services for international military and space
customers. FSCG products are used on such platforms as the F/A-18
fighter, A-10 attack plane, P-3 reconnaissance aircraft and EH-101
helicopter for surveillance, target verification and battle damage
assessment.
o Consistent with our goal of utilizing our technology in the commercial
sector, the Data Systems Group produces consumable magnetic heads used
in the production of hard disk drives by some of the world's
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largest computer manufacturers. Other commercial products provide data
retrieval capability for devices such as airplane phones, credit card
readers and other electronic scanning equipment.
Our profitability in the defense electronics industry is due in part to our
focus on managing our financial risk with respect to the development and
fabrication of new products. Many of our research and development projects are
performed with funding obtained from the military customer under development
contracts. In fact, in fiscal year 1999, we received approximately $15,400,000
in research and development funding from our customers. In addition, when a
system enters into full production, the terms of many of our production
contracts provide for progress payments or milestone payments. This allows us to
fund a portion of our working capital requirements from external sources and
reduce our financial risk.
STRATEGY
Our goal is to secure our emerging position as a mid-tier defense
technology supplier by maintaining our reputation for technical excellence,
focusing on the development of profitable long-term contracts and acquiring
businesses that complement or extend our product lines.
o LEVERAGE EXISTING CONTRACTS TO WIN NEW BUSINESS. Our experience has
shown that high levels of performance on existing contracts provide
contractors with valuable exposure to decision makers within the
government procurement staff and greatly enhance the prospects of
obtaining new or follow-on contracts. We intend to continue to
leverage our high level of performance on our extensive range of
existing contracts across entire program life cycles to help us obtain
new and follow-on contracts.
o OBTAIN NEW DEVELOPMENT CONTRACTS. Customer-funded development
contracts offer us the opportunity to work with our military customers
to design and manufacture new systems and components that provide
highly customized solutions to our customers' procurement needs, while
minimizing our financial risk. An important element of our success
will continue to be our ability to win new development contracts to
maintain our backlog of funded programs.
o PURSUE SELECTIVE ACQUISITIONS. Historically, we have pursued
acquisitions of complementary businesses with leading positions in
niche product or market areas that are synergistic with our existing
business. We believe that such acquisitions offer the opportunity to
acquire new technologies and customers, thereby leveraging our core
strengths. The acquisition of existing contracts provides us with both
current income and the opportunity for future contract awards based
upon our performance.
RECENT ACQUISITIONS
Our financial results for the year ended March 31, 1999 do not reflect the
full impact of two important acquisitions completed in the latter half of the
fiscal year:
On October 20, 1998, we acquired certain assets of the Second
Generation Ground-Based Electro-Optical and Focal Plane Array businesses of
Raytheon Company for approximately $45.0 million in cash. As a result of
this acquisition, we have become a leading provider of Forward Looking
Infra-Red (FLIR) technology. This technology enables an operator to detect,
identify and acquire targets in complete darkness and other limited
visibility conditions. For fiscal year 1999, these businesses generated
approximately $45.6 million in revenue, and as of March 31, 1999 had a
funded backlog of approximately $159.5 million, 50% of which is expected to
be recognized as revenue during fiscal 2000.
On February 19, 1999, we completed our acquisition of NAI
Technologies, Inc. (NAI) for approximately 2.9 million shares of DRS
common stock. NAI designs, manufactures and markets rugged computer
systems, advanced peripheral products, intelligent terminals,
radiation-suppressant TEMPEST computer terminals and other electronic
equipment. For fiscal year 1999, NAI generated approximately $7.0 million
in revenue and as of March 31, 1999, had a funded backlog of approximately
$28.5 million, 81% of which is expected to be recognized as revenue during
fiscal 2000.
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COMPANY ORGANIZATION
ELECTRONIC SYSTEMS GROUP
ESG consists of DRS Electronic Systems, Inc. (DRS ESI), located in
Gaithersburg, Maryland, DRS Laurel Technologies (DRS Laurel), located in
Johnstown, Pennsylvania, DRS Technical Services, Inc., located in San Diego,
California, DRS Technical Services, located in Chesapeake, Virginia, DRS Rugged
Systems, Inc., (DRS Rugged Systems) located in Longmont, Colorado, DRS Rugged
Systems (Europe) Ltd. (DRS Rugged Systems (Europe)), located in Farnham,
Surrey, United Kingdom, DRS Advanced Programs, Inc. (DRS Advanced Programs),
located in Columbia, Maryland, and DRS Rugged Systems (Australia) PTY. Ltd.
located in Fyshwick, Australia.
ESG is a leading provider of naval computer workstations used to process
and display integrated combat information. ESG produces rugged computers and
peripherals, surveillance, radar and tracking systems, acoustical signal
processing and display equipment, and combat control systems for U.S. and
international military organizations. ESG products are used on front-line
platforms, including Aegis destroyers and cruisers, aircraft carriers,
submarines and surveillance aircraft. ESG's products also are used in the U.S.
Army's ongoing battlefield digitization programs.
DRS ESI. DRS ESI designs, manufactures and integrates electronic systems
using advanced commercial technology to meet the performance and environmental
requirements of military customers. Current products include tactical processing
and combat information systems for naval ships, submarines and aircraft,
surveillance systems for coastal and harbor regions, radar systems for surface
ships, and low-cost emulators of legacy military systems for test and training
support. Major products and contracts include:
o AN/UYQ-70: AN/UYQ-70 Advanced Display Systems are advanced,
open-architecture display systems designed for widespread application
through software and hardware modification, ultimately for deployment
on Aegis and other surface ships, submarines and airborne platforms.
These systems are self-contained, microprocessor-based units complete
with mainframe interface software and offer 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 legacy systems. These systems
were developed for the U.S. Navy under a subcontract with Lockheed
Martin Tactical Defense Systems. Based upon the size of the Naval
surface fleet and the average number of workstations to be deployed on
each ship, we believe that the potential market for these workstations
may exceed 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
commercial off-the-shelf (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. We
currently deliver these Military Display Emulators for use at
land-based training sites for the Aegis and other U.S. Navy programs.
o AN/SPS-67: AN/SPS-67 Radar Systems are being deployed on the U.S.
Navy's new DDG-51 Aegis class ships and Spanish Navy's F-100 class
ships. They provide ocean surveillance and navigation data, including
detection and tracking of low flying aircraft and other targets. An
integral part of the ships' command and control combat system, the
AN/SPS-67 is a below-deck system which we believe has a potential
market application on other surface ships in the Navy's fleet, as well
as on aircraft carriers and amphibious operation assault ship
platforms.
o AN/UYQ-65: AN/UYQ-65 Data Processing and Display Sets were the first
COTS-based tactical workstations to be qualified by the U.S. Navy and
were designed to comply with the stringent
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requirements of the Aegis shipbuilding program. Replacing the sensor
displays in the SQQ-89 anti-submarine warfare (ASW) combat suite, the
AN/UYQ-65 employs dual processors enabling simultaneous I/O and
graphics processing. This new approach allows for required high
bandwidth processing, while maintaining response times for
operator/machine interfaces. The system architecture can be adapted to
meet various interface, cooling, memory, storage and processing
requirements. These systems currently are provided to EDO Corporation
under subcontract for international allied navies.
o AN/SQR-17A(V)3: The Mobile In-shore Undersea Warfare (MIUW) systems
are multi-sensor processing systems that are deployed in land-based
vans, utilizing sonobuoys and anchored passive detectors for harbor
defense, coastal defense and amphibious operations surveillance, as
well as for the enhancement of drug interdiction efforts. These
systems currently are being procured for use in 22 field
installations. We are under contract to provide the system's
underwater sensor string arrays and other upgrades to these field
installations.
DRS ESI also produces a line of lightweight portable display workstations
for the collection, display, storage and communication of data in the field,
replacement data storage systems for program loading and data archiving on P-3C
aircraft, and flat panel display products, display subsystems and other computer
peripherals for integration primarily with military tactical display
workstations.
DRS LAUREL. We own 80% of DRS Laurel through a partnership formed in
December 1993 with Sunburst Management, Inc. DRS Laurel serves as a
cost-efficient manufacturing operation for us and other prime defense
contractors. DRS Laurel primarily manufactures and integrates electronic
systems, providing turn-key production, and performs related electronic and
electromechanical assembly and associated test services. In addition, DRS Laurel
specializes in cable and wire harness interconnect products, primarily for large
industrial customers involved in the military and commercial aerospace
industries. DRS Laurel currently produces both the AN/UYQ-65 and AN/UYQ-70
workstations and provides electronic manufacturing services to Northrop Grumman
for the Air Force's E-8C Joint STARS aircraft and to United Defense for the M-2
Bradley fighting vehicles.
DRS TECHNICAL SERVICES, INC. AND DRS TECHNICAL SERVICES. These units
perform field service and depot level repairs for ESG products, as well as other
manufacturers' systems, and also provide systems and software engineering
support to the U.S. Navy for the testing of shipboard combat systems. The
facilities are located in close proximity to U.S. Naval bases in Norfolk,
Virginia and San Diego, California. Services, including equipment and field
change installation, configuration audit, repair, testing and maintenance, are
performed for the U.S. Navy and, to a lesser extent, commercial customers. DRS
Technical Services also has performed work for foreign navies, including those
of Australia, Egypt, Greece, the Republic of China and Turkey.
DRS RUGGED SYSTEMS. DRS Rugged Systems designs, develops and manufactures
rugged high-performance computer workstation systems and associated peripherals
for customers that require operation in severe environment situations. In
addition to supplying products such as flat panel displays, portable and
transportable integrated workstations, rack-mounted computer systems and mass
storage expansion units, DRS Rugged Systems also provides rugged integrated
computer systems for specific rugged requirement applications, including ground
mobile, airborne, naval surface and underwater applications. DRS Rugged Systems
participates in the U.S. Army's Common Hardware/Software (CHS-2) program, which
is providing the basic hardware/software infrastructure for the Force XXI
"digitization of the battlefield" initiative.
DRS RUGGED SYSTEMS (EUROPE). DRS Rugged Systems (Europe) specializes in the
design, development and implementation of rugged COTS hardware for land, sea and
airborne forces. DRS Rugged Systems (Europe) is the rugged hardware systems
integrator for the British Army Attack Helicopter (Apache) ground support
system, and it also supplies the integrated rugged hardware solution in support
of the Royal Air Force Chinook Helicopter Fleet's generic health and usage
monitoring system. It is also a primary supplier of rugged COTS systems to the
Swedish Army, which utilizes rugged multi-platform computers in different
configurations, in related mobile tactical communications and information
systems, TS9000 and ATLE IS, respectively. The Flat Panel Rugged (FPR) 20-inch
rugged flat panel display is utilized in the Royal Navy's Command Support System
(CSS), and the rugged hardware for the Royal Navy's Submarine Fleet's DCG
Re-host tactical support system was designed, developed, tested and installed
under contract to BAeSEMA.
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The Explorer (often referred to as the CCU, Compact Computer Unit) provides
the full capabilities of the CHS-2 products in a portable, self-contained unit
with its own power source and an integrated flat panel display. The unit uses
the same exchangeable media (hard disks and tape units) and provides total
compatibility of all information and system security. The unit shares its design
with the DRS Rugged Systems (Europe's) Explorer 2 and is being complemented with
an upgraded version with a larger display and greater upgrade capabilities.
The Genesis 300 rugged multi-platform computer, a variant of the Genesis SR
(short rack), will feature an integrated 12-inch screen and keyboard. Since its
launch in 1997, the Genesis SR, which supports applications such as mission
planning, tactical communications, combat support and logistics support, has
been sold into military programs in Europe, Scandinavia and Southeast Asia. The
OPUS 16 rugged flat panel with computer, a 16-inch flat panel display with a
single board Intel(TM) computer housed in a rugged rackmount or portable
enclosure, will join the extensive FPR range of rugged flat panel color
displays. DRS Rugged Systems (Europe)'s fixed, rackmount or portable FPR panels
with 12-, 13-, 16- and 20-inch displays currently operate in a variety of land,
airborne, surface vessel and submarine environments.
DRS RUGGED SYSTEMS (AUSTRALIA) PTY. LTD. DRS Rugged Systems (Australia)
PTY. Ltd., a subsidiary of DRS Rugged Systems (Europe), was established in
1997. The division is under contract to provide maintenance support to the
Australian Army Tactical Command Support System (AUSTACSS) and to manufacture
Explorer II workstations for a U.S. defense company.
DRS ADVANCED PROGRAMS. DRS Advanced Programs provides custom-packaged
integrated computer systems for deployment in land vehicles, ships, shelters and
other demanding environments, including unique physical packaging requirements
such as compact size, low weight, specialized air flow and rack mounting. DRS
Advanced Programs markets directly to various U.S. Government agencies,
primarily in the intelligence community and has teamed with leading
corporations, such as GTE and Booz-Allen.
DRS Advanced Programs designs and integrates special purpose systems
configured specifically for a variety of target applications, including:
communications processing; data acquisition, storage and forwarding; digital
signal processing; and client/server systems and embedded processing. DRS
Advanced Programs also provides specially packaged monitors, keyboards, printers
and peripheral subsystems that are used in conjunction with its computer
systems. DRS Advanced Programs now also provides support services such as
configuration management, testing, sparing, maintenance and life cycle support.
ELECTRO-OPTICAL SYSTEMS GROUP
EOSG consists of DRS Infrared Technologies, LP (DRS Infrared), located in
Dallas, Texas, DRS Sensor Systems, Inc. (DRS Sensor), located in El Segundo,
California, DRS Photronics, Inc. (DRS Photronics), located in Oakland, New
Jersey, DRS Optronics, Inc. (DRS Optronics) located in Palm Bay, Florida, and
DRS Hadland Ltd. (DRS Hadland), based in Tring, Hertfordshire, the United
Kingdom.
EOSG produces systems and subsystems for infrared night vision and
targeting products used in some of the U.S. Army's most important battlefield
platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting
Vehicle and the HMMWV scout vehicle. EOSG designs, manufactures and markets
products that allow operators to detect, identify and target objects based upon
their infrared signatures regardless of the ambient light level. The
effectiveness of the previous generation of these products was recognized in
Operation Desert Storm. This Group is also a leading designer and manufacturer
of eye-safe laser range finders and multiple-platform weapons calibration
systems for such diverse air platforms as the Apache attack helicopter and
AC-130U gunship. EOSG is leveraging its technology base by expanding into
related non-defense markets and is a leading producer of ultra high-speed
digital imaging systems.
DRS INFRARED. DRS Infrared produces infrared scanning Focal Plane Arrays
(FPAs), staring FPAs, and linear coolers (designed to maintain optimal operating
temperatures for infrared scanning) for military electro-optical systems
applications. An FPA is a two-dimensional assembly of electro-optical detecting
pixels used to generate night vision capability. FPAs are also used in
heat-seeking missile guidance systems and missile warning systems, applications
for which no pictorial image is required. DRS Infrared is a leading global
supplier of cryogenic linear coolers for infrared devices.
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DRS Infrared is the sole source supplier of the Detector Dewar Cooler
(DDC) module for the U.S. Army's Javelin Commanders Launch Unit (CLU) for a
Lockheed Martin-Raytheon joint venture. DRS Infrared is delivering the initial
units of a three-year multi-year contract with an ordered total of 1,385 units.
DRS Infrared has a 40% share of the current contract for the SADA (Standard
Advanced Dewar Assembly) II Detector procured by the U.S. Army and supplied to
the HTI (Horizontal Technology Integration) program for use in the Second
Generation night vision equipment upgrades provided by DRS Sensor for the
Abrams, Bradleys and HMMWV scout vehicles.
Prior to its acquisition, DRS Infrared had provided approximately 6,000
linear drive coolers to a wide cross-section of electro-optics system vendors.
The business base represented by the Javelin and SADA II programs is expected to
consist of over 10,000 coolers, or $54 million in revenues over the next ten
years.
DRS Infrared also supplies a 256 x 256 midwave infrared module for Lockheed
Martin's Joint Air-to-Surface Stand-off Missile (JASSM) program. It also
supplies 240x480 DDC modules for several programs and has exclusive rights of
supply for certain of these items through calendar year 2000 in support of
Raytheon system sales.
DRS SENSOR. DRS Sensor designs and manufactures the second generation FLIR
sighting systems for the U.S. Army's Abrams, Bradleys and HMMWV scout vehicles.
Second generation FLIR technology enables an operator to detect, identify and
acquire targets in complete darkness. Current programs of DRS Sensor include:
o HTI Second Generation FLIR thermal imaging systems (HTI SGF Thermal
Imaging Systems) installed on the U.S. Army's Abrams, Bradleys and
HMMWV Scouts. In January, 1999, DRS Sensor was awarded a total of
$55.9 million to provide HTI SGF Thermal Imaging Systems for the
sighting systems of Abrams and Bradleys, a result of the exercise of
an option on a multiple-year contract with a total post-acquisition
value of $92 million;
o Improved Bradley Acquisition System (IBAS), which provides the
thermal imaging and fire control system installed on Bradleys. In
November 1998, DRS Sensor was awarded a $24.2 million contract to
provide IBAS systems for the Bradleys, a result of the exercise of an
option on an acquired contract; and
o Long Range Advanced Scout Surveillance System (LRAS3), a development
program which provides the thermal image sighting systems to be
installed on the HMMWV scouts.
DRS OPTRONICS. DRS Optronics designs and manufactures electro-optical
targeting, sighting and fire control systems and various missile components. DRS
Optronics provides certain manufacturing services to DRS Sensor in connection
with the HTI SGF Thermal Imaging Systems and IBAS.
DRS Optronics also provides:
o Night Vision Binoculars: DRS Optronics is currently under contract to
develop and manufacture these units for the Israeli military. The
Nightstar(TM) night vision binocular is a hand-held viewing binocular
that incorporates an image intensifier tube, laser range finder and
digital compass in a compact lightweight system suited for infantry
units, special forces and night operations involving forward observers
and reconnaissance patrols. Nightstar(TM) displays range and azimuth
data in the soldier's eyepiece, allowing identification of targets and
providing essential fire support data for nighttime engagement. These
units have a range of 20 to 2,000 meters.
o Gunners' Auxiliary Sight: This is an electro-optical device used as a
primary or secondary sighting system on Abrams M1 Main Battle Tanks
and contains a very sophisticated electro-optical device and a laser
protective filter. DRS Optronics has produced more than 2,000 of these
instruments and continues to operate as a repair and retrofit facility
for the M1A2 upgrade program. Options for additional units under this
program may be exercised through fiscal 2000.
o Tube-launched Optically-tracked Wire-guided (TOW) Optical Sight: DRS
Optronics is currently the only U.S. qualified producer of two of the
three critical assemblies in this device. This complex electro-optical
system is the main component of the U.S.'s premier ground 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. DRS Optronics is
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currently the only qualified manufacturer of this tightly toleranced
assembly and is involved in working on modification and retrofit
programs. DRS Optronics also has been contracted to modify a version
for use by an overseas customer.
o Eye-Safe Laser Range Finder: DRS Optronics competed against the U.S.
Army's historical primary laser supplier for this contract and was
awarded an initial contract for preproduction units. DRS Optronics
also is currently manufacturing a laser range finder/target designator
for airborne use in the Modular Integrated Laser Engagement System
Air/Ground Engagement System II program. This effort includes
redesigning the target designator unit to accommodate DRS Optronics'
laser components.
o Missile Components: DRS Optronics provides the primary, secondary,
tertiary and fold mirrors, housing and nose dome for Sidewinder and
Stinger missiles. It is currently under contract to produce infrared
components and subassemblies on many of the next-generation infrared
missile systems.
DRS PHOTRONICS. DRS Photronics produces weapons calibration, or
boresighting equipment, used to align and harmonize the navigation, targeting
and weapons systems on rotary- and fixed-wing aircraft. Multiple Platform
Boresighting Equipment (MPBE) is DRS Photronics' main product line. MPBE
currently is used on the Army's Apache helicopters and Apache Longbow
helicopters, the Marine Corps' Cobra helicopters, and the Air Force's AC-130
Spectre gunship radar. This technology is proprietary to the company.
The company is the prime contractor on a tri-service (Army, Navy and Air
Force) program to develop the Airborne Digital Imaging System (ADIS) for the
test and evaluation of weapons separation events on board Navy F/A-18 aircraft.
The system, which also can be used on various other fixed- and rotary-wing
military aircraft, includes an electronically-shuttered, fast-frame,
high-resolution, digital imaging camera and a high-density, digital data storage
device. Upon completion, the ADIS will incorporate a color readiness capability
and will include a miniaturized high-speed electronic camera to assure
compatibility with multiple air platforms.
DRS HADLAND. DRS Hadland designs, manufactures and markets products for
ultra high-speed image capture and analysis. Products include a comprehensive
range of equipment for the visual analysis of events lasting from hundreds of
femtoseconds to milliseconds. Many of these systems are used for multiple
applications by international military forces, ballistic test ranges, university
and other research institutes, laboratories and large corporations. DRS Hadland
also integrates airborne monitors and Computer-Controlled Device (CCD) cameras
with airborne video tape recording devices from DRS Precision Echo, Inc.,
another DRS subsidiary. DRS Hadland products include:
o Framing Cameras: Framing cameras have the ability to take a sequence
of pictures at the same location at very high speeds. These cameras
are designed to produce images at equivalent speeds of several million
pictures per second, although in practice 4-8 frames are taken.
Framing cameras are used primarily for research in the areas of
electrical breakdown/discharge, ballistics, detonics and combustion.
o Electronic Ballistic Range Cameras: These cameras use digital imaging
to capture a single picture of a projectile in flight. Slower than
framing cameras but with better resolution, these cameras are used in
the development and proof testing of ballistics.
o Streak Cameras: These cameras are designed to capture images of quick
events analyzed over a very short, continuous period. Faster than
framing or range cameras, streak cameras are used to produce
continuous cross section images in one dimension, rather than full
images, and are used for applications such as laser development and
testing.
FLIGHT SAFETY AND COMMUNICATIONS GROUP
FSCG consists of DRS Flight Safety and Communications, with locations in
Carleton Place and Nepean, Ontario, Canada, DRS Technologies (UK) Ltd., located
in Hayes, Middlesex, the United Kingdom, and DRS Precision Echo, Inc. (DRS
Precision Echo), located in Santa Clara, California.
FSCG is a leading manufacturer of deployable flight emergency or "black
box" recording equipment. These complete emergency avionics systems combine the
functionality of a crash locator beacon with a flight incident recorder for
search, recovery and crash analysis. This Group uses advanced commercial
technology in the design and manufacture of multi-sensor digital, analog and
video data capture and recording products, as well as high-
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capacity data storage devices for harsh aerospace and defense environments. FSCG
also manufactures shipboard communications and infrared laser warning and range
finder displays for Canadian and other foreign navies.
DRS FLIGHT SAFETY AND COMMUNICATIONS. DRS Flight Safety and Communications'
major products and services include:
o Emergency Avionics System 3000 (EAS3000): The EAS3000 is an
integrated in-flight data recorder, cockpit voice recorder and
emergency locator beacon system constructed in a modular, deployable
and crash-survivable package, designed to withstand intensive
destructive forces. Mounted on the outside of a helicopter, the
EAS3000 provides the immediate location of an accident site, allowing
early rescue of survivors and recovery of vital flight and cockpit
voice data. DRS Flight Safety and Communications provides the EAS3000
for use on UK EH-101 helicopters and its variants, as well as on the
Italian MMI, Canadian Cormorant, Tokyo Metropolitan Police and other
military and search and rescue helicopters. DRS Flight Safety and
Communications also developed a version of the EAS3000, known as
EAS3000F, for use on fixed-wing aircraft.
o Deployable Flight Incident Recorders: Designed to withstand the
intense destructive forces associated with an aircraft crash,
deployable flight incident recorders are mounted beneath the airframe
skin. Deployment commands provided by switch activation trigger
release of the unit and activation of the recorder. These systems also
contain crash locator beacons. They have been installed successfully
on fighter aircraft, such as the German Tornado and the U.S. Navy
F/A-18 Hornet, and are used to record both flight and voice data.
o Aircraft Crash Locator Beacons: Consisting of a composite airfoil
which encloses a radio transmitter and power source, crash locator
beacons are designed to deploy and activate either before or upon
impact. Used primarily on fixed-wing military aircraft, these crash
position locators enable the rapid location of downed aircraft and
timely rescue of survivors.
o Integrated Shipboard Communications Systems: Using the latest
available technology and COTS-based designs, FSCG produces integrated
digital shipboard communications systems which provide single-button
access to tactical interior, exterior and secured channels for joint
operations. These Shipboard Integrated Communications (SHINCOM)
systems improve communication efficiency by eliminating the need for
multiple single-purpose communications systems, thus providing a
comprehensive system solution. FSCG's SHINCOM systems are capable of
handling shipboard interior communications; communications with other
aircraft, surface and undersea vessels; and UHF/VHF and broadband
communications via satellite with shore stations and cooperating
units. These systems are used aboard the Canadian Iroquois class
ships, the U.S.S. George Washington aircraft carrier and are being
manufactured for the Armada of Venezuela under a contract with Ingalls
Shipbuilding.
o Electronic Manufacturing and Systems Integration Services: FSCG is an
experienced provider of manufacturing, test and product support
services and performs contract manufacturing services for various
aerospace, military and space applications. FSCG's manufacturing
expertise and capabilities include:
o surface mount and through-hole multi-layer computer circuit
assemblies (CCAs);
o harness fabrication;
o power supply assembly and testing;
o motherboard assembly and testing; and
o systems integration services.
DRS TECHNOLOGIES (UK) LTD. DRS Technologies (U.K.) Ltd. provides emergency
avionics and flight recorders to international military customers.
DRS PRECISION ECHO. DRS Precision Echo designs and manufactures a variety
of COTS digital, analog and video recording systems used for military
applications, including reconnaissance, antisubmarine warfare (ASW) and other
information warfare data storage requirements. DRS Precision Echo is a leading
U.S. manufacturer of
8
<PAGE>
Hi-8 millimeter military recorders supplied to the U.S. and international armed
forces. DRS Precision Echo's products include:
o WRR-818: This ruggedized airborne video recorder captures various
sensor and video data on the U.S. Navy's F/A-18 and on the U.S. Air
Force's A/OA-10A aircraft. The U.S. Army also has selected it for use
in its Kiowa Warrior attack helicopters. A similar recorder, the
WRR-812, has been adapted for use in the Canadian Army's Light Armored
Reconnaissance Vehicles.
o DCMR-24 and 100. These are digital cassette mission recorders that use
high-capacity digital tape formats under license by Sony Corporation.
DRS Precision Echo produces the DCMR-24 for U.S. Navy P-3C patrol
aircraft.
DRS Precision Echo also provides a line of high-capacity digital tape
drives and automated library systems for the archiving and back-up of very large
amounts of digital data, ranging from 378 gigabytes to 2.6 petabytes of
uncompressed data.
DATA SYSTEMS GROUP
DSG consists of DRS Ahead Technology, Inc. (DRS Ahead), with locations in
San Jose, California, Plymouth, Minnesota, St. Croix Falls, Wisconsin, and
Razlog, Bulgaria. DRS Ahead manufactures burnish, glide, test and certification
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. In addition, the
company specializes in the manufacture and refurbishment of broadcast video and
audio heads, heads used in commercial flight data recorders and in a variety of
industries for reading, writing and verifying data on magnetic cards, tapes and
inks.
CUSTOMERS
We sell a significant portion of our products to agencies of the U.S.
Government, primarily the Department of Defense, to foreign government agencies
or to prime contractors or their subcontractors. Approximately 78%, 74% and 71%
of total consolidated revenues for fiscal 1999, 1998 and 1997, respectively,
were derived directly or indirectly from defense contracts for end use by the
U.S. Government and its agencies. See "Foreign Operations and Export Sales"
below for information concerning sales to foreign governments.
BACKLOG
The following table sets forth our backlog by major product group
(including enhancements, modifications and related logistics support) at the
dates indicated.
"Backlog" refers to the aggregate revenues remaining to be earned at a
specified date under contracts held by us, including, for U.S. Government
contracts, the extent of the funded amounts thereunder which have been
appropriated by Congress and allotted to the contract by the procuring
Government agency. Backlog also includes all firm orders for commercial
products. Fluctuations in backlog generally relate to the timing and amount of
defense contract awards.
9
<PAGE>
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
-------------- -------------- --------------
Government Products:
U.S. Government............ $293,300,000 $141,500,000 $ 85,900,000
Foreign Government......... 48,400,000 24,900,000 23,000,000
------------ ------------- -------------
341,700,000 166,400,000 108,900,000
Commercial Products.......... 24,100,000 11,000,000 9,500,000
------------ ------------- -------------
$365,800,000 $177,400,000 $118,400,000
============ ============ ============
At March 31, 1999, our backlog of orders was approximately $365.8 million
compared with $177.4 million at March 31, 1998. The increase in backlog was due
primarily to $140.4 million of acquired backlog from the acquisition of NAI and
the Raytheon electro-optical businesses. New contract awards of approximately
$322.3 million were booked during the fiscal year ended March 31, 1999.
Approximately 66% of backlog as of March 31, 1999 is expected to result in
revenues during fiscal 2000.
RESEARCH AND DEVELOPMENT
The defense electronics sector is subject to rapid technological changes,
and the our future success will depend in large part upon our ability to improve
existing product lines and to develop new products and technologies in the same
or related fields. Thus, our technological expertise is an important factor
affecting our growth. A portion of our research and development activities take
place in connection with customer-sponsored research and development contracts.
We recorded revenues for customer-sponsored research and development of
approximately $15,400,000, $11,800,000 and $13,000,000 for fiscal 1999, 1998 and
1997, respectively. All such customer-sponsored activities are primarily the
result of contracts directly or indirectly with the U.S. Government. We also
invest in internal research and development (IR&D). Such expenditures were
approximately $5,200,000, $4,000,000, and $3,900,000 for fiscal 1999, 1998 and
1997, respectively.
CONTRACTS
Our contracts are normally for production, service or development.
Production and service contracts are typically of the fixed-price variety with
development contracts currently of the cost-type variety. Because of their
inherent uncertainties and consequent cost overruns, historically, development
contracts have been less profitable than production contracts.
Fixed-price contracts may provide for a firm fixed price or they may be
fixed-price incentive contracts. Under the firm fixed-price contracts, we agree
to perform for an agreed-upon price. Accordingly, we derive benefits from cost
savings, but bear the risk of cost overruns. Under the fixed-price incentive
contracts, if actual costs incurred in the performance of the contracts are less
than estimated costs for the contracts, the savings are apportioned between the
customer and us. If actual costs under such a contract exceed estimated costs,
however, excess costs are apportioned between the customer and us, up to a
ceiling. We bear all costs that exceed the ceiling, if any.
Cost-type contracts typically provide for reimbursement of allowable costs
incurred plus a fee (profit). Unlike fixed-price contracts in which we are
committed to deliver without regard to performance cost, cost-type contracts
normally obligate us to use our best efforts to accomplish the scope of work
within a specified time and a stated contract dollar limitation. In addition,
U.S. Government procurement regulations mandate lower profits for cost-type
contracts because of our reduced risk. Under cost-plus-incentive-fee contracts,
the incentive may be based on cost or performance. When the incentive is based
on cost, the contract specifies that we are reimbursed for allowable incurred
costs plus a fee adjusted by a formula based on the ratio of total allowable
costs to target cost. Target cost, target fee, minimum and maximum fee and
adjustment formulae are agreed upon when the contract is negotiated. In the case
of performance-based incentives, we are reimbursed for allowable incurred costs
plus an incentive, contingent upon meeting or surpassing stated performance
targets. The contract provides for increases in the fee to the extent that such
targets are surpassed and for decreases to the extent that such targets are not
met. In some instances, incentive contracts also may include a combination of
both cost and performance incentives. Under cost-plus-fixed-fee contracts, we
are reimbursed for costs and receive a fixed fee, which is negotiated and
specified in the contract. Such fees have statutory limits.
10
<PAGE>
The percentages of revenues during fiscal 1999, 1998 and 1997 attributable
to our contracts by contract type were as follows:
FISCAL YEARS ENDED MARCH 31,
----------------------------
1999 1998 1997
------ ------ ------
Firm fixed-price................... 84% 85% 85%
Cost-plus-incentive fee............ 2% 4% 5%
Cost-plus-fixed fee................ 14% 11% 10%
The consistent percentage and continued predominance of firm fixed-price
contracts are reflective of the fact that production contracts comprise a
significant portion of our U.S. Government contract portfolio.
We negotiate for and generally receive progress payments from our customers
of between 75-90% of allowable costs incurred on the previously described
contracts. Included in our reported revenues are certain amounts which we have
not billed to customers. These amounts, approximately $14.8 million, $7.6
million, and $3.8 million as of March 31, 1999, 1998 and 1997, 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 internal
research and development costs are allowable general and administrative
expenses. To the extent that general and administrative expenses are included in
inventory, research and development costs also are included. Unallowable costs,
pursuant to the FAR, are excluded from costs accumulated on U.S. Government
contracts. Work-in-process inventory included general and administrative costs
(which include internal research and development costs) of $13.6 million and
$9.9 million at March 31, 1999 and 1998, respectively.
Our defense contracts and subcontracts are subject to audit, various profit
and cost controls, and standard provisions for termination at the convenience of
the customer. Multiyear U.S. Government contracts and related orders are subject
to cancellation if funds for contract performance for any subsequent year become
unavailable. In addition, if certain technical or other program requirements are
not met in the developmental phases of the contract, then the follow-on
production phase may not be realized. Upon termination other than for a
contractor's default, the contractor normally is entitled to reimbursement for
allowable costs, but not necessarily all costs, and to an allowance for the
proportionate share of fees or earnings for the work completed.
COMPETITION
Our products are sold in markets containing competitors which are
substantially larger than we are, devote substantially greater resources to
research and development and generally have greater financial resources. Certain
competitors are also our customers and suppliers. The extent of competition for
any single project generally varies according to the complexity of the product
and the dollar volume of the anticipated award. We believe that we compete on
the basis of the performance of our products, our reputation for prompt and
responsive contract performance, and our accumulated technical knowledge and
expertise. Our future success will depend in large part upon our ability to
improve existing product lines and to develop new products and technologies in
the same or related fields.
In the military sector, we compete with large and mid-tier defense
contractors on the basis of product performance, cost, overall value, delivery
and reputation. As the size of the overall defense industry has decreased in
recent years, the number of consolidations and mergers of defense suppliers has
increased. We expect this consolidation trend to continue. As the industry
consolidates, the large defense contractors are narrowing their supplier base
and awarding increasing portions of projects to strategic mid- and lower-tier
suppliers, and, in the process, are becoming oriented more toward system
integration and assembly. Management believes that we have benefited from this
trend, as evidenced by the formation of strategic alliances with several large
suppliers.
11
<PAGE>
PATENTS AND LICENSES
We have patents on certain of our commercial and data recording products
semi-conductor devices, rugged computer related items, and electro-optical and
focal plane array products. DRS and its subsidiaries have certain registered
trademarks, none of which are considered significant to current operations. We
believe our patent position and intellectual property portfolio, in the
aggregate, is valuable to our operations. We do not believe that the conduct of
our business as a whole is materially dependent on any single patent, trademark
or copyright.
MANUFACTURING AND SUPPLIERS
Our manufacturing processes for our products, excluding certain
electro-optical products, includes the assembly of purchased components and
testing of products at various stages in the assembly process. Purchased
components include integrated circuits, circuit boards, sheet metal fabricated
into cabinets, resistors, capacitors, semiconductors, silicon wafers and other
conductive materials, insulated wire and cables. In addition, many of our
products use machined castings and housings, motors and recording and
reproducing heads. Many of the purchased components are fabricated to our
designs and specifications. The manufacturing process for certain of our optics
products includes the grinding, polishing and coating of various optical
materials and the machining of metal components.
Although materials and purchased components generally are available from a
number of different suppliers, several suppliers are our sole source of certain
components. If a supplier should cease to deliver such components, other sources
probably would be available; however, added cost and manufacturing delays might
result. We have not experienced significant production delays attributable to
supply shortages, but occasionally experienced quality and other related
problems with respect to certain components, such as semiconductors and
connectors. In addition, with respect to our optical products, certain exotic
materials, such as germanium, zinc sulfide and cobalt, may not always be readily
available.
FOREIGN OPERATIONS AND EXPORT SALES
We currently sell several of our products and services in the international
marketplace to Canada, Israel, the Republic of China, Spain, Australia, and
other countries in Europe, Scandinavia, and Southeast Asia. Foreign sales are
derived under export licenses granted on a case-by-case basis by the United
States Department of State. Our foreign contracts generally are payable in
United States dollars. Export sales accounted for 10% or less of total revenues
in the fiscal years ended March 31, 1998 and 1997.
We operate outside the United States through FSCG, in Canada and the United
Kingdom, and through ESG and EOSG primarily in the United Kingdom. The
information required by this item with respect to revenues and long-lived assets
by geographic area is incorporated by reference herein to page 49 of the DRS
1999 Annual Report (for the fiscal year ended March 31, 1999).
The addition of international businesses involves additional risks for us,
such as exposure to currency fluctuations, future investment obligations and
changes in foreign economic and political environments. In addition,
international transactions frequently involve increased financial and legal
risks arising from stringent contractual terms and conditions and widely
different legal systems, customs and practices in foreign countries.
12
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names of our executive officers, their positions and offices with us,
and their ages are set forth below:
NAME AGE POSITION
- ---- --- --------
Mark S. Newman............. 49 Chairman of the Board, President
and Chief Executive Officer
Paul G. Casner, Jr......... 61 Executive Vice President, Operations
Nina Laserson Dunn......... 52 Executive Vice President, General Counsel
and Secretary
Richard Ross............... 45 Vice President; President of DRS
Electro-Optical Systems Group
Richard A. Schneider....... 46 Executive Vice President, Chief Financial
Officer and Treasurer
MARK S. NEWMAN has been employed by us since 1973. He was named Vice
President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive
Vice President in 1987. Mr. Newman became a Director of DRS in 1988. In May
1994, Mr. Newman became the President and Chief Executive Officer of DRS and in
August 1995 became Chairman of the Board.
PAUL G. CASNER, JR. joined DRS in 1993 as President of Technology
Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he
became President of the DRS Electronic Systems Group and a Vice President of
DRS. In 1998, he became our Executive Vice President, Operations. Mr. Casner has
over 30 years of experience in the defense electronics industry and has held
positions in engineering, marketing and general management.
NINA LASERSON DUNN joined us as Executive Vice President, General Counsel
and Secretary in July 1997. Prior to joining DRS, Ms. Dunn was a director in the
corporate law department of Hannoch Weisman, a Professional Corporation, where
she served as our outside legal counsel. Ms. Dunn is admitted to practice law in
New York and New Jersey and is a member of the American, New York State and New
Jersey State Bar Associations.
RICHARD ROSS joined us as Assistant Vice President and Director of Sales in
1986 and became Assistant Vice President, Corporate Development in 1987. In
1988, he became a Vice President of DRS, and in 1990, he became President of DRS
Photronics, Inc. Mr. Ross also serves as President of the DRS Electro-Optical
Systems Group.
RICHARD A. SCHNEIDER joined us in 1999 as Executive Vice President, Chief
Financial Officer and Treasurer of DRS. He held similar positions at NAI and was
a member of its Board of Directors prior to its acquisition by DRS in February
1999. Mr. Schneider has over 20 years of experience in corporate financial
management, including ten years with NAI.
EMPLOYEES
At March 31, 1999, we had approximately 2,180 employees, 1,503 of which
were located in the United States. None of our employees are represented by
labor unions, and we have experienced no work stoppages. There is a continuing
demand for qualified technical personnel, and we believe that its future growth
and success will depend upon its ability to attract, train and retain such
personnel.
13
<PAGE>
ITEM 2. PROPERTIES
We lease the following properties:
<TABLE>
<CAPTION>
SUBSIDIARY APPROXIMATE
OR SQUARE
DIVISION LOCATION ACTIVITIES FOOTAGE EXPIRATION
---------------------------- -------------------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CORPORATE
DRS Technologies, Inc. Parsippany, New Jersey Corporate 10,800 Fiscal 2003
Headquarters
ESG
DRS Electronic Systems, Inc. Gaithersburg, Maryland Administrative, 45,500 Fiscal 2006
Engineering and
Manufacturing
DRS Electronic Systems, Inc. Arlington, Virginia Administrative and 2,000 Fiscal 2002
Marketing
DRS Laurel Technologies Johnstown, Pennsylvania Administrative and 38,000 Fiscal 2004
Manufacturing
DRS Laurel Technologies Davidsville, Manufacturing 65,800 Fiscal 2000
Pennsylvania
DRS Technical Services, Inc. San Diego, California Engineering 5,000 Fiscal 2000
Support Services
DRS Technical Services Chesapeake, Virginia Field Service and 22,000 Fiscal 2005
Engineering Support
DRS Advanced Programs, Inc. Columbia, Maryland Administrative, 25,000 Fiscal 2002
Engineering and
Manufacturing
DRS Rugged Systems Farnham, Surrey, Administrative, 26,000 Fiscal 2015
(Europe) Ltd. United Kingdom Engineering and
Manufacturing
DRS Rugged Systems Gateshead, Newcastle, Administrative 500 Fiscal 2001
(Europe) Ltd. United Kingdom
DRS Rugged Systems Fyshwick, Australia Sales 1,200 Fiscal 2000
(Australia) PTY. Ltd.
DRS Rugged Systems, Inc. Longmont, Colorado Administrative, 43,300 Fiscal 2005
Engineering and
Manufacturing
EOSG
DRS Photronics, Inc. Oakland, New Jersey Administrative and 25,400 Fiscal 2003
Engineering
DRS Photronics, Inc. Oakland, New Jersey Administrative and 36,000 Fiscal 2003
Manufacturing
DRS Optronics, Inc. Palm Bay, Florida Administrative, 85,200 Fiscal 2006
Engineering and
Manufacturing
DRS Hadland, Inc. Cupertino, California Sales and Field 1,200 Fiscal 2000
Service
DRS Hadland GmbH Munich, Germany Sales and Field 200 (1)
Service
</TABLE>
- ----------
(1) Lease has no set expiration date. Three months notice is required to
terminate lease.
14
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARY APPROXIMATE
OR SQUARE
DIVISION LOCATION ACTIVITIES FOOTAGE EXPIRATION
---------------------------- -------------------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
DRS Hadland Ltd. Tring, Hertfordshire, Storage 2,000 Fiscal 2000
United Kingdom
DRS Infrared Technologies, Dallas, Texas Administrative, 109,600 Fiscal 2003
LP Engineering and
Manufacturing
DRS Sensor Systems, Inc. El Segundo, California Administrative, 17,400 Fiscal 2000
Engineering and
Manufacturing
DSG
DRS Ahead Technology, Inc. San Jose, California Administrative, 32,000 Fiscal 2001
Product
Development and
Manufacturing
DRS Ahead Technology, Inc. Plymouth, Minnesota Administrative and 13,700 Fiscal 2003
Manufacturing
DRS Ahead Technology, Inc. St. Croix Falls, Administrative and 20,000 Fiscal 2000
Wisconsin Manufacturing
FSCG
DRS Flight Safety and Nepean, Ontario, Administrative and 8,000 Fiscal 2004
Communications Canada Engineering
DRS Precision Echo, Inc. Santa Clara, California Administrative, 32,700 Fiscal 2006
Engineering and
Manufacturing
DRS Technologies (UK) Ltd. Hayes, Middlesex, Administrative and 6,800 Fiscal 2001
United Kingdom Manufacturing
</TABLE>
On October 20, 1998, upon the closing of the acquisition of the
electro-optical businesses of Raytheon, DRS Sensor Systems entered into a lease
agreement for approximately 17,400 square feet of space partitioned from the
Raytheon facility in El Segundo, California, and DRS Infra-Red entered into two
sub-lease agreements for Raytheon facilities in Dallas, Texas for (1) a
stand-alone 48,000 square foot research facility and (2) a partition measuring
61,600 square feet of a neighboring Texas Instruments building. DRS Sensor
Systems is currently in the process of relocating to its newly leased facility
in Torrance, California.
During July 1998, in connection with the expiration of the lease for the
Kanata, Ontario, Canada facility, FSCG relocated a substantial portion of the
Kanata operations to its facility in Carleton Place, Ontario, Canada and the
remainder to a leased facility in Nepean, Ontario, Canada.
We lease the building in Oakland, New Jersey from LDR Realty Co., a
partnership established by the co-founders of DRS. We believe that this lease
was consummated on terms no less favorable than those that could have been
obtained by us from an unrelated third party in a transaction negotiated on an
arms-length basis.
We own the following properties:
<TABLE>
<CAPTION>
SUBSIDIARY APPROXIMATE
OR SQUARE
DIVISION LOCATION ACTIVITIES FOOTAGE
---------------------------- -------------------------- -------------------- -------------------
<S> <C> <C> <C>
DSG
DRS Ahead Technology, Inc. Razlog, Bulgaria Manufacturing 64,100
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARY APPROXIMATE
OR SQUARE
DIVISION LOCATION ACTIVITIES FOOTAGE
---------------------------- -------------------------- -------------------- -------------------
<S> <C> <C> <C>
EOSG
DRS Hadland Ltd. Tring, Hertfordshire, Administrative, 7,500
United Kingdom Engineering and
Manufacturing
FSCG
DRS Flight Safety and Carleton Place, Ontario, Administrative and 128,500
Communications Canada Manufacturing
</TABLE>
We believe that all our facilities are in good condition, adequate for our
intended use and sufficient for our immediate needs. It is not certain whether
we will negotiate new leases as existing leases expire. Such determinations will
be made as existing leases approach expiration and will be based on an
assessment of our requirements at that time. Further, we believe that we can
obtain additional space, if necessary, based on prior experience and current
real estate market conditions.
Substantially all of our assets, including those properties identified
above, are pledged as collateral on our borrowings (see Note 7 of Notes to
Consolidated Financial Statements).
ENVIRONMENTAL PROTECTION
We believe that our manufacturing operations and properties are, in all
material respects, in compliance with existing federal, state and local
provisions enacted or adopted to regulate the discharge of materials into the
environment or otherwise protect the environment. Such compliance has been
achieved without material effect on our earnings or competitive position.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal actions and claims arising in the ordinary
course of our business. In our opinion, we have adequate legal defenses for each
of the actions and claims and we believe that their ultimate disposition will
not have a material adverse effect on our consolidated financial position or
results of operations.
In the first quarter of fiscal 1999, subpoenas were issued to the Company
by the United States Attorney for the Eastern District of New York seeking
documents related to certain equipment manufactured by DRS Photronics. These
subpoenas were issued in connection with United States v. Tress, a case
involving a product substitution allegation against an employee of DRS
Photronics. On June 26, 1998, the complaint against the employee is dismissed
without prejudice. To date, no claim has been made or threatened against the
Company or DRS Phototronics. DRS Phototronics is currently unable to ship
certain equipment related to the case, resulting in delays in the Company's
recognition of revenues. At this time, the Company is unable to quantify the
effect of the delayed shipments on its future results of operations or financial
position, or to predict when such shipments ultimately will be made, although
the delays are expected to impact fiscal 2000 first quarter results.
We are presently involved in a dispute in arbitration with Spar Aerospace
Limited ("Spar") with respect to the working capital adjustment, if any,
provided for in the purchase agreement between the Company and Spar dated as of
September 19, 1997, pursuant to which we acquired, through certain of our
subsidiaries, certain assets of Spar (see Note 2 of Notes to Consolidated
Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 11, 1999 at a special meeting, DRS stockholders approved the
merger of NAI Technologies, Inc. with and into a wholly-owned subsidiary of DRS.
There were 4,202,205 votes in favor of the merger, 32,500 votes against, and
7,107 abstentions. The merger successfully was consummated on February 19, 1999.
At the same meeting, the stockholders approved an amendment to our 1996 Omnibus
Plan to increase the number of shares of our Common Stock reserved for issuance
under this Plan by 900,000 shares, for an aggregate of 1,400,000. There were
3,989,677 votes in favor of the Plan amendment, 232,318 votes against and 19,817
abstentions. No other matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended March 31, 1999.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We have not paid any cash dividends since 1976. We intend to retain future
earnings for use in our business and do not expect to declare cash dividends on
our Common Stock in the foreseeable future. The indenture relating to the our 9%
Senior Subordinated Convertible Debentures and our bank lines of credit restrict
our ability to pay dividends or make other distributions on our Common Stock.
See Note 7 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 our Board of
Directors. The timing, amount and form of any future dividends will depend,
among other things, on our results of operations, financial condition, cash
requirements, plans of expansion and other factors deemed relevant by our Board
of Directors.
The information required by this item with respect to the market prices for
and number of holders of our common equity securities is incorporated herein by
reference to page 50 of the DRS 1999 Annual Report (for the fiscal year ended
March 31, 1999).
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference herein
to page 20 of the DRS 1999 Annual Report (for the fiscal year ended March 31,
1999).
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information required by this item is incorporated by reference herein
to pages 21 through 31 of the DRS 1999 Annual Report (for the fiscal year ended
March 31, 1999).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risks
relating to fluctuations in interest rates and foreign currency exchange risk.
The Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
INTEREST RATE RISK
As the Company seeks debt financing to maintain its ongoing operations and
sustain its growth, it is exposed to interest rate risk. Borrowings under the
Company's $150 million secured credit facility with Mellon Bank, N.A are
sensitive to changes in interest rates as such borrowings bear interest at
variable rates. In January 1998, the Company entered into an interest rate
collar agreement (expiring on January 8, 2001) to limit the impact of interest
rate fluctuations on cash flow and interest expense. As of March 31, 1999
approximately $6.6 million of the Company's $101.5 million of interest rate
sensitive obligations outstanding have been limited to the "ceiling" rate of
5.75% and the "floor" rate 4.77%.
FOREIGN CURRENCY EXCHANGE RISK
DRS operates and conducts business in foreign countries and as a result is
exposed to movements in foreign currency exchange rates. More specifically, our
net equity is impacted by the conversion of the net assets of foreign
subsidiaries for which the functional currency is not the U.S. Dollar for U.S.
reporting purposes. The Company's exposure to foreign currency exchange risk
related to its foreign operations is not material to the Company's results of
operations, cash flows or financial position. The Company, at present, does not
hedge this risk but continues to evaluate such foreign currency translation risk
exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference herein
to pages 32 through 50 of the DRS 1999 Annual Report (for the fiscal year ended
March 31, 1999).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
The information required by Items 10. through 13. of this Part is
incorporated herein by reference to our Definitive Proxy Statement, dated June
28, 1999, for the 1999 Annual Meeting of Stockholders. Reference also is made to
the information under "Executive Officers of the Registrant" in Part I of this
report.
18
<PAGE>
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 DRS and its
subsidiaries have been incorporated by reference to the DRS 1999
Annual Report (for the fiscal year ended March 31, 1999),
pursuant to Item 8 of this report:
<TABLE>
<CAPTION>
1999 ANNUAL REPORT PAGE(S)
------------------ -------
<S> <C>
Independent Auditors' Report 51
Consolidated Balance Sheets--March 31, 1999 and 1998 32
Consolidated Statements of Earnings--Years Ended March 31,
1999, 1998 and 1997 33
Consolidated Statements of Stockholders' Equity and Comprehensive
Earnings--Years Ended March 31, 1999, 1998 and 1997 34
Consolidated Statements of Cash Flows--Years Ended March 31,
1999, 1998 and 1997 35
Notes to Consolidated Financial Statements 36-50
</TABLE>
2. Financial Statement Schedules See Appendix A hereto.
3. Exhibits filed as part of this report are listed in the Exhibit
Index at the end of this report.
(b) Reports on Form 8-K
1. Filed as of January 4, 1999; Amendment No. 1 to Current Report on
Form 8-K dated November 4, 1998, containing financial statements
of assets to be acquired and liabilities to be assumed pursuant
to the Company's acquisition of certain assets of the Second
Generation Ground-Based Electro-Optical and Focal Plane Array
businesses of Raytheon Company.
2. Filed as of January 6, 1999; Amendment No. 2 to Current Report on
Form 8-K dated November 4, 1998, containing consent of
independent auditors.
3. Filed as of March 5, 1999; Current Report on Form 8-K, describing
the Company's acquisition of NAI Technologies, Inc.
19
<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.
DRS TECHNOLOGIES, INC.
Dated: June 29, 1999
/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 29, 1999
- -------------------------------------- Chief Executive Officer and Director
Mark S. Newman
/s/ RICHARD A. SCHNEIDER Executive Vice President, Chief June 29, 1999
- -------------------------------------- Financial Officer and Treasurer
Richard A. Schneider
/s/ IRA ALBOM Director June 29, 1999
- --------------------------------------
Ira Albom
/s/ DONALD C. FRASER Director June 29, 1999
- --------------------------------------
Donald C. Fraser
/s/ WILLIAM F. HEITMANN Director June 29, 1999
- --------------------------------------
William F. Heitmann
/s/ STEVEN S. HONIGMAN Director June 29, 1999
- --------------------------------------
Steven S. Honigman
/s/ MARK N. KAPLAN Director June 29, 1999
- --------------------------------------
Mark N. Kaplan
/s/ C. SHELTON JAMES Director June 29, 1999
- --------------------------------------
C. Shelton James
/s/ STUART F. PLATT Director June 29, 1999
- --------------------------------------
Stuart F. Platt
/s/ ERIC J. ROSEN Director June 29, 1999
- --------------------------------------
Eric J. Rosen
</TABLE>
20
<PAGE>
APPENDIX A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Independent Auditors' Report
Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are
either not required, not applicable or the required information is shown
in the consolidated financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders,
DRS Technologies, Inc.:
Under date of May 11, 1999, we reported on the consolidated balance sheets
of DRS Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and
the related consolidated statements of earnings, stockholders' equity and
comprehensive earnings, and cash flows for each of the years in the three-year
period ended March 31, 1999, as contained in the 1999 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
1999. 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, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Short Hills, New Jersey
May 11, 1999
21
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS (A) DEDUCTIONS (B)
--------------------------- ---------------------------
(1) (2) (1) (2)
CHARGED TO CREDITED TO
BALANCE AT CHARGED TO OTHER CREDITED TO OTHER BALANCE AT
BEGINNING OF COSTS ACCOUNTS-- COSTS ACCOUNTS-- END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE AND EXPENSES DESCRIBE PERIOD
----------- ------------ ------------ ---------- ------------ ---------- ----------
INVENTORY RESERVE
<S> <C> <C> <C> <C> <C> <C>
Year ended March 31, 1999 $1,695,000 $3,484,000 $ 440,000(c) $1,461,000 $ 797,000(d) $3,361,000
Year ended March 31, 1998 $ 741,000 $ 664,000 $ 988,000(c) $ 532,000 $ 166,000(d) $1,695,000
Year ended March 31, 1997 $1,069,000 $ 44,000 $2,166,000(c) $ 400,000 $2,138,000(d) $ 741,000
LOSSES & FUTURE COSTS
ACCRUED ON UNCOMPLETED
CONTRACTS
Year ended March 31, 1999 $4,120,000 $2,717,000 $5,784,000(c) $1,197,000 $3,305,000(e) $8,119,000
Year ended March 31, 1998 $2,204,000 $4,834,000 $ 166,000(c) $2,346,000 $ 738,000(e) $4,120,000
Year ended March 31, 1997 $3,850,000 $1,564,000 $ 16,000(c) $1,060,000 $2,166,000(e) $2,204,000
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year ended March 31, 1999 $ 486,000 $ 564,000 $ 258,000(c) $ 48,000 $ 6,000(d) $1,254,000
Year ended March 31, 1998 $ 136,000 $ 313,000 $ 71,000(c) $ 34,000 $ -- $ 486,000
Year ended March 31, 1997 $ 136,000 $ -- $ -- $ -- $ -- $ 136,000
</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 from related reserve accounts.
(d) Represents amounts utilized and credited to related asset accounts.
(e) Represents amounts reclassified to related reserve accounts.
22
<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 NO. DESCRIPTION
- ----------- -----------
3.1 -- Restated Certificate of Incorporation of the Company
[Registration Statement No. 2-70062-NY, Amendment No. 1, Exhibit
2(a)]
3.2 -- Certificate of Amendment of the Restated Certificate of
Incorporation of the Company, as filed July 7, 1983 [Registration
Statement on Form 8-A of the Company, dated July 13, 1983,
Exhibit 2.2]
3.3 -- Composite copy of the Restated Certificate of Incorporation of
the Company, as amended [Registration Statement No. 2-85238,
Exhibit 3.3]
3.4 -- Amended and Restated Certificate of Incorporation of the Company,
as filed April 1, 1996 [Registration Statement No. 33-64641,
Post-Effective Amendment No. 1, Exhibit 3.4]
3.5 -- By-laws of the Company, as amended to November 7, 1994 [Form
10-K, fiscal year ended March 31, 1995, File No. 1-8533,
Exhibit 3.4]
3.6 -- Certificate of Amendment of the Certificate of Incorporation of
Precision Echo Acquisition Corp., as filed March 10, 1995 [Form
10-K, fiscal year ended March 31, 1995, File No. 1-8533, Exhibit
3.5]
3.7 -- Form of Advance Notice By-Laws of the Company [Form 10-Q, quarter
ended December 31, 1995, File No. 1-8533, Exhibit 3]
3.8 -- Amended and Restated By-Laws of the Company, as of April 1, 1996
[Registration Statement No. 33-64641, Post-Effective Amendment
No. 1, Exhibit 3.8]
4.1 -- Indenture, dated as of September 22, 1995, between the Company
and The Trust Company of New Jersey, as Trustee, in respect of
the Company's 9% Senior Subordinated Convertible Debentures Due
2003 [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]
10.1 -- 1991 Stock Option Plan of the Company [Registration Statement
No. 33-42886, Exhibit 28.1]
10.2 -- 1996 Omnibus Plan of the Company [Registration Statement No.
333-14487, Exhbit 99.1]
10.3 -- Joint Venture Agreement, dated as of November 3, 1993, by and
between DRS Systems Management Corporation and Laurel
Technologies, Inc. [Form 10-Q, quarter ended December 31, 1993,
File No. 1-8533, Exhibit 6(a)(3)]
10.4 -- Waiver Letter, dated as of December 13, 1993, by and between
DRS Systems Management Corporation and Laurel Technologies, Inc.
[Form 10-Q, quarter ended December 31, 1993, File No. 1-8533,
Exhibit 6(a)(4)]
10.5 -- Partnership Agreement, dated December 13, 1993, by and between
DRS Systems Management Corporation and Laurel Technologies, Inc.
[Form 10-Q, quarter ended December 31, 1993, File No. 1-8533,
Exhibit 6(a)(5)]
10.6 -- 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)]
23
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7 -- Lease, dated as of June 1, 1983, between LDR Realty Co. and the
Company [Form 10-K, fiscal year ended March 31, 1984, File No.
1-8533, Exhibit 10.7]
10.8 -- Renegotiated Lease, dated June 1, 1988, between LDR Realty Co.
and the Company [Form 10-K, fiscal year ended March 31, 1989,
File No. 1-8533, Exhibit 10.8]
10.9 -- Lease, dated July 20, 1988, between Precision Echo, Inc. and Bay
511 Corporation [Form 10-K, fiscal year ended March 31, 1991,
File No. 1-8533, Exhibit 10.9]
10.10 -- Amendment to Lease, dated July 1, 1993, between Precision Echo,
Inc. and Bay 511 Corporation [Form 10-K, fiscal year ended March
31, 1994, File No. 1-8533, Exhibit 10.12]
10.11 -- Second Amendment to Lease, dated October 17, 1995 between
Precision Echo, Inc. and Bay 511 Corporation [Registration
Statement No. 33-64641, Amendment No. 1, Exhibit 10.11]
10.12 -- Lease Modification Agreement, dated February 22, 1994, between
Technology Applications and Service Company and Atlantic Real
Estate Partners II [Form 10-K, fiscal year ended March 31, 1994,
File No. 1-8533, Exhibit 10.13]
10.13 -- Amendment to Lease Modification, dated June 1, 1994, between
Technology Applications and Service Company and Atlantic Estate
Partners II [Form 10-K, fiscal year ended March 31, 1995, File
No. 1-8533, Exhibit 10.11]
10.14 -- Triple Net Lease, dated October 22, 1991, between Technology
Applications and Service Company and Marvin S. Friedberg [Form
10-K, fiscal year ended March 31, 1994, File No. 1-8533,
Exhibit 10.14]
10.15 -- Lease, dated November 10, 1993, between DRS Systems Management
Corp. and Skateland Roller Rink, Inc. [Form 10-K, fiscal year
ended March 31, 1994, File No. 1-8533, Exhibit 10.17]
10.16 -- Lease, dated March 23, 1992, between Ahead Technology
Corporation and Vasona Business Park [Form 10-K, fiscal year
ended March 31, 1995, File No. 1-8533, Exhibit 10.15]
10.17 -- Amendment to Lease, dated May 21, 1992, between Ahead
Technology Corporation and Vasona Business Park [Form 10-K,
fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.16]
10.18 -- Revision to Lease Modification, dated August 25, 1992, between
Ahead Technology Corporation and Vasona Business Park [Form 10-K,
fiscal year ended March 31, 1995, File No. 1-8533, Exhibit 10.17]
10.19 -- Lease, dated January 13, 1995, between the Company and Sammis
New Jersey Associates [Form 10-K, fiscal year ended March 31,
1995, File No. 1-8533, Exhibit 10.18]
10.20 -- Lease, dated April 3, 1996, by and between the Company and Los
Alamos Economic Development Corporation [Form 10-K, fiscal year
ended March 31, 1996, File No. 1-8533, Exhibit 10.20]
10.21 -- Employment, Non-Competition and Termination Agreement, dated
July 20, 1994, between Diagnostic/Retrieval Systems, Inc. and
David E. Gross [Form 10-Q, quarter ended June 30, 1994, File No.
1-8533, Exhibit 1]
10.22 -- 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]
10.23 -- Asset Purchase Agreement, dated October 28, 1994, Acquisition
by PE Acquisition Corp., a subsidiary of Precision Echo, Inc. of
all of the Assets of Ahead Technology Corporation [Form 10-Q,
quarter ended December 31, 1994, File No. 1-8533, Exhibit 1]
10.24 -- 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]
24
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.25 -- 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]
10.26 -- Lease, dated May 25, 1995, between Technology Applications and
Service Company and Sports Arena Village, Ltd., L.P.
[Registration Statement No. 33-64641, Amendment No. 1, Exhibit
10.81]
10.27 -- 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 10.84]
10.28 -- 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 10.85]
10.29 -- 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 10.86]
10.30 -- 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]
10.31 -- Joint Venture Agreement, dated as of February 6, 1996, by and
among DRS/MS, Inc., Universal Sonics Corporation, Ron Hadani,
Howard Fidel and Thomas S. Soulos [Registration Statement No.
33-64641, Amendment No. 1, Exhibit 10.91]
10.32 -- Partnership Agreement, dated as of February 6, 1996, by and
between DRS/MS, Inc. and Universal Sonics Corporation
[Registration Statement No. 33-64641, Amendment No. 1, Exhibit
10.92]
10.33 -- Asset Purchase Agreement, dated as of February 9, 1996, by and
among Mag-Head Engineering, Company, Inc. and Ahead Technology
Acquisition Corporation, a subsidiary of Precision Echo, Inc.
[Registration Statement No. 33-64641, Post-Effective Amendment
No. 1, Exhibit 10.93]
10.34 -- Employment, Non-Competition and Termination Agreement, dated
March 28, 1996, between the Company and Leonard Newman
[Registration Statement No. 33-64641, Post-Effective Amendment
No. 1, Exhibit 10.94]
10.35 -- Asset Purchase Agreement, dated June 17, 1996, by and among
Vikron, Inc., Northland Aluminum, Inc., Ahead Wisconsin
Acquisition Corporation, a third-tier subsidiary of the Company,
and Ahead Technology, Inc., a second-tier subsidiary of the
Company [Form 10-K, fiscal year ended March 31, 1997, File No. 1-
8533, Exhibit 10.99]
10.36 -- Agreement and Plan of Merger, dated September 30, 1996, by and
among PTI Acquisition Corp., a subsidiary of the Company, Pacific
Technologies, Inc., David A. Leedom, Karen A. Mason, Robert T.
Miller, Carl S. Ito and Barry S. Kindig [Form 10-K, fiscal year
ended March 31, 1997, File No. 1-8533, Exhibit 10.101]
10.37 -- Asset Purchase Agreement, dated October 22, 1996, by and among
Ahead Technology, Inc., a second-tier subsidiary of the Company,
Nortronics Acquisition Corporation, a third-tier subsidiary of
the Company, Nortronics Company, Inc., Alan Kronfeld, Thomas
Philipich and Robert Liston [Form 10-K, fiscal year ended March
31, 1997, File No. 1- 8533, Exhibit 10.102]
10.38 -- Purchase Agreement, dated as of September 19, 1997, between
DRS Technologies, Inc. and Spar Aerospace Limited. [Form 8-K,
October 27, 1997, File No. 1-8533, Exhibit 1]
10.39 -- Asset Purchase Agreement, dated July 28, 1998, by and among
the Company, Raytheon TI Systems, Inc., Raytheon Company and
Raytheon Systems Georgia, Inc. [Form 8-K, November 4, 1998, File
No. 1-8533, Exhibit 1]
25
<PAGE>
EXHIBIT NO. DESCRIPTION
10.40 -- Letter Amendment by and among the Company, Raytheon TI Systems,
Inc., Raytheon Company and Raytheon Systems Georgia, Inc., dated
October 20, 1998, amending the Asset Purchase Agreement. [Form
8-K, November 4, 1998, File No. 1-8533, Exhibit 2]
10.41 -- Amended and Restated Revolving Credit Loan and Term Loan
Agreement, dated October 20, 1998, by and among the Company, DRS
Technologies Canada Company, DRS Technologies Canada, Inc., DRS
EO, Inc., DRS FPA, L.P. and Mellon Bank, N.A. [Form 8-K, November
4, 1998, File No. 1-8533, Exhibit 3]
10.42 -- Agreement and Plan of Merger dated August 26, 1998, as amended,
among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI
Technologies, Inc. [Registration Statement No. 333-69751, Post
Effective Amendment No. 1, Exhibit 2.1]).
10.43 -- Amendment to Agreement and Plan of Merger, dated February 17,
1999, among DRS Technologies, Inc., DRS Merger Sub, Inc. and NAI
Technologies, Inc. [Form 8-K, March 5, 1999, File No. 1-8533,
Exhibit 2]
10.44 -- 1991 Stock Option Plan of NAI Technologies, Inc. [Registration
Statement No. 333-69751, Post Effective Amendment No. 1 on Form
S-8, Exhibit 4.4]
10.45 -- 1993 Stock Option Plan for Directors of NAI Technologies, Inc.
[Registration Statement No. 333-69751, Post Effective Amendment
No. 1 on Form S-8, Exhibit 4.5]
10.46 -- 1996 Stock Option Plan of NAI Technologies, Inc. [Registration
Statement No. 333-69751, Post Effective Amendment No. 1 on Form
S-8, Exhibit 4.6]
10.47* -- Employment Agreement, dated as of November 20, 1996, by and
between the Company and Mark S. Newman
10.48* -- Employment Agreement, dated as of April 30, 1997, by and between
the Company and Nina Laserson Dunn
10.49* -- Employment Agreement, dated as of February 19, 1999, by and
between the Company and Richard A. Schneider
10.50[P]-- Subcontract No. 483901(D), dated June 24, 1994, under Contract
No. N00024-94-D-5204, between the Company and Unisys Corporation
Government Systems Group [Form 10-K, fiscal year ended March 31,
1995, 1995, File No. 1-8533, Exhibit 10.37]
10.51[P]-- Purchase Order No. 10606321 1, dated October 28, 1998, between
the Company and Raytheon TI Systems, Inc.
10.52[P]-- Contract DAAH01-97-C-0390, dated September 24, 1997, between
Hughes Georgia, Inc. and the U.S. Army
10.53[P]-- Modification P00001, dated January 16, 1998, to Contract
DAAH01-97-C-0390
10.54[P]-- Modification P00008, dated October 30, 1998, to Contract
DAAH01-97-C-0390
10.55[P]-- Contract DAAB07-97-C-J430, dated April 1, 1997, between Hughes
Aircraft Co. and the U.S. Army
10.56[P]-- Modification P00037, dated March 31, 1999, to Contract
DAAB07-97-C-J430
*13 -- Portions of the 1999 Annual Report to Stockholders of the Company
*21 -- List of subsidiaries of the Company as of March 31, 1999
*23.1 -- Consent of KPMG LLP
*27 -- Financial Data Schedule
26
AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
20th day of November, 1996, by and between DIAGNOSTIC RETRIEVAL SYSTEMS.
INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan
Way, Parsippany, New Jersey and Mark S. Newman (the "Executive"), currently
residing at 191 Campbell Road, Far Hills, New Jersey 07931.
WHEREAS, the Executive desires to enter into an agreement of employment
with the Company in accordance with the terms and conditions set forth herein:
and
WHEREAS, the Company desires to continue to employ the Executive as Its
Chairman of the Board, President and Chief Executive Officer in accordance with
the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. Term of Employment. This Agreement shall be effective from the date first
above written (the "Effective Date") and its initial term shall continue in
effect until the third anniversary of the Effective Date (such period being
the "Initial Term"). On November 2Oth of each year, beginning on November 20,
1998, this Agreement shall automatically be renewed for successive two year
periods, unless at least ninety (90) days prior to the end of each renewal date
either party hereto gives written notice to the other party of its intention not
to renew this Agreement and, as provided below, shall remain in effect following
a Change in Control. This Agreement may be terminated at any time during its
initial term or during any renewal term solely in accordance with the terms and
conditions of Section 5 hereof.
2. Duties.
2.1 Position. The Company hereby employs the Executive in a professional
capacity with the title of Chairman of the Board, President and Chief Executive
Officer of the Company, and the Executive hereby accepts such employment and
undertakes and agrees to serve in such capacities. In such capacities, the
Executive shall have such powers, perform such duties and fulfill such
responsibilities typically associated with such positions in other
publicly-held companies, including, without limitation, planning, supervision
and control of the operations and financial affairs of the Company, management
and direction of the Company's operating divisions, and such other general
powers and duties of an operational or supervisory nature usually vested in the
offices held by him. In addition. subject to his election by the stockholders
of the Company, the Executive shall serve on the Company's Board of Directors
as Chairman of the Board. Performance of his duties hereunder shall in no event
require that the Executive, work on a regular basis at any location other than
within twenty (2O) miles of his present office location; provided, however,
that if Executive initiates a relocation of his present office, such shall be
deemed
1
<PAGE>
a consent to performance of his duties in such location. The Executive shall
devote substantially all of his working time and efforts to the performance of
his duties hereunder. The Executive shall report directly to the Board of
Directors of the Company, and shall have the authority to hire and discharge
any employee or independent contractor of the Company or its affiliates.
2.2 Limitation on Other Employment. During the term of his employment
hereunder, the Executive will not engage in any other occupation for gain,
profit or pecuniary advantage without the consent of the Board of Directors
of the Company; provided, however, that this limitation shall not be construed
as preventing him from (a) serving on the board of directors of any corporation
not directly competitive with the Company (provided that Executive has informed
the Board of Directors of the Company of his intention to so serve and that the
Board of Directors of the Company has not objected thereto within twenty days of
its receipt of Executives notice), and (b) investing or trading in securities
or other forms of investment, in each case so long as such activities do not
materially interfere with the performance of his duties hereunder and such
investments do not represent the ownership of 5% or more of the capital stock of
publicly traded entities.
3. Compensation.
3.1 Base Salary. In consideration of the services rendered hereunder, the
Company shall pay the Executive during the Initial Term of this Agreement a base
salary at the rate of THREE HUNDRED TWENTY THOUSAND DOLLARS ($320,000) per annum
or at such higher rate as the Company's Board of Directors may reasonably
determine ("Base Salary"), which amount will be payable to him in bi-weeklv
installments (or at such intervals as other salaried employees of the Company
are paid). The amount of the Executive's Base Salary shall be reviewed annually
by the Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee"), but shall not be reduced without written consent of
the Executive and shall in all events be increased annually by the percentage
change in the Consumer Price index for Urban Wage Earners - New York, N.Y. -
Northeastern N.J. ("CPI"). The Executive and the Company may agree on a higher
Base Salary for any renewal term of this Agreement but if they do not agree by
the beginning of a renewal term, the Executive's Base Salary shall be the base
salary he received in the year immediately prior to the renewal term increased
by the percentage change in the CPI.
3.2 Incentive Compensation.
(a) To further the attainment of the Company's long-term profit and
growth objectives, the Executive shall be eligible to receive an incentive
bonus in all events equal to no less a percentage of the Executive's Base
Salary as shall be equal to that percentage attainable by the Executive
under the currently effective Incentive Compensation Plan ("ICP").
Specific annual entitlements to bonus awards shall be predicated on the
Executive's performance and subject to the Company achieving its
operating targets, consistent with the rules as set forth in the ICP.
-2-
<PAGE>
(b) The Executive shall participate in all other Bonus, Long-Term
Capital Accumulation and/or Stock-Based Programs that the Company may
adopt from time to time.
(c) To further provide Executive with appropriate incentive and reward
to continue as Chief Executive Officer of the Company and to acquire a
proprietary interest in the long-term success of the Company, the Company
hereby grants, pursuant to the Company's 1996 Omnibus Plan (the "Plan"),
fifty thousand (50,000) options to acquire Company Stock. These
options shall be Incentive Stock Options to the extent permitted by the
Plan and Non-Qualified Stock Options for the balance. The option exercise
price payable shall be the Fair Market Value of a share of Company Stock.
The term of the option shall be ten (10) years and shall vest, be
exercisable and the Executive shall have Reload Options all as provided in
Section 7 of the Plan. All capitalized terms shall have the meaning
specified in the Plan.
As further incentive for the Executive to pursue acquisition targets
for the Company, upon the consummation of any Board approved acquisition,
it is the parties intention that the Board consider appropriate
compensation to Executive on a case-by-case basis.
4. Benefits.
4.1 Benefit Programs. The Executive will be included in all group insurance
plans ("Insurance Plans"), retirement plans, and other benefit plans and
arrangements (such retirement and other benefit plans and arrangements, together
with the Insurance Plans, the "Benefit Program") available to executives of the
Company, as such plans may be or have been adopted from time to time. The
Company will provide to the Executive the specific benefits listed on Schedule A
hereto.
4.2 Vacation. The Executive shall be entitled to five (5) weeks of vacation
with pay during each twelve (12) month period of employment under this
Agreement.
4.3 Automobile and Other Expenses. The Company will provide the Executive
with an automobile of the type currently provided to him and the Company will
pay, or reimburse him for, all business related operating expenses of such
automobile without limitation, insurance, service, repairs, gasoline and oil).
The Company will also reimburse the Executive for: (1) his ordinary and
customary business expenses incurred in the performance of his duties
hereunder, (ii) a comprehensive annual physical examination by a physician of
his choice and (iii) tax planning and financial counselling by professionals of
his choice up to an annual limitation of $10,000.
5. Termination.
5.1 Termination by the Company for Cause.
(a) Definition. The Company may terminate the Executive's employment
hereunder for "Cause" which shall be limited to:
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(i) Gross neglect or dereliction of Executive's duties or other
grave misconduct by him and the failure to cure such situation within
twenty days after receipt of a notice thereof from the Board of
Directors.
(ii) Executive's engaging in conduct which has caused
demonstrable and serious injury to the Company, monetary or
otherwise, as evidenced by a written determination authorized by the
Board of Directors of the Company, or
(iii) Executive's conviction for or plea to a felony or for any
lesser crime which involves the property of the Company.
(b) Compensation upon Termination for Cause. Upon the termination of
the Executive's employment for Cause, the Company shall pay the Executive
his Base Salary, prorated Incentive Compensation and continued
participation in the Benefit Program, through the effective date of such
termination.
5.2 Termination For Disability or Death.
(a) Disability. The Company may terminate the Executive's employment
hereunder in the event of the Executive's permanent disability. For the
purposes of this Agreement, permanent disability shall mean the Executive's
inability, whether mental or physical to perform the regular duties of his
employment on a full-time continuous basis for six (6) consecutive months
(the "Disability Period"). If a policy of disability insurance is in effect
insuring the Executive, then in no event shall Executive be deemed to be
disabled until he is determined to be entitled to receive disability income
payments pursuant to such disability policy. During the Disability Period,
the Company shall (i) pay the Executive his full Base Salary then in
effect, as well as any ICP benefit to which he would otherwise be entitled,
reduced by any amounts to which he actually receives under any disability
plan maintained by the Company during the Disability Period, and (ii) shall
continue his participation in the Benefit Program. The Company shall notify
the Executive in writing of any such finding on its part at the end of
the Disability Period. If the Company and the Executive are unable to agree
whether he is so disabled the question shall be decided by a panel of three
physicians, one to be designated by the Company, one by the Executive and
one by the first two so designated. The determination of the panel shall
be final and binding upon the parties with costs of the panel to be paid
by the Company.
(b) Death. The Executive's employment hereunder will terminate upon
the Executive's death.
(c) Compensation Upon Termination For Disability or Death.
(i) If the Company terminates the Executive's employment due to
permanent disability, pursuant to Subsection 5.2(a) herein, the
Company shall pay the Executive his monthly Base Salary then in
effect for one (1) year after his termination, reduced by any
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amounts to which he actually receives under any disability plan
maintained by the Company and shall pay the Executive when due, a
pro-rata portion of the bonus determined pursuant to (iii) below
corresponding to the period of his employment during the termination
year.
(ii) If the Executive's employment is terminated due to his
death, pursuant to Subsection 5.2(b) herein, the Company shall pay
the Executive's estate or designated beneficiary (A) the Executive's
Base Salary and any other amounts due or earned through the date of
death, and (B) until the end of the fiscal year in which occurred the
date of death or, if greater, for three months following the date of
death, the Executive's Base Salary as then in effect, and (C) a
pro-rata portion of the bonus determined pursuant to (iii) below
corresponding to the period of his employment during the termination
year.
(iii) For purposes of determining the bonus payable in the year
of termination, the Company shall pay a bonus equal to the amount of
the most recent full year's bonus paid to Executive preceding the year
of termination, pro-rated for the period of his employment during the
termination year.
(d) Benefits upon Termination for Death or Disability.
(i) If the Company terminates the Executive's employment due to
his permanent disability, pursuant to Subsection 5.2(a) herein, the
Company shall continue to provide him and his dependents coverage
under the Insurance Plans, at his option, for the longer of Executive
reaching the age of sixty-five (65) or the period required by
applicable law. The Company shall provide such coverage at its expense
(except with respect to those costs for which the Executive was
responsible prior to the termination of employment).
(ii) If the Executive's employment is terminated due to his
death, pursuant to Subsection 5.2(b) herein, the Company shall
continue to provide the Executive's dependents medical insurance
coverage, at their option, for the longer of one (1) year after his
death, the period for which Executive's children would be considered
dependents for health insurance purposes, or the period required by
applicable law. The Company shall provide such coverage at its expense
(except for those costs for which the Executive was responsible prior
to this death).
5.3 Termination By The Executive.
(a) Good Reason. The Executive may terminate his employment during the
Employment Period hereunder for "Good Reason" (i) upon the failure by the
Company (or its stockholders as the case may be) to elect or reelect or to
appoint or reappoint the Executive as a member of the Board of Directors of
the Company or to the offices of President and Chief Executive Officer of
the Company or (ii) after the occurrence, without the written consent of
the Executive, of an event constituting a material breach of this Agreement
by the Company that has not been fully cured within twenty (20) days after
written notice thereof has been given by the Executive to the Company, or
(iii) upon the occurrence of any action taken by the Company
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which would constitute a constructive termination; provided, that, in
addition to and without limiting the generality of the foregoing, on and
after a Change in Control (as defined in Section 5.3(c)) herein), any one
of the following events shall be deemed a material breach of this
Agreement;
(i) the assignment to the Executive of any duties inconsistent with
the Executive's then status as an executive officer of the Company or a
substantial adverse alteration in the nature of the Executive's
responsibilities from those in effect immediately prior to the Change in
Control;
(ii) a reduction by the Company in the Executive's Base Salary as in
effect immediately prior to the Change in Control;
(iii) a reduction in the aggregate percentage upon which the Execu-
tive's Incentive Compensation is determined following the Change of Control
unless equivalent reductions are made generally for other executives of the
Company;
(iv) the relocation of Executive's principal place of employment,
without his consent, to a location more than twenty (20) miles from the
place of such employment immediately prior to the Change in Control;
(v) the failure by the Company to continue to provide the Executive
with benefits substantially similar to those enjoyed by Executive under
the Benefit Program, as in effect immediately prior to the Change in
Control, the taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive the Executive
of any material fringe benefit enjoyed by the Executive immediately prior
to the Change in Control, or the failure by the Company to provide the
Executive with the number of paid vacation days to which Executive is
entitled on the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect immediately prior to
Change in Control;
(vi) the failure of a successor to the Company to expressly assume and
agree to perform this Agreement pursuant to Section 5.6 hereof.
(b) Compensation and Benefits upon Termination by The Executive.
(i) In the event of a termination of this Agreement by the Executive,
without Good Reason, the Company shall provide to him his Base Salary,
the pro-rata portion of the bonus determined pursuant to Section
corresponding to the period of his employment during the termination year
and continued participation in the Benefit Program through the effective
date of such termination.
(ii) If the Executive terminates his employment hereunder for Good
Reason. (A) if there has not occurred a Change in Control, the Company
shall also pay him, as
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liquidated damages under this Agreement, his monthly Base Salary then in
effect for the balance of this Agreement then in effect, but for not less
than one year plus the pro-rata portion of the bonus determined pursuant to
Section 5.2(c)(iii); (B) if there has occurred a Change in Control, the
Company shall pay him, as liquidated damages under this Agreement, a lump
sum equal to 2.99 times the sum of his the sum of his Base Salary then in
effect plus the bonus earned by him during the immediately preceding fiscal
year of the Company, and (C) in either case, the Executive's employment
shall be deemed to continue for the balance of the Agreement for purposes
of determining his participation in the Benefit Program; provided, however,
that if such participation by him after termination of employment is not
permitted under any such plan, the Company will provide him with the
equivalent benefits. The Company will pay the total costs of the
Executive's participation in such plans or the equivalent thereof. During
the period the Executive will have full use of the Company-supplied
automobile. The Executive also will be provided with outplacement
assistance utilizing a consultation service designated and paid for by the
Company. Furthermore, all stock options granted to Executive shall
immediately vest and be exercisable for a period of 12 months following
termination.
(c) Definition of Change in Control. A "Change in Control" shall mean the
occurrence of the event set forth in any one of the following paragraphs:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting
power of the Company's then outstanding securities, excluding any Person
who becomes such a Beneficial Owner in connection with a transaction
described in clause (A) of paragraph (iii) below; or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the
date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual
or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other
corporation, other than (A) a merger or consolidation which would result in
the voting securities of the Company, outstanding immediately prior to such
merger or consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or any
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parent thereof) at least 60% of the combined voting power of the securities
of the Company or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not including in the
securities Beneficially Owned by such Person any securities acquired
directly from the Company or its Affiliates other than in connection with
the acquisition by the Company or its Affiliates of a business)
representing 20% or more of the combined voting power of the Company's
then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or disposition
by the Company of all or substantially all of the Company's assets to an
entity, at least 60% of the combined voting power of the voting securities
of which are owned by the stockholders of the Company in substantially the
same proportions as their ownership of the Company immediately prior to
such sale.
For purposes of this Section 5.3(c), the following definitions shall apply:
"Person" shall have the meaning given in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Act,"), as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company
or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company. "Beneficial Owner" shall have the meaning set
forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth
in Rule 12b-2 promulgated under Section 12 of the Act.
5.4 Termination by the Company other than for Cause.
(a) Compensation Upon Termination by the Company other than for
Cause. If the Company terminates the Executive's employment hereunder
without "Cause," the Company shall pay the Executive the amounts
described in 5.3(b)(ii).
(b) Benefits Upon Termination by the Company other than for Cause. If
the Company terminates the Executive's employment hereunder without
"Cause," the Executive's employment shall be deemed to continue for the
balance of the Agreement for purposes of determining his participation
in the Benefit Program existing prior to the termination or under any
equivalent plan providing the same coverage which may be substituted for
any such plan; provided, however, that if such participation by him after
termination of employment is not permitted under any such plan,
the Company will provide him with the equivalent benefits. The Company
will pay the total costs of the Executive's participation in such plans
or the equivalent thereof. During this period the Executive will have full
use of the Company-supplied automobile. The Executive also will be provided
with out-placement assistance utilizing a consultation
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service designated and paid for by the Company. Furthermore, all stock
options granted to Executive shall immediately vest and be exercisable for
a period of 12 months following termination.
5.5. Insurance. As soon as practicable and if available on commercially
reasonable terms, the Company shall purchase key man insurance sufficient to
cover its severance obligations to the Executive under Sections 5.1(b),
5.3(b), and 5.4(b).
5.6 Successor. The Company, or any entity which controls the Company, shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company by written agreement expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Company
would be required to perform if no such succession had occurred. Failure of the
Company or a controlling entity to obtain such agreement prior to the effective
date of any such succession followed by failure of the successor to honor this
Agreement shall be a breach of this Agreement and shall entitle the Executive to
the rights and benefits hereunder as though he had terminated his employment
with the Company for Good Reason pursuant to paragraph 5.3 hereof (including
those provisions which concern compensation following a Change in Control),
whether or not he terminates his employment with the Company. As used in this
Agreement, "Company" shall mean the Company as defined above and any successor
to all or substantially all of its business or assets which becomes bound by all
of the terms and conditions of this Agreement.
6. Restrictions.
6.1 Confidential Information. The Executive agrees that during and after
the period of his employment he will not, without authorization from the
Company, divulge, disclose or otherwise communicate to any person or company any
information of a confidential nature pertaining to specific details of the
Company's business, functions or operations, except in connection with the
discharge of his duties hereunder, or pursuant to the order of a court of
competent jurisdiction. The Executive further agrees that, upon termination of
his employment with the Company for any reason, he will prompty return to the
Company all books and records of or pertaining to the Company's business, and
ail other property belonging to the Company which is in his custody or
possession.
6.2 Non-Compete. During his employment by the Company and in the event he
is terminated by the Company for Cause or terminates his employment without Good
Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the
Executive shall not compete with the Company in any activity relating to the
business of the Company as conducted by the Company during the term of this
Agreement. For purposes of the preceding sentence, competition shall include,
without limitation, direct or indirect competition by the Executive, whether as
an owner, officer, director, employer, partner, consultant, advisor, contractor,
principal agent, licensor, employee or affiliate of a person firm, venture or
corporation that so competes with the Company. Without the prior written
approval of the Board of Directors, the Executive further
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agrees that during the twelve (12) month period following the termination of
this Agreement for any reason he will not solicit for employment any employee of
the Company.
6.3 Cause of Action. The parties hereby declare that the rights of the
Company are of a unique nature, the loss of which may cause irreparable harm,
and that it may be impossible to measure in money the damages which will accrue
to the Company by reason of the loss of such rights or a failure by the
Executive to perform or adhere to any of the obligations under Sections 6.1 and
6.2 hereof. The Executive expressly acknowledges that remedies at law alone will
be inadequate to compensate the Company for any breach or violation of any of
the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition
to all other remedies hereunder or thereunder, shall be entitled, as a matter of
right, to seek injunctive relief, including specific performance, with respect
to any such breach of violation, in any court of competent jurisdiction.
7. Legal Matter.
7.1 Resolution of Conflict. Any and all disputes, claims and controversies
between the parties hereto concerning the validity, interpretation, performance,
termination or breach of this Agreement, which cannot be resolved by the parties
within ninety (90) days after such dispute, claim or controversy arises shall,
at the option of either party, be referred to and finally settled by
arbitration. Such arbitration shall be initiated by the initiating party giving
notice (the "Arbitration Notice") to the other party (the "Respondent") that it
intends to submit such dispute, claim or controversy to arbitration. Each party
shall, within thirty (30) days of the date the Arbitration Notice is received by
the Respondent, designate a person to act as an arbitrator, if either party
fails to designate a person to Act as an arbitrator within the time specified
herein the arbitration shall be conducted by the sole designated arbitrator. The
two arbitrators appointed by the parties shall, within thirty (30) days after
their designation appoint a third arbitrator who shall act as presiding
arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by
the parties are unable to appoint a Presiding Arbitrator, the Presiding
Arbitrator shall be appointed according to the rules of the American Arbitration
Association as in effect on the date the notice of submission to arbitration is
given (the "Rules").
Such arbitration shall be held in New Jersey in accordance with the Rules
except as otherwise expressly provided herein. The arbitrators shall, by
majority vote, render a written decision stating reasons therefor in reasonable
detail within three (3) months after the appointment of all the arbitrators.
Each party shall bear its own costs and attorneys fees. All other costs and
expenses of arbitration shall be apportioned between the parties by the
arbitrators. The award of the arbitrators shall be made in United States
currency and shall be final and binding, and judgment thereon may be rendered by
any court having jurisdiction thereof, or application may be made to such court
for the judicial acceptance of the award and an order of enforcement as the case
may be.
7.2 Agreement Confidential. Both the Executive and the Company will keep
the terms of this Agreement confidential provided that this provision shall not
restrict any disclosure by the Company pursuant to any applicable law,
regulation or Judicial order.
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7.3 Notices. All notices, requests, consents and other communications,
required or permitted to be given hereunder, shall be in writing and shall be
deemed to have been duly given if delivered personally or mailed first class,
postage prepaid, by registered or certified mail, addressed to either party at
the address first written above (or to such other address as either party shall
designate by notice in writing to the other party in accordance herewith).
8. Miscellaneous.
8.1 Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New Jersey applicable to
agreements made and to be performed within New Jersey, without regard to the
principles of conflict of laws.
8.2 Headings. The sections headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
8.3 Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and from and
after the date hereof supersedes all prior agreements, arrangements and
understandings, written or oral, relating to the subject matter hereof provided,
however, that the benefits conferred under this Agreement are in addition to,
and not in lieu of, any and all benefits conferred under plans and arrangements
currently in effect for the Executive.
8.4 Assignment. This Agreement is binding upon and shall insure to the
benefits of the Executive and his estate, but the Executive's rights and
obligations hereunder may not be assigned or pledged by him.
8.5 Modification. This Agreement may be amended, modified, superseded,
canceled, renewed or extended, and the terms or covenants hereof may be waived,
only by written instrument executed by both of the parties hereto or in the case
of a waiver, by the party waiving compliance.
8.6 Section 162(m). In the event compensation payable to Executive
hereunder in any single tax year would result in the non-deductibility of a
portion of such compensation by the Company solely by reason of Section 162(m)
of the Internal Revenue Code of 1986, as amended, then, and in such event, the
Company shall be permitted to defer payment of such non-deductible amount to
the Executive to be paid to him on the first day of the succeeding tax year of
the Company.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with legal and binding effect as of the day and year first above
written.
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
BY: /s/ MARK N. KAPLAN
-------------------------------------
Mark N. Kaplan
Chairman, Compensation Committee of
the Board of Directors
THE EXECUTIVE
/s/ MARK S. NEWMAN
--------------------------------------
Mark S. Newman
<PAGE>
SCHEDULE A
Mark S. Newman
Group/Executive Benefits
GROUP PLANS BENEFIT
- ----------- -------
DRS Group Medical/Dental Plan Vanes
DRS Group Life Insurance Plan $50,000
DRS Group AD&D $500,000
DRS Long Term Disability Plan S5,000 monthly benefit
DRS Retirement/Savings Plan (401K) Varies - Fully vested
DRS Reimbursement Account Plan (IRC 125) Varies (See below)
EXECUTIVE PLANS/BENEFITS BENEFIT
- ------------------------ -------
Executive Incentive Compensation Plan Varies
1991 DRS Stock Option Plan See Proxy for current options
1996 Omnibus Plan No grants issued at present
Group Life Carve-Out $450,000
Life Insurance $100,000 (family beneficiary)
S100,000 (family beneficiary)
$250,000 (split DRS/family)
$1,000,000 (split DRS/family)
$2,000,000 (family beneficiary)
S1,600,000 (SERP pre-retirement
death benefit)
Long Term Disability $6,340 monthly benefit
$3,000 monthly benefit
$2,000 monthly benefit
DRS Reimbursement Account: one time annual deposit to the
reimbursement account (amount may vary from year to year) $10,000 for 1996
Supplemental Executive Retirement Plan (SERP) Determined at
time of
Retirement
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of the 30th day of April, 1997, by and between DIAGNOSTIC RETRIEVAL SYSTEMS,
INC., a Delaware corporation (the "Company"), having an address at 5 Sylvan Way,
Parsippany, New Jersey and Nina Laserson Dunn (the "Executive"), currently
residing at 431 Kelly Court, Wyckoff, New Jersey 07481.
WHEREAS, the Executive desires to enter into an agreement of employment
with the Company in accordance with the terms and conditions set forth herein;
and
WHEREAS, the Company desires to employ the Executive as its Executive Vice
President, General Counsel and Secretary in accordance with the terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. Term of Employment. The initial term of employment shall begin on July 1,
1997 (the "Effective Date") and shall continue in effect until the third
anniversary of the Effective Date (such period being the "Initial Term"). On
July 1 of each year, beginning on July 1, 1998, this Agreement shall
automatically be renewed for successive two year periods, unless at least ninety
(90) days prior to the end of each renewal date either party hereto gives
written notice to the other party of its intention not to renew this Agreement
and, as provided below, shall remain in effect following a Change in Control.
This Agreement may be terminated at any time during its initial term or during
any renewal term solely in accordance with the terms and conditions of Section 5
hereof.
2. Duties
2.1 Position. The Company hereby employs the Executive in an executive
capacitY with the title of Executive Vice President, General Counsel and
Secretary of the Company, and the Executive hereby accepts such employment and
undertakes and agrees to serve in such capacities. In such capacities, the
Executive shall have such powers, perform such duties and fulfill such
responsibilities typically associated with such positions in other publicly-held
companies, including, without limitation, planning, supervision and control of
the Company's administrative and legal divisions, and such other general powers
and duties of an operational or supervisory nature usually vested in the offices
held by her. As Secretary, the Executive shall attend meetings of the Board of
Directors and the Shareholders of the Company and record the proceedings
thereof. Performance of her duties hereunder shall in no event require that the
Executive work on a regular basis at any location other than within twenty (20)
miles of the Company's present office location. The Executive shall devote
substantially all of her working time and efforts to the performance of her
duties hereunder. The Executive shall report directly to the Chief Executive
<PAGE>
Officer ("CEO") of the Company, and shall have the authority to hire and
discharge any employee within her areas of responsibility.
2.2 Limitation on Other Employment. During the term of her employment
hereunder, the Executive will not engage in any other occupation for gain,
profit or pecuniary advantage, without the consent of the CEO of the Company;
provided, however, that this limitation shall not be construed as preventing her
from (a) serving on the board of directors of any corporation not directly
competitive with the Company (provided that Executive has obtained the approval
of the CEO), and (b) investing or trading in securities or other forms of
investment, in each case so long as such activities do not materially interfere
with the performance of her duties hereunder and such investments do not
represent the ownership of 5% or more of the capital stock of publicly traded
entities.
3. Compensation.
3.1 Base Salary. In consideration of the services rendered hereunder, the
Company shall pay the Executive during the Initial Term of this Agreement a base
salary at the rate of TWO HUNDRED FORTY THOUSAND DOLLARS ($240,000) per annum or
at such higher rate as the CEO may reasonably determine ("Base Salary"), which
amount will be payable to her in bi-weekly installments (or at such intervals as
other salaried employees of the Company are paid). The amount of the Executive's
Base Salary shall be reviewed annually by the CEO but shall not be reduced
without written consent of the Executive.
3.2 Incentive Compensation.
(a) To further the attainment of the Company's long-term profit and
growth objectives, the Executive shall be eligible to receive an incentive bonus
equal, in the initial year of employment, to no less a percentage of the
Executive's Base Salary as that percentage attainable by the Executive under
Level 29 of the currently effective Incentive Compensation Plan ("ICP").
Specific annual entitlements to bonus awards shall be predicated on the
Executive's performance and subject to the Company achieving its operating
targets, consistent with the rules as set forth in the ICP. Until such a time as
the Executive and the CEO agree on the individual performance criteria of the
Executive, bonus awards shall be predicated 70% on the Company's performance, as
calculated for the CEO, and 30% on the CEO's evaluation of the Executive.
(b) The Executive shall participate in all other Bonus, Long-Term
Capital Accumulation and/or Stock-Based Programs that the Company may adopt
from time to time.
(c) To further provide Executive with appropriate incentive and to
acquire a proprietary interest in the long-term success of the Company, the
Company hereby grants, pursuant to the Company's 1996 Omnibus Plan (the
"Plan"), fifty thousand (50,000) options to acquire Company Stock. Twenty
thousand (20.000) of these options shall be Non-Qualified Stock Options
("NQO") and thirty thousand (30.000) of these options shall be Incentive Stock
Options ("ISO"). The option exercise price payable shall be $0.01 per share of
Company Stock for the
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NQO's and fair market value at the date of this Agreement for ISO's. The term of
the option shall be ten (10) years and 20% of the options shall vest on the date
of this Agreement, with an additional 20% vesting on each of the first, second,
third and fourth anniversaries hereof. All capitalized terms shall have the
meaning specified in the Plan.
4. Benefits.
4.1 Benefit Programs. The Executive will be included in all group insurance
plans ("Insurance Plans"), retirement plans, and other benefit plans and
arrangements (such retirement and other benefit plans and arrangements, together
with the Insurance Plans, the "Benefit Program") available to executives of
the Company, as such plans may be or have been adopted from time to time. The
Company will provide to the Executive the specific benefits listed on Schedule A
hereto. The Executive shall be a Class B Participant in the Company's SERP and,
pursuant to Section II L (1)(f) of such SERP, "Service" (and employment for
purposes of Sections III (B) and IV (A)) has been deemed by the Board of
Directors of the Company to commence as of July 1, 1992.
4.2 Vacation. Executive shall be entitled to four (4) weeks of vacation
with pay during each twelve (12) month period of employment under this
Agreement.
4.3 Automobile and Other Expenses. The Company will provide the Executive
with an automobile of a type mutually agreed upon and the Company will pay, or
reimburse her for, all business related operating expenses of such automobile
(including, without limitation, insurance, service, repairs, gasoline and oil).
The Company will also reimburse the Executive for her ordinary and customary
business expenses incurred in the performance of her duties hereunder.
5. Termination
5.1 Termination by the Company for Cause.
(a) Definition. The Company may terminate the Executive's employment
hereunder for "Cause" which shall be limited to:
(i) Gross neglect or dereliction in the performance of Executive's
duties or other grave misconduct by her and the failure to cure such situation
within twenty days after receipt of a notice thereof from the Board of
Directors,
(ii) Executive's engaging in conduct which has caused demonstrable
and serious injury to the Company, monetary or otherwise, as evidenced by a
written determination authorized by the Board of Directors of the Company, or
(iii) Executive's conviction for or plea to a felony or for any
lesser crime which involves the property of the Company.
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(b) Compensation upon Termination for Cause. Upon the termination of
the Executive's employment for Cause, the Company shall pay the Executive her
Base Salary, prorated Incentive Compensation and continued participation in
the Benefit Program, through the effective date of such termination.
5.2 Termination For Disability or Death.
(a) Disability. The Company may terminate the Executive's employment
hereunder in the event of the Executive's permanent disability. For the purposes
of this Agreement, permanent disability shall mean the Executive's inability,
whether mental or physical, to perform the regular duties of her employment on a
full-time continuous basis for six (6) consecutive months (the "Disability
Period"). If a policy of disability insurance is in effect insuring the
Executive, then in no event shall Executive be deemed to be disabled until she
is determined to be entitled to receive disability income payments pursuant to
such disability policy. During the Disability Period, the Company shall (i) pay
the Executive her full Base Salary then in effect, as well as any ICP benefit to
which she would otherwise be entitled, reduced by any amounts which she actually
receives under any disability plan maintained by the Company during the
Disability Period, and (ii) shall continue her participation in the Benefit
Program. The Company shall notify the Executive in writing of any such finding
on its part at the end of the Disability Period. If the Company and the
Executive are unable to agree whether she is so disabled the question shall be
decided by a panel of three physicians, one to be designated by the Company,
one by the Executive and one by the first two so designated. The determination
of the panel shall be final and binding upon the parties with costs of the panel
to be paid by the Company.
(b) Death. The Executive's employment hereunder will terminate upon
the Executive's death.
(c) Compensation Upon Termination For Disability or Death.
(i) If the Company terminates the Executive's employment due to
permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall
pay the Executive her monthly Base Salary then in effect for one (1) year after
her termination, reduced by any amounts to which she actually receives under any
disability plan maintained by the Company and shall pay the Executive when due,
a pro-rata portion of the bonus determined pursuant to (iii) below corresponding
to the period of her employment during the termination year.
(ii) If the Executive's employment is terminated due to her death,
pursuant to Subsection 5.2(b) herein, the Company shall pay the Executive's
estate or designated beneficiary (A) the Executive's Base Salary and any other
amounts due or earned through the date of death, and (B) until the end of the
fiscal year in which occurred the date of death or, if greater, for three months
following the date of death, the Executive's Base Salary as then in effect,
and (C) a pro-rata portion of the bonus determined pursuant to (iii) below
corresponding to the period of her employment during the termination year.
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(iii) For purposes of determining the bonus payable in the year of
termination, the Company shall pay a bonus equal to the amount of the current
year's bonus which could have been paid to Executive for the year of
termination, pro-rated for the period of her employment during the termination
year.
(d) Benefits upon Termination for Death or Disability.
(i) If the Company terminates the Executive's employment due to her
permanent disability, pursuant to Subsection 5.2(a) herein, the Company shall
continue to provide her and her dependents coverage under the Insurance Plans,
at her option, for the longer of one year or the period required by applicable
law. The Company shall provide such coverage at its expense (except with respect
to those costs for which the Executive was responsible prior to the termination
of employment).
(ii) If the Executive's employment is terminated due to her death,
pursuant to Subsection 5.2(b) herein, the Company shall continue to provide
the Executive's dependents medical insurance coverage, at their option, for
the longer of one (1) year after her death or the period required by applicable
law. The Company shall provide such coverage at its expense (except for those
costs for which the Executive was responsible prior to her death).
5.3 Good Reason. Termination By The Executive.
(a) Good Reason. The Executive may terminate her employment during the
Employment Period hereunder for "Good Reason" (i) upon the failure by the
Company (or its stockholders as the case may be) to elect or reelect or to
appoint or reappoint the Executive to the offices of Executive Vice President,
General Counsel and Secretary of the Company, or (ii) after the occurrence,
without the written consent of the Executive, of an event constituting a
material breach of this Agreement by the Company that has not been fully cured
within twenty (20) days after written notice thereof has been given by the
Executive to the Company, or (iii) upon the occurrence of any action taken by
the Company which would constitute a constructive termination; provided, that,
in addition to and without limiting the generality of the foregoing, on and
after a Change in Control (as defined in Section 5.3(c)) herein), any one of the
following events shall be deemed a material breach of this Agreement:
(i) the assignment to the Executive of any duties inconsistent with
the Executive's then status as an executive officer of the Company or a
substantial adverse alteration in the nature of the Executive's responsibilities
from those in effect immediately prior to the Change in Control;
(ii) a reduction by the Company in the Executive's Base Salary as
in effect immediately prior to the Change in ControL;
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(iii) a reduction in the aggregate percentage upon which the
Executive's Incentive Compensation is determined following the Change of Control
unless equivalent reductions are made generally for other executives of the
Company.
(iv) the relocation of Executive's principal place of employment,
without her consent, to a location more than twenty (20) miles from the place
of such employment immediately prior to the Change in Control;
(v) the failure by the Company to continue to provide the Executive
with benefits substantially similar to those enjoyed by Executive under the
Benefit Program, as in effect immediately prior to the Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the Executive of any
material fringe benefit enjoyed by the Executive immediately prior to the Change
in Control, or the failure by the Company to provide the Executive with the
number of paid vacation days to which Executive is entitled on the basis of
years of service with the Company in accordance with the Company's normal
vacation policy in effect immediately prior to Change in Control;
(vi) the failure of a successor to the Company to expressly assume
and agree to perform this Agreement pursuant to Section 5.5 hereof.
(b) Compensation and Benefits upon Termination by The Executive.
(i) In the event of a termination of this Agreement by the
Executive, without Good Reason, the Company shall provide to her her Base
Salary, the pro-rata portion of the bonus determined pursuant to Section
5.2(c)(iii) corresponding to the period of his employment during the
termination year and continued participation in the Benefit Program, through the
effective date of such termination.
(ii) If the Executive terminates her employment hereunder for Good
Reason, (A) if there has not occurred a Change in Control, the Company shall
also pay her, as liquidated damages under this Agreement, her monthly Base
Salary then in effect for the balance of this Agreement then in effect, but for
not less than two years plus the pro-rata portion of the bonus determined
pursuant to Section 5.2(c)(iii); (B) if there has occurred a Change in Control,
the Company shall pay her, as liquidated damages under this Agreement, a lump
sum equal to 2.99 times the sum of her Base Salary then in effect plus the bonus
earned by her during the immediately preceding fiscal year of the Company, and
(C) in either case, the Executive's employment shall be deemed to continue for
the balance of the Agreement for purposes of determining her participation in
the Benefit Program; provided, however, that if such participation by her after
termination of employment is not permitted under any such plan, the Company will
provide her with the equivalent benefits. The Company will pay the total costs
of the Executive's participation in such plans or the equivalent thereof. During
the period the Executive will have full use of the Company-supplied automobile.
The Executive also will be provided with out placement assistance utilizing a
consultation service designated and paid for by the Company.
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Furthermore, all stock options granted to Executive shall immediately vest and
be exercisable for a period of 12 months following termination.
(c) Definition of Change in Control. A "Change in Control" shall mean
the occurrence of an event set forth in any one of the following paragraphs:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting power
of the Company's then outstanding securities, excluding any Person who becomes
such a Beneficial Owner in connection with a transaction described in clause (A)
of paragraph (iii) below and excluding a transaction whereby a Person becomes
the Beneficial Owner of 20% or more of the combined voting power of the
Company's then outstanding securities, but such transaction does not transfer
the power to control the management or the policies of the Company; or
(ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any other corporation,
other than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof) at least 60% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
Person is or becomes the Beneficial Owner, directly or indirectly, of securities
of the Company (not including in the securities Beneficially' Owned by such
Person any securities acquired directly from the Company or its Affiliates other
than in connection with the acquisition by the Company or its Affiliates of a
business) representing 20% or more of the combined voting power of the Company's
then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets, other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an
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entity, at least 60% of the combined voting power of the voting securities of
which are owned by the stockholders of the Company in substantially the same
proportions as their ownership of the Company immediately prior to such sale.
For purposes of this Section 5.3(c), the following definitions shall apply:
"Person" shall have the meaning given in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Act"), as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company
or any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
Affiliates, (iii) an underwriter temporarily holding securities pursuant to an
offering of such securities, or (iv) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company. "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Act. "Affiliate" shall have
the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Act.
5.4 Termination by the Company other than for Cause.
(a) Compensation Upon Termination by the Company other than for Cause.
If the Company terminates the Executive's employment hereunder without "Cause,"
the Company shall pay the Executive the amounts described in 5.3(b)(ii).
(b) Benefits Upon Termination by the Company other than for Cause. If
the Company terminates the Executive's employment hereunder without "Cause," the
Executive's employment shall be deemed to continue for the balance of the
Agreement for purposes of determining her participation in the Benefit Program
existing prior to the termination or under any equivalent plan providing the
same coverage which may be substituted for any such plan; provided, however,
that if such participation by her after termination of employment is not
permitted under any such plan, the Company will provide her with the equivalent
benefits. The Company will pay the total costs of the Executive's participation
in such plans or the equivalent thereof. During this period the Executive will
have full use of the Company-supplied automobile. The Executive also will be
provided with out-placement assistance utilizing a consultation service
designated and paid for by the Company. Furthermore, all stock options granted
to Executive shall immediately vest and be exercisable for a period of 12 months
following termination.
5.5 Successor. The Company, or any entity which controls the Company, shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company by written agreement expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Company
would be required to perform if no such succession had occurred. Failure of the
Company or a controlling entity to obtain such agreement prior to the
effective date of any such succession followed by failure of the successor to
honor this Agreement shall be a breach of this Agreement and shall entitle the
Executive to the rights and benefits hereunder as though she had terminated her
employment with the Company for Good Reason pursuant to paragraph 5.3 hereof
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(including those provisions which concern compensation following a Change in
Control), whether or not she terminates her employment with the Company. As used
in this Agreement, "Company" shall mean the Company as defined above and any
successor to all or substantially all of its business or assets which becomes
bound by all of the terms and conditions of this Agreement.
6. Restrictions.
6.1 Confidential Information. The Executive agrees that during and after
the period of her employment she will not, without authorization from the
Company, divulge, disclose or otherwise communicate to any person or company any
information of a confidential nature pertaining to specific details of the
Company's business, functions or operations, except in connection with the
discharge of her duties hereunder, or pursuant to the order of a court of
competent jurisdiction. The Executive further agrees that, upon termination of
her employment with the Company for any reason, she will promptly return to the
Company all books and records of or pertaining to the Company's business, and
all other property belonging to the Company which is in her custody or
possession.
6.2 Non-Compete. During her employment by the Company and in the event she
is terminated by the Company for Cause or terminates her employment without Good
Reason, for twelve (12) months thereafter, subject to Section 2.2 above, the
Executive shall not compete with the Company in any activity relating to the
business of the Company as conducted by the Company during the term of this
Agreement. For purposes of the preceding sentence, competition shall include,
without limitation, direct or indirect competition by the Executive, whether as
an owner, officer, director, employer, partner, consultant, advisor, contractor,
principal agent, licensor, employee or affiliate of a person firm, venture or
corporation that so competes with the Company. Without the prior written
approval of the CEO, the Executive further agrees that during the twelve (12)
month period following the termination of this Agreement for any reason she will
not solicit for employment any employee of the Company. Notwithstanding the
above, competition shall not be deemed to include the practice of law after
termination of employment.
6.3 Cause of Action. The parties hereby declare that the rights of the
Company are of a unique nature, the loss of which may cause irreparable harm,
and that it may be impossible to measure in money the damages which will accrue
to the Company by reason of the loss of such rights or a failure by the
Executive to perform or adhere to any of the obligations under Sections 6.1 and
6.2 hereof. The Executive expressly acknowledges that remedies at law alone will
be inadequate to compensate the Company for any breach or violation of any of
the provisions of Sections 6.1 or 6.2 hereof, and that the Company, in addition
to all other remedies hereunder or thereunder, shall be entitled, as a matter of
right, to seek injunctive relief, including specific performance, with respect
to any such breach of violation. in any court of competent jurisdiction.
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7. Legal Matters.
7.1 Resolution of Conflict. Any and all disputes, claims and controversies
between the parties hereto concerning the validity, interpretation, performance,
termination or breach of this Agreement, which cannot be resolved by the parties
within ninety (90) days after such dispute, claim or controversy arises shall,
at the option of either party, be referred to and finally settled by
arbitration. Such arbitration shall be initiated by the initiating party giving
notice (the "Arbitration Notice") to the other party (the "Respondent") that it
intends to submit such dispute, claim or controversy to arbitration. Each party
shall, within thirty (30) days of the date the Arbitration Notice is received
by the Respondent, designate a person to act as an arbitrator, if either party
fails to designate a person to Act as an arbitrator within the time specified
herein the arbitration shall be conducted by the sole designated arbitrator.
The two arbitrators appointed by the parties shall, within thirty (30) days
after their designation appoint a third arbitrator who shall act as presiding
arbitrator (the "Presiding Arbitrator"). If the two arbitrators designated by
the parties are unable to appoint a Presiding Arbitrator, the Presiding
Arbitrator shall be appointed according to the rules of the American
Arbitration Association as in effect on the date the notice of submission to
arbitration is given (the "Rules").
Such arbitration shall be held in New Jersey in accordance with the Rules
except as otherwise expressly provided herein. The arbitrators shall, by
majority vote, render a written decision stating reasons therefor in reasonable
detail within three (3) months after the appointment of all the arbitrators.
Each party shall bear its own costs and attorneys fees. All other costs and
expenses of arbitration shall be apportioned between the parties by the
arbitrators. The award of the arbitrators shall be made in United States
currency and shall be final and binding, and judgment thereon may be rendered by
any court having jurisdiction thereof, or application may be made to such court
for the judicial acceptance of the award and an order of enforcement as the case
may be.
7.2 Agreement Confidential. Both the Executive and the Company will keep
the terms of this Agreement confidential provided that this provision shall not
restrict any disclosure by the Company pursuant to any applicable law,
regulation or judicial order.
7.3 Notices. All notices, requests, consents and other communications,
required or permitted to be given hereunder, shall be in writing and shall be
deemed to have been duly given if delivered personally or mailed first class,
postage prepaid, by registered or certified mail, addressed to either party at
the address first written above (or to such other address as either party shall
designate by notice in writing to the other party in accordance herewith).
8. Indemnification. The Company desires to have the Executive serve as an
executive officer and general counsel of the Company, free from undue concern
for unpredictable, inappropriate or unreasonable legal risks and personal
liabilities by reason of her acting in good faith in the performance of her duty
to the Company and will, therefore indemnify the Executive to the fullest
extent permitted under Delaware law; and the Executive desires to serve as an
executive officer
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and general counsel of the Company; provided that she is furnished with the
indemnity set forth hereinafter.
8.1 Definitions. As used in this Agreement:
(a) The Term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought in the name of the Company
or otherwise and whether of a civil, criminal, administrative or investigative
nature, including, but not limited to, actions, suits or proceedings brought
under and/or predicated upon the Securities Act of 1933, as amended, and/or the
Securities Exchange Act of 1934, as amended, and/or their respective state
counterparts and/or any rule or regulation promulgated thereunder, in which
Executive may be or may have been involved as a party or otherwise by reason of
the fact that Executive is or was a director and/or officer of the Company, by
reason of any action taken by her or of any inaction on her part while acting
as such director and/or officer or by reason of the fact that he is or was
serving at the request of the Company as a director, officer, employee or agent
of another Company, partnership, joint venture, trust or other enterprise,
whether or not she is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
(b) The term "Expenses" includes, without limitation thereto, expenses
of investigations, judicial or administrative proceedings or appeals, amounts
paid in settlement by or on behalf of Executive, attorneys' fees and
disbursements and any expenses of establishing a right to indemnification under
this Agreement, but shall not include the amount of judgments, fines or
penalties actually levied against Executive.
8.2 Indemnity in Third Party Proceedings. The Company shall indemnify
Executive in accordance with the provisions of this section if Executive is a
party to or threatened to be made party to or otherwise involved in any
Proceeding (other than a Proceeding by or in the name of the Company to procure
a judgment in its favor), by reason of the fact that Executive is or was a
director and/or officer of the Company or is or was acting at the request of the
Company as a director, officer, employee, or agent of another Company,
partnership, joint venture, trust or other enterprise, against all Expenses,
liabilities, judgments, fines and penalties, actually and reasonably incurred by
Executive in connection with the defense or settlement of such Proceeding,
provided that Executive acted in good faith and in a manner which she reasonably
believed to be in or not opposed to the best interests of the Company and, in
the case of a criminal proceeding, in addition, had no reasonable cause to
believe that her conduct was unlawful. The termination of any such Proceeding by
judgment, order of court, settlement, conviction, or upon a plea of nolo
contendere, or its equivalent, shall not, of itself, create a presumption that
Executive did not act in good faith in a manner which she reasonably believed to
be in the best interests of the Company, and with respect to any criminal
proceeding, that such person had reasonable cause to believe that her conduct
was unlawful.
8.3 Indemnity in Proceedings By or In the Name of the Company. The Company
shall indemnify Executive in accordance with the provisions of this section if
Executive is a
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party to or threatened to be made a party to or otherwise involved in any
Proceeding by or in the name of the Company to procure a judgment in its favor
by reason of the fact that Executive was or is a director and/or officer of the
Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another Company, partnership, joint venture, trust
or other enterprise against all Expenses actually incurred by Executive in
connection with the defense or settlement of such Proceeding, but only if she
acted in good faith and in a manner which she reasonably believed to be in or
not opposed to the best interests of the Company, except that no indemnification
for Expenses shall be made under this Paragraph 8.3 in respect of any claim,
issue or matter as to which Executive will have been adjudged to be liable to
the Company, unless and only to the extent that any court in which such
Proceeding is brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
Executive is fairly and reasonably entitled to indemnity for such expenses as
such court shall deem proper.
8.4 Indemnification of Expenses of Successful Party. Notwithstanding any
other provision of this Agreement, to the extent that Executive has been
successful on the merits or otherwise, in defense of any Proceeding or in
defense of any claim, issue or matter therein, including the dismissal of an
action without prejudice, Executive shall be indemnified against all Expenses
incurred in connection therewith.
8.5 Advances of Expenses. Any Expenses incurred by Executive in any
Proceeding described in this Agreement shall be paid by the Company in advance
and on or prior to the date when payment of such Expenses is due.
8.6 Indemnification Hereunder Not Exclusive. The indemnification provided
by this Agreement shall not be deemed exclusive of any other rights to which
Executive may be entitled under the Certificate of Incorporation, the Bylaws,
any agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise.
9. Miscellaneous.
9.1 Governing Law. Except for the indemnification provision contained in
Section 8 which shall be governed by the laws of the State of Delaware, this
Agreement shall be governed by and construed and enforced in accordance with the
laws of the State of New Jersey applicable to agreements made and to be
performed within New Jersey, without regard to the principles of conflict of
laws.
9.2 Headings. The sections headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.3 Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and from and
after the date hereof supersedes all prior agreements, arrangements and
understandings, written or oral, relating to the
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subject matter hereof provided, however, that the benefits conferred under this
Agreement are in addition to, and not in lieu of, any and all benefits conferred
under plans and arrangements currently in effect for the Executive.
9.4 Assignment. This Agreement is binding upon and shall insure to the
benefits of the Executive and her estate, but the Executive's rights and
obligations hereunder may not be assigned or pledged by her.
9.5 Modification. This Agreement may be amended, modified, superseded,
canceled, renewed or extended, and the terms or covenants hereof may be waived,
only by written instrument executed by both of the parties hereto or in the
case of a waiver, by the party waiving compliance.
9.6 Section 162(m). In the event compensation payable to Executive
hereunder in any single tax year would result in the non-deductibility of a
portion of such compensation by the Company solely by reason of Section 162(m)
of the Internal Revenue Code of 1986, as amended, then, and in such event, the
Company shall be permitted to defer payment of such non-deductible amount to the
Executive to be paid to her on the first day of the succeeding tax year of the
Company.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement with legal and binding effect as of the day and year first above
written.
DIAGNOSTIC/RETRIEVAL SYSTEMS. INC.
By: /s/ MARK S. NEWMAN
-----------------------------------
Mark S. Newman, Chairman,
President and Chief Executive
Officer
THE EXECUTIVE
/s/ NINA LASERSON DUNN
--------------------------------------
Nina Laserson Dunn
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SCHEDULE A
Group/Executive Benefits
GROUP PLANS BENEFIT
- ----------- -------
DRS Group Medical/Dental Plan Varies
DRS Group Life Insurance Plan $50,000
DRS Group AD&D $500,000
DRS Long Term Disability Plan $5,000 monthly benefit
DRS Retirement/Savings Plan (401K) Varies
DRS Reimbursement Account Plan (IRC 125) Varies (See below)
EXECUTIVE PLANS/BENEFITS BENEFIT
- ------------------------ -------
Executive Incentive Compensation Plan Varies
1996 Omnibus Plan Option for 50,000 shares granted
at present
Life Insurance $1,200,000
Long Term Disability $9,000 monthly benefit.
DRS Reinbursement Account: one time annual deposit
to the reimbursement account (amount may vary from $7,500 for 1997
year to year)
Supplemental Executive Retirement Plan (SERP) Determined at time of
Retirement
AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 19th day of February, 1999, by and between DRS TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), having an address at 5 Sylvan Way,
Parsippany, New Jersey and Richard A. Schneider (the "Executive"), currently
residing at 23 Old Town Avenue, Huntington, NY 11743.
WHEREAS, the Executive desires to enter into an agreement of
employment with the Company in accordance with the terms and conditions set
forth herein; and
WHEREAS, the Company desires to employ the Executive as its Executive
Vice President, Finance and Chief Financial Officer in accordance with the terms
and conditions set forth herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. TERM OF EMPLOYMENT. The initial term of employment shall begin on
February l9, 1999 (the "Effective Date") and shall continue in effect until
the first anniversary of the Effective Date (such period being the "Initial
Term"). On February 19 of each year, beginning on February 19, 2000, this
Agreement shall automatically be renewed for successive one year periods,
unless at least ninety (90) days prior to the end of each renewal date
either party hereto gives written notice to the other party of its
intention not to renew this Agreement and, as provided below, shall remain
in effect following a Change in Control. This Agreement may be terminated
at any time during its initial term or during any renewal term solely in
accordance with the terms and conditions of Section 5 hereof.
2. DUTIES.
2.1 POSITION. The Company hereby employs the Executive in an executive
capacity with the title of Executive Vice President, Finance and Chief
Financial Officer of the Company, and the Executive hereby accepts
such employment and undertakes and agrees to serve in such capacities.
In such capacities, the Executive shall have such powers, perform such
duties and fulfill such responsibilities typically associated with
such positions in other publicly held companies. Performance of his
duties hereunder shall in no event require that the Executive work on
a regular basis at any location other than within twenty (20) miles of
the Company's present office location. The Executive shall devote
substantially all of his
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working time and efforts to the performance of his duties hereunder.
The Executive shall report directly to the Chief Executive Officer
("CEO") of the Company.
2.2 LIMITATION ON OTHER EMPLOYMENT. During the term of his employment
hereunder, the Executive will not engage in any other occupation for
gain, profit or pecuniary advantage, without the consent of the CEO of
the Company; provided, however, that this limitation shall not be
construed as preventing him from (a) serving on the board of directors
of any corporation not directly competitive with the Company (provided
that the Executive has obtained the approval of the CEO), and (b)
investing or trading in securities or other forms of investment, in
each case so long as such activities do not materially interfere with
the performance of his duties hereunder and such investments do not
represent the ownership of 5% or more of the capital stock of publicly
traded entities.
3. COMPENSATION.
3.1 BASE SALARY. In consideration of the services rendered hereunder, the
Company shall pay the Executive during the Initial Term of this
Agreement a base salary at the rate of TWO HUNDRED TWENTY THOUSAND
DOLLARS ($220,000) per annum ("Base Salary"), which amount will be
payable to him in bi-weekly installments (or at such intervals as
other salaried employees of the Company are paid). The amount of the
Executive's Base Salary shall be reviewed annually by the CEO but
shall not be reduced without written consent of the Executive.
3.2 INCENTIVE COMPENSATION.
(a) Effective April 1, 1999 the Executive will be eligible to
participate in the DRS Incentive Compensation Plan ("ICP") at a
grade level commensurate with his position. The current grade
level for the Executive is M76. Specific annual entitlements to
bonus awards shall be predicated on the Executive's performance
and subject to the Company achieving its operating targets,
consistent with the rules set forth in the ICP. Because the
Executive is not in the ICP plan for 1999, the Executive will
receive a bonus of $50,000 for FY99 payable on or about July 1,
1999.
(b) The Executive shall participate in all other Bonus, Long-Term
Capital Accumulation and/or Stock-Based Programs that the Company
may adopt from time to time.
(c) To further provide the Executive with appropriate incentive and
to acquire a proprietary interest in the long-term success of the
Company, the Company shall recommend to the Stock Option
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Committee of the Board of Directors that he be granted, pursuant
to the Company's 1996 Omnibus Plan (the "Plan"), [18,750]
options to acquire Company Stock. These options shall be
Non-Qualified Stock Options ("NQO"). The option exercise price
payable shall be the fair market value at the date of the grant.
The term of the option shall be (10) years and 20% of the options
shall vest on the date of grant, with an additional 20% vesting
on each of the first, second, third and fourth anniversaries
thereof. All capitalized terms shall have the meaning specified
in the Plan.
4. BENEFITS.
4.1 BENEFIT PROGRAMS. The Executive will be included in all group
insurance plans ("Insurance Plans"), retirement plans, and other
benefits plans and arrangements (such retirement and other benefit
plans and arrangements, together with the Insurance Plans, the
"Benefit Program") available to executives of the Company, as such
plans may be or have been adopted from time to time. The Company will
provide to the Executive the specific benefits listed on Schedule A
hereto. The Executive shall be a Class B Participant in the Company's
SERP.
4.2 VACATION. The Executive shall be entitled to three (3) weeks of
vacation with pay during each twelve (12) month period of employment
under this Agreement.
4.3 AUTOMOBILE AND OTHER EXPENSES. In accordance with Company policy as
established from time to time, the Company will provide the Executive
with an automobile of a type mutually agreed upon and the Company will
pay, or reimburse him for, all business related operating expenses of
such automobile (including, without limitation, insurance, service,
repairs, gasoline and oil). The Company will also reimburse the
Executive for his ordinary and customary business expenses incurred in
the performance of his duties hereunder.
5. TERMINATION.
5.1 TERMINATION BY THE COMPANY FOR CAUSE.
(a) DEFINITION. The Company may terminate the Executive's employment
hereunder for "Cause" which shall be limited to:
(i) Gross neglect or dereliction in the performance of the
Executive's duties or other misconduct by him and the
failure to cure such situation within twenty days after
receipt of a notice thereof from the Board of Directors,
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(ii) The Executive's engaging in conduct which has caused
demonstrable and serious injury to the Company, monetary or
otherwise, as evidenced by a written determination
authorized by the Board of Directors of the Company, or
(iii) The Executive's conviction for or plea to a felony or for
any lesser crime which involves the property of the
Company.
(b) COMPENSATION UPON TERMINATION FOR CAUSE. Upon the termination of
the Executive's employment for Cause, the Company shall pay the
Executive his Base Salary and continued participation in the
Benefit Program through the effective date of such termination.
5.2 TERMINATION FOR DISABILITY OR DEATH.
(a) DISABILITY. The Company may terminate the Executive's employment
hereunder in the event of the Executive's permanent disability.
For the purposes of this Agreement, permanent disability shall
mean the Executive's inability, whether mental or physical, to
perform the regular duties of his employment on a full-time
continuous basis for six (6) consecutive months (the "Disability
Period"). If a policy of disability insurance is in effect
insuring the Executive, then in no event shall Executive be
deemed to be disabled until he is determined to be entitled to
receive disability income payments pursuant to such disability
policy. During the Disability Period the Company shall (i) pay
the Executive his full Base Salary then in effect, as well as any
ICP benefit to which he would otherwise be entitled, reduced by
any amounts which he actually received under any disability plan
maintained by the Company during the Disability Period, and (ii)
shall continue his participation in the Benefit Program. The
Company shall notify the Executive in writing of any such finding
on its part at the end of the Disability Period. If the Company
and Executive are unable to agree whether he is so disabled the
question shall be decided by a panel of three physicians, one to
be designated by the Company, one by the Executive and one by the
first two so designated. The determination of the panel shall be
final and binding upon the parties with costs of the panel to be
paid by the Company.
(b) DEATH. The Executive's employment hereunder will terminate
upon-the Executive's death.
(c) COMPENSATION UPON TERMINATION FOR DISABILITY OR DEATH.
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(i) If the Company terminates the Executive's employment due to
permanent disability, pursuant to Subsection 5.2(a) herein,
the Company shall pay the Executive his monthly Base Salary
then in effect for one (1) year after his termination,
reduced by any amounts to which he actually receives under
any disability plan maintained by the Company and shall pay
the Executive when due, a pro-rata portion of the bonus
determined pursuant to (iii) below corresponding to the
period of his active employment during the termination
year.
(ii) If the Executive's employment is terminated due to his
death, pursuant to Subsection 5.2 (b) herein, the Company
shall pay the Executive's estate or designated beneficiary
(A) the Executive's Base Salary and any other amounts due
or earned through the date of death, and (B) a pro-rata
portion of the bonus determined pursuant to (iii) below
corresponding to the period of his employment during the
termination year.
(iii) For purposes of determining the bonus payable in the year
of termination, the Company shall pay a bonus equal to the
amount of the current year's bonus which could have been
paid to Executive for the year of termination, pro-rated
for the period of his employment during the termination
year.
(d) BENEFITS UPON TERMINATION FOR DEATH OR DISABILITY.
(i) If the Company terminates the Executive's employment due to
his permanent disability, pursuant to Subsection 5.2(a)
herein, the Company shall continue to provide him and his
dependents coverage under insurance Plans, at his option,
for the longer of one year or the period required by
applicable law. The Company shall provide such coverage at
its expense (except with respect to those costs for which
the Executive was responsible prior to the termination of
employment).
(ii) If the Executive's employment is terminated due to his
death, pursuant to Subsection 5.2(b) herein, the Company
shall continue to provide the Executive's dependents
medical insurance coverage, at their option, for the longer
of one (1) year after his death or the period required by
applicable law. The Company shall provide such coverage at
its expense (except for those costs for which the Executive
was responsible prior to his death).
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<PAGE>
5.3 TERMINATION BY THE EXECUTIVE.
(a) GOOD REASON. The Executive may terminate his employment during
the Employment Period hereunder for "Good Reason" (i) upon the
failure by the Company (or its stockholders as the case may be)
to elect or reelect or to appoint or reappoint the Executive to
the offices of Executive Vice President, Finance and Chief
Financial Officer, or (ii) after the occurrence, without the
written consent of the Executive, of an event constituting a
material breach of this Agreement by the Company that has not
been fully cured within twenty (20) days after written notice
thereof has been given by the Executive to the Company, or (iii)
upon the occurrence of any action taken by the Company which
would constitute a constructive termination; provided, that, in
addition to and without limiting the generality of the foregoing,
on and after a Change in Control (as defined in Section 5.3(c)
herein), any one of the following events shall be deemed a
material breach of this Agreement:
(i) the assignment to the Executive of any duties inconsistent
with the Executive's then status as an executive officer of
the Company or a substantial adverse alteration in the
nature of the Executive's responsibilities from those in
effect immediately prior to the Change in Control;
(ii) a reduction by the Company in the Executive's Base Salary
as in effect immediately prior to the Change in Control;
(iii) a reduction in the aggregate percentage upon which the
Executive's Incentive Compensation is determined following
the Change of Control unless equivalent reductions are made
generally for other executives of the Company;
(iv) the relocation of Executive's principal place of
employment, without his consent, to a location more than
twenty (20) miles from the place of such employment
immediately prior to the Change in Control;
(v) The failure by the company to continue to provide the
Executive with benefits substantially similar to those
enjoyed by Executive under the Benefit Program, as in
effect immediately prior to the Change in Control, the
taking of any action by the company which would directly
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<PAGE>
or indirectly materially reduce any of such benefits or
deprive the Executive of any material fringe benefit enjoyed
by the Executive immediately prior to the Change in Control,
or the failure by the Company to provide the Executive with
the number of paid vacation days to which Executive is
entitled on the basis of years of service with the Company
in accordance with the Company's normal vacation policy in
effect immediately prior to Change in Control; and
(vi) The failure of a successor to the Company to expressly
assume and agree to perform this Agreement pursuant to
Section 5.5 herein.
(b) COMPENSATION AND BENEFITS UPON TERMINATION BY THE EXECUTIVE.
(i) In the event of a termination of this Agreement by the
Executive, without Good Reason, the company shall provide
to him his Base Salary, corresponding to the period of his
employment and continued participation in the Benefit
Program, through the effective date of such termination.
(ii) If the Executive terminates his employment hereunder for
Good Reason, (A) if there has not occurred A Change in
Control, the Company shall also pay him, as liquidated
damages under this Agreement, his monthly Base Salary then
in effect for twelve months following the notice of
termination, plus the pro-rata portion of the bonus
determined pursuant to Section 5.2(c)(iii); (B) if there
has occurred a Change in Control, the Company shall pay
him, as liquidated damages under this Agreement, a lump sum
equal to the sum of the bonus earned by him during the
immediately preceding fiscal year of the Company plus 200%
of his annual Base Salary then in effect, and (C) in either
case, the Executive's employment shall be deemed to
continue for the balance of the Agreement for purposes of
determining his participation in the Benefit Program;
provided, however, that if such participation by him after
termination of employment is not permitted under any such
plan, the Company will provide him with the equivalent
benefits. The Company will pay the total costs of the
Executive's participation in such plans or the equivalent
thereof. During the period the Executive will have full use
of the Company-supplied automobile. The Executive also will
be provided with out-placement assistance utilizing a
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<PAGE>
consultation service designated and paid for by the Company.
Furthermore, all stock options granted to Executive shall
immediately vest and be exercisable for a period of 12
months following termination.
(c) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall mean
the occurrence of an event set forth in any one of the following
paragraphs:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates) representing 20% or more of the combined voting
power of the Company's then outstanding securities,
excluding any Person who becomes such a Beneficial Owner in
connection with a transaction described in clause (A) of
paragraph (iii) below and excluding a transaction whereby a
person becomes the Beneficial Owner of 20% or more of the
combined voting power of the Company's then outstanding
securities, but such transaction does not transfer the
power to control the management or the policies of the
Company; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then
serving: individuals who, on the date hereof, constitute
the Board and any new director (other than a director whose
initial assumption of office is in connection with an
actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election
of directors of the Company) whose appointment or election
by the Board or nomination for election by the Company's
stockholders was approved or recommended by a vote of at
least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or
whose appointment, election or nomination for election was
previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company
with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities
of the Company outstanding immediately prior to such merger
or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting
8
<PAGE>
securities of the surviving entity or any parent thereof) at
least 60% of the combined voting power of the securities of
the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation,
or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not including
in the securities Beneficially Owned by such Person any
securities acquired directly from the Company or its
Affiliates other than in connection with the acquisition by
the Company or its Affiliates of a business) representing
20% or more of the combined voting power of the Company's
then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's
assets, other than a sale or disposition by the Company of
all or substantially all of the Company's assets to an
entity, at least 60% of the combined voting power of the
voting securities of which are owned by the stockholders of
the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
For purposes of this Section 5.3(c), the following definitions shall apply:
"Person" shall have the meaning given in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Act"), as modified and used in Section
13(d) thereof, except that such term shall not include (i) the Company or any of
its subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company. "Beneficial Owner" shall have the meaning set
forth in Rule 13d-3 under the Act. "Affiliate" shall have the meaning set forth
in Rule 12b-2 promulgated under Section 12 of the Act.
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5.4 TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE.
(a) COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR
CAUSE. If the Company terminates the Executive's employment
hereunder without "Cause", the Company shall pay the Executive
the amounts described in 5.3(b)(ii)(A).
(b) BENEFITS UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. if
the company terminates the Executive's employment hereunder
without "Cause", the Executive's employment shall be deemed to
continue for the balance of the Agreement for purposes of
determining his participation in the Benefit Program existing
prior to the termination or under any equivalent plan providing
the same coverage which may be substituted for any such plan;
provided, however, that if such participation by him after
termination of employment is not permitted under any such plan,
the Company will provide him with the equivalent benefits. The
Company will pay the total costs of the Executive's participation
in such plans or the equivalent thereof. During this period the
Executive will have full use of the Company-supplied automobile.
The Executive also, will be provided with out-placement
assistance utilizing a consultation service designated and paid
for by the Company. Furthermore, all stock options granted to
Executive shall immediately vest and be exercisable for a period
of 12 months following termination.
5.5 SUCCESSOR. The Company, or any entity which controls the Company,
shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the
business or assets of the Company by written agreement expressly to
assume and agree to perform this Agreement in the same manner and to
the same extent as the Company would be required to perform if no such
succession had occurred. Failure of the Company or a controlling
entity to obtain such agreement prior to the effective date of any
such succession followed by failure of the successor to honor this
Agreement shall be a breach of this Agreement and shall entitle the
Executive to the rights and benefits hereunder as though he had
terminated his employment with the Company for Good Reason pursuant to
paragraph 5.3 hereof (including those provisions which concern
compensation following a Change in Control), whether or not he
terminates his employment with the Company. As used in this Agreement,
"Company" shall mean the Company as defined above and any successor to
all or substantially all of its business or assets which becomes bound
by all of the terms and conditions of this Agreement.
10
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6. RESTRICTIONS.
6.1 CONFIDENTIAL INFORMATION. The Executive agrees that during and after
the period of his employment he will not, without authorization from
the Company, divulge, disclose or otherwise communicate to any person
or company any information of a confidential nature pertaining to
specific details of the Company's business, functions or operations,
except in connection with the discharge of his duties hereunder, or
pursuant to the order of a court of competent jurisdiction. The
Executive further agrees that, upon termination of his employment with
the Company for any reason, he will promptly return to the Company all
books and records of or pertaining to the Company's business, and all
other property belonging to the Company which is in his custody or
possession.
6.2 NON-COMPETE. During his employment by the Company and in the event he
is terminated by the Company for Cause or terminates his employment
without Good Reason, for twelve (12) months thereafter, subject to
Section 2.2 above, the Executive shall not compete with the Company in
any activity relating to the Business of the Company as conducted by
the Company during the term of this Agreement. For purposes of the
preceding sentence, competition shall include, without limitation,
direct or indirect competition by the Executive, whether as an owner,
officer, director, employer, partner, consultant, advisor, contractor,
principal agent, licensor, employee or affiliate of a person firm,
venture or corporation that so competes with the Company. Without the
prior written approval of the CEO, the Executive further agrees that
during the twelve (12) month period following the termination of this
Agreement for any reason he will not solicit for employment any
employee of the Company. It is further agreed and understood that the
Executive shall not engage in any conduct or communication which shall
disparage the Company or interfere with its current or prospective
business relationships.
6.3 CAUSE OF ACTION. The parties hereby declare that the rights of the
Company are of a unique nature, the loss of which may cause
irreparable harm, and that it may be impossible to measure in money
the damages which will accrue to the company by reason of the loss of
such rights or a failure by the Executive to perform or adhere to any
of the obligations under Sections 6.1 and 6.2 hereof. The Executive
expressly acknowledges that remedies at law alone will be inadequate
to compensate the Company for any breach or violation of any of the
provisions of Sections 6.1 or 6.2 hereof, and that the Company, in
addition to all other remedies hereunder or thereunder, shall be
entitled, as a matter of right, to seek injunctive relief, including
specific performance, with respect to any such breach of violation, in
any court of competent jurisdiction.
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7. LEGAL MATTERS.
7.1 RESOLUTION OF CONFLICT. Other than as provided in Section 6.3 herein
with respect to obligations contained in Sections 6.1 and 6.2 herein,
any and all disputes, claims and controversies between the parties
hereto concerning the validity, interpretation, performance,
termination or breach of this Agreement, which cannot be resolved by
the parties within ninety (90) days after such dispute, claim or
controversy arises shall, at the option of either party, be referred
to and finally settled by arbitration. Such arbitration shall be
initiated by the initiating party giving notice (the "Arbitration
Notice") to the other party (the "Respondent") that it intends to
submit such dispute, claim or controversy to arbitration. Each party
shall, within thirty (30) days of the date the Arbitration Notices is
received by the Respondent, designate a person to act as an
arbitrator, if either party fails to designate a person to Act as an
arbitrator within the time specified herein the arbitration shall be
conducted by the sole designated arbitrator. The two arbitrators
appointed by the parties shall, within thirty (30) days after their
designation appoint a third arbitrator who shall act as presiding
arbitrator (the "Presiding Arbitrator"). If the two arbitrators
designated by the parties are unable to appoint a Presiding
Arbitrator, the Presiding Arbitrator shall be appointed according to
the rules of the American Arbitration Association as in effect on the
date the notice of submission to arbitration is given (the "Rules").
Such arbitration shall be held in New Jersey in accordance with the
Rules except as otherwise expressly provided herein. The arbitrators
shall, by majority vote, render a written decision stating reasons
therefor in reasonable detail within three (3) months after the
appointment of all the arbitrators. Each party shall bear its own
costs and attorneys fees. All other costs and expenses of arbitration
shall be apportioned between the parties by the arbitrators. The award
of the arbitrators shall be made in United States currency and shall
be final and binding, and judgment thereon may be rendered by any
court having jurisdiction thereof, or application may be made to such
court for the judicial acceptance of the award and an order of
enforcement as the case may be.
7.2 AGREEMENT CONFIDENTIAL. Both the Executive and the Company will keep
the terms of this Agreement confidential provided that this provision
shall not restrict any disclosure by the Company pursuant to any
applicable law, regulation or judicial order.
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7.3 NOTICES. All notices, requests, consents and other communications,
required or permitted to be given hereunder, shall be in writing and
shall be deemed to have been duly given if delivered personally or
mailed first class, postage prepaid, by registered or certified mail,
addressed to either party at the address first written above (or to
such other address as either party shall designate by notice in
writing to the other party in accordance herewith).
8. MISCELLANEOUS.
8. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New Jersey
applicable to agreements made and to be performed within New Jersey,
without regard to the principles of conflict of laws.
8.2 HEADINGS. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
8.3 ENTIRE AGREEMENt. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof,
and from and after the date hereof supersedes all prior agreements,
arrangements and understandings, written or oral, relating to the
subject matter hereof provided, however, that the benefits conferred
under this Agreement are in addition to, and not in lieu of, any and
all benefits conferred under plans and arrangements currently in
effect for the Executive.
8.4 ASSIGNMENT. This Agreement is binding upon and shall inure to the
benefits of the Executive and his estate, but the Executive's rights
and obligations hereunder may not be assigned or pledged by him.
8.5 MODIFICATION. This Agreement may be amended, modified, superseded,
canceled, renewed or extended, and the terms or covenants hereof may
be waived, only be written instrument executed by both of the parties
hereto or in the case of a waiver, by the party waiving compliance.
8.6 SECTION 162(m). In the event compensation payable to Executive
hereunder in any single tax year would result in the non-deductibility
of a portion of such compensation by the Company solely by reason of
Section 162(m) of the Internal Revenue Code of 1986, as amended, then,
and in such event, the Company shall be permitted to defer payment of
such nondeductible amount to the Executive to be paid to him on the
first day of the succeeding tax year of the Company.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement with legal and binding effect as of the day and year first above
written.
DRS TECHNOLOGIES, INC.
/s/ MARK S. NEWMAN
-------------------------------------
BY: Mark S. Newman, Chairman,
President and Chief Executive Officer
THE EXECUTIVE
/s/ RICHARD A. SCHNEIDER
-------------------------------------
Richard A. Schneider
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SCHEDULE A
GROUP PLANS BENEFIT
- ----------------------------------------------- --------------------------
DRS Group Medical/Dental Plan Varies
DRS Group Life Insurance Plan $50,000
DRS Group AD&D $440,000 (2 X salary)
DRS Long Term Disability Plan--Class I $10,000 monthly benefit
DRS Retirement/Savings Plan (401K) Varies
DRS Reimbursement Account Plan (IRC 125) Varies (See below)
EXECUTIVE PLANS/BENEFITS BENEFIT
- ----------------------------------------------- --------------------------
Executive Incentive Compensation Plan Varies
1996 Omnibus Plan (1)
Life Insurance $1,110,000
DRS Reimbursement Account: one time annual $5,000 currently
Deposit to the reimbursement account (amount
may vary from year to year)
Supplemental Executive Retirement Plan (SERP)-- Determined at time of
Class B Participant Retirement
(1) Amount determined by combining resulting DRS shares from NAI option
conversion with additional grant to equal in the aggregate 50,000 shares.
15
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Years Ended March 31, 1999 1998 1997 1996 1995
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
REVENUES $273,428,000 $190,854,000 $143,578,000 $101,454,000 $69,930,000
OPERATING INCOME $ 14,245,000 $ 14,259,000 $ 12,582,000 $ 8,547,000 $ 5,094,000
EARNINGS BEFORE EXTRAORDINARY
ITEM AND INCOME TAXES $ 4,742,000 $ 9,664,000 $ 9,284,000 $ 6,727,000 $ 4,256,000
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986,000 $ 6,372,000 $ 5,663,000 $ 4,103,000 $ 2,604,000
NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000 $ 4,103,000 $ 2,604,000
- -------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA (1)(2)
BASIC EARNINGS PER SHARE $ 0.45 $ 1.13 $ 1.03 $ 0.75 $ 0.51
DILUTED EARNINGS PER SHARE $ 0.44 $ 0.93 $ 0.84 $ 0.69 $ 0.50
BOOK VALUE PER SHARE $ 7.96 $ 7.16 $ 5.90 $ 4.86 $ 4.16
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL POSITION
WORKING CAPITAL $ 13,491,000 $ 42,126,000 $ 32,838,000 $ 33,990,000 $20,317,000
NET PROPERTY, PLANT AND EQUIPMENT $ 34,163,000 $ 22,972,000 $ 19,987,000 $ 16,191,000 $ 9,849,000
TOTAL ASSETS $330,344,000 $163,473,000 $ 97,673,000 $ 97,251,000 $64,590,000
LONG-TERM DEBT, EXCLUDING
CURRENT INSTALLMENTS $102,091,000 $ 56,532,000 $ 30,801,000 $ 32,608,000 $11,732,000
NET STOCKHOLDERS' EQUITY $ 73,442,000 $ 44,335,000 $ 32,987,000 $ 26,566,000 $22,509,000
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
PRETAX RETURN ON REVENUES (1) 1.7% 5.1% 6.5% 6.6% 6.1%
AFTER TAX RETURN ON REVENUES (1) 1.1% 3.3% 3.9% 4.0% 3.7%
RETURN ON AVERAGE STOCKHOLDERS' EQUITY (1) 5.6% 16.5% 19.0% 16.7% 12.3%
CURRENT RATIO 1.1 1.8 2.2 2.0 1.9
LONG-TERM DEBT, EXCLUDING CURRENT
INSTALLMENTS, TO TOTAL CAPITALIZATION 58.2% 56.0% 48.3% 55.1% 34.3%
INTEREST COVERAGE RATIO (6) 2.83x 4.28x 4.98x 4.69x 5.91x
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
EBIT (3) $ 14,100,000 $ 14,762,000 $ 12,876,000 $ 9,408,000 $ 5,628,000
EBITDA (4) $ 26,511,000 $ 25,821,000 $ 17,903,000 $ 12,578,000 $ 8,108,000
FREE CASH FLOW (5) $ 19,645,000 $ 15,251,000 $ 12,675,000 $ 6,247,000 $ 5,565,000
CAPITAL EXPENDITURES $ 6,866,000 $ 6,570,000 $ 5,228,000 $ 6,331,000 $ 2,543,000
DEPRECIATION AND AMORTIZATION $ 12,411,000 $ 7,059,000 $ 5,027,000 $ 3,170,000 $ 2,480,000
INTERNAL RESEARCH AND DEVELOPMENT $ 5,228,000 $ 4,049,000 $ 3,852,000 $ 649,000 $ 795,000
EMPLOYEES (7) $ 2,180 $ 1,470 $ 1,107 $ 809 $ 565
REVENUES PER EMPLOYEE (8) $ 133,000 $ 124,000 $ 129,000 $ 137,000 $ 130,000
</TABLE>
- ----------
(1) Earnings per share and financial ratios presented and calculated before
extraordinary item in fiscal 1999.
(2) No cash dividends have been distributed in any of the years in the
five-year period ended March 31, 1999.
(3) Earnings before extraordinary items, interest and related expenses, and
income taxes.
(4) Earnings before extraordinary items, interest and related expenses,
income taxes, depreciation and amortization.
(5) EBITDA less capital expenditures.
(6) Ratio of EBITDA to interest and related expenses (primarily amortization
of debt issuance costs).
(7) Indicates the number of employees at March 31 for each of the fiscal
years presented. Included in fiscal 1999, 1998, 1997 and 1996 are
approximately 407, 428, 188 and 155 employees, respectively, from new
operations. (See Note 2 of Notes to Consolidated Financial Statements.)
(8) Based on average number of employees.
-20-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis (MD&A) of the consolidated
financial condition and results of operations of DRS Technologies, Inc. and
Subsidiaries (hereinafter, the Company or DRS) as of March 31, 1999 and 1998,
and for each of the fiscal years in the three-year period ended March 31, 1999.
This discussion should be read in conjunction with the audited consolidated
financial statements and related notes.
The following discussion and analysis contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Persons reading this report
are cautioned that risks and uncertainties are inherent to forward-looking
statements. Accordingly, the Company's actual results could differ materially
from those suggested by such forward-looking statements. Risks include, without
limitation: the effect of the Company's acquisition strategy on future operating
results; the uncertainty of acceptance of new products and successful bidding
for new contracts; the effect of technological changes or obsolescence relating
to the Company's products and services; the effects of government regulation or
shifts in government policy, as they may relate to the Company's products and
services; competition; and other matters referred to in this report.
BUSINESS OVERVIEW DRS Technologies is a leading supplier of defense electronics
systems and has served the defense industry for over thirty years. The Company
provides advanced technology products and services to government and commercial
markets worldwide and holds leading positions in most of its niche markets. DRS
develops and manufactures a broad range of mission critical products -- from
rugged computers and peripherals to systems and components in the areas of
communications, data storage, digital imaging, electro-optics, flight safety and
space. The Company's defense electronics systems and subsystems are sold to all
branches of the U.S. military, selected U.S. government intelligence agencies,
major aerospace/defense prime contractors, international military forces and a
wide range of commercial customers. DRS also offers a full complement of
technical support and advanced manufacturing services.
The Company has grown substantially in recent years, as a result of
internal business development and strategic acquisitions. In fiscal 1999, the
Company completed two milestone transactions: the acquisition of certain assets
of the Second Generation Ground-Based Electro-Optical (Ground EO) and Focal
Plane Array (FPA) buinesses (together, the EOS Business) of Raytheon Company and
certain of its subsidiaries (Raytheon); and the merger with NAI Technologies,
Inc. These acquisitions have significantly expanded the Company's business base
and have increased and further diversified DRS's backlog.
Over the past five fiscal years, revenues and earnings before extraordinary
items, interest and related expenses, income taxes, depreciation and
amortization (EBITDA) have grown at compounded average annual rates of
approximately 36% and 31%, respectively. In fiscal 1999, the Company's total
revenues increased by approximately 43%, with revenues generated by the
Company's core businesses (existing businesses as of March 31, 1998) increasing
by approximately 18%.
Funded backlog also has increased substantially. At March 31, 1999, DRS's
funded backlog was approximately $365.8 million, an increase of 106% from the
prior year-end level, and included approximately $108.7 million and $31.7
million added at the dates of acquisition of the EOS Business of Raytheon and
the merger with NAI Technologies, Inc., respectively. These acquisitions have
further diversified the Company's backlog with respect to its defense customer
base. As of March 31, 1999, approximately 47% and 27% of the Company's backlog
related to products and services for the U.S. Army and U.S. Navy, as compared
with 11% and 62% at March 31, 1998, respectively.
To achieve this level of growth and business development, DRS has executed
a consistent long-term business strategy. The Company's goal is to secure its
emerging position as a mid-tier defense technology supplier by maintaining its
reputation for technical excellence, focusing on the development of profitable
long-term contracts and acquiring businesses that complement or extend existing
product lines.
COMPANY ORGANIZATION AND PRODUCTS DRS is organized into four principal
operating segments, three of which compete in the defense industry: the
Electronic Systems Group (ESG); the Electro-Optical Systems Group (EOSG); the
Flight Safety and Communications Group (FSCG); and the Data Systems Group (DSG).
Each group is comprised of separate and distinct businesses.
-21-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
During the current fiscal year, DRS's military recording systems
subsidiary, DRS Precision Echo, Inc., was combined with DRS Flight Safety and
Communications for management purposes, based on business and product synergies.
DRS Precision Echo, Inc. previously had been managed, together with DRS Ahead
Technology, Inc., as part of DSG. DSG now consists solely of the operations of
DRS Ahead Technology, Inc., which principally serves commercial markets.
Prior-year balances and results of operations disclosed in this MD&A for both
FSCG and DSG have been restated to give effect to this management change. In
addition, as a result of acquisitions completed in fiscal 1999, ESG and EOSG now
include the operations of NAI Technologies, Inc. and the EOS Business of
Raytheon, respectively.
ESG is a leading provider of naval computer workstations used to process
and display integrated combat information. ESG produces rugged computers and
peripherals, surveillance, radar and tracking systems, acoustical signal
processing and display equipment, and combat control systems. ESG products are
used on front-line platforms, including Aegis destroyers and cruisers, aircraft
carriers, submarines and surveillance aircraft. ESG's products also are used in
the U.S. Army's ongoing battlefield digitization programs.
EOSG produces systems and subsystems for infrared night vision and
targeting products used in some of the U.S. Army's most important battlefield
platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting
Vehicle and the High-Mobility Multipurpose Wheeled Vehicle (HMMWV) scout
vehicle. EOSG designs, manufactures and markets products that allow operators to
detect, identify and target objects based upon their infrared signatures
regardless of the ambient light level. The effectiveness of the previous
generation of these products was recognized in the Desert Storm conflict. This
Group is also a leading designer and manufacturer of eye-safe laser range
finders and multiple-platform weapons calibration systems for such diverse air
platforms as the Apache attack helicopter and AC-130U gunship. EOSG is
leveraging its technology base by expanding into related non-defense markets and
is a leading producer of ultra high-speed digital imaging systems.
FSCG is a leading manufacturer of deployable flight emergency or "black
box" recording equipment used by military and search and rescue aircraft. FSCG
also manufactures shipboard communications and infrared surveillance systems for
the U.S., Canadian and other navies. This Group uses advanced commercial
technology in the design and manufacture of multi-sensor digital, analog and
video data capture recording products, as well as high-capacity data storage
devices for the harsh environments of aerospace and defense applications. FSCG,
recognized for its technical expertise and capabilities, also provides advanced
manufacturing services for international military and space customers. FSCG
products are used on such platforms as the F/A-18 fighter, A-10 attack plane,
P-3 reconnaissance aircraft and EH-101 helicopter for surveillance, target
verification and battle damage assessment.
DSG produces consumable magnetic heads used in the production of hard disk
drives by some of the world's largest computer manufacturers. Other commercial
products provide data retrieval capability for devices such as airplane phones,
credit card readers and other electronic scanning equipment.
ACQUISITIONS AND RELATED ACTIVITIES On June 18, 1996, DRS Ahead Technology, Inc.
(Ahead Technology) acquired, through a wholly-owned subsidiary, substantially
all the assets of Vikron, Inc. (Vikron) for approximately $3.7 million in cash.
The excess of cost over the estimated fair value of net assets acquired was
approximately $1.6 million and is being amortized on a straight-line basis over
fifteen years. Vikron, located in St. Croix Falls, Wisconsin, manufactures data
and recording heads.
On October 24, 1996, Ahead Technology acquired, through a wholly-owned
subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for
approximately $2.4 million in cash. In September 1998, DSG closed Nortronics'
sole production facility in Dassel, Minnesota, and transferred related assets
and products to the Group's Plymouth, Minnesota and Razlog, Bulgaria plants.
On October 30, 1996, Pacific Technologies, Inc., a California corporation,
merged with and into a wholly-owned subsidiary of the Company for stock and cash
valued at approximately $0.5 million. Based in San Diego, California, and
renamed DRS Technical Services, Inc., it provides systems and software
engineering support to the U.S. Navy for the testing of shipboard combat
systems.
On May 13, 1997, a subsidiary of the Company acquired approximately 80% of
the outstanding equity of Magnetic Heads Company Ltd. (MHC) for approximately
$0.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead
Technology, Inc. (Bulgaria) AD (Ahead Technology -- Bulgaria), is a manufacturer
and supplier of magnetic recording heads used primarily for commercial
applications. In connection with this acquisition, the Company has agreed to
make additional investments in DRS Ahead Technology -- Bulgaria totaling
approximately $2.3 million over a five-year period. For purposes of this
agreement, investments include the transfer of technology and related intangible
assets, transfer of inventory and other productive assets, employee training and
other similar transfers and expenditures.
-22-
<PAGE>
On September 12, 1997, the Company sold substantially all of the net assets
of DRS Medical Systems (a partnership formed in February 1996 in which the
Company held a 90% interest) to United States Surgical Corporation for
approximately $1.9 million in cash. The sale resulted in a gain of approximately
$0.1 million and the reversal of accrued obligations of $0.3 million. The
results of operations of this partnership were not material to the consolidated
operating results of the Company during the periods presented.
On October 29, 1997, DRS acquired, through certain of its subsidiaries, the
assets of the Applied Systems Division of Spar Aerospace Limited (Spar), a
Canadian corporation, and 100% of the stock of Spar Aerospace (UK) Limited,
incorporated under the laws of England and Wales (the Spar Acquisition),
pursuant to a purchase agreement (the Agreement) dated as of September 19, 1997
between DRS and Spar. The Company paid approximately $35.4 million in cash for
the Acquisition (which included $6.9 million for cash acquired in connection
with the transaction), subject to a certain working capital adjustment as
provided for in the Agreement. The amount of such working capital adjustment, if
any, remains the subject of dispute between DRS and Spar. Although the Company
cannot, at this time, predict the outcome of such dispute, management does not
expect that its resolution will have a material impact on the Company's
consolidated results of operations or financial position. The excess of cost
over the estimated fair value of net assets acquired was approximately $20.0
million and is being amortized on a straight-line basis over 30 years. DRS
incurred professional fees and other costs related to the Spar Acquisition of
approximately $1.5 million, which were capitalized as part of the total purchase
price. Headquartered in Carleton Place, Ontario, Canada, and operating under the
name DRS Flight Safety and Communications (FS&C), the company has been an
international provider of aviation and defense systems for over 30 years. It
designs, manufactures and markets sophisticated flight safety systems, naval
communications systems and other advanced electronics for government and
commercial customers around the world. It also provides custom manufacturing
services for complex electronic assemblies and systems.
On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics
Ltd. and subsidiaries for approximately $6.5 million in cash. Headquartered in
Tring, Hertfordshire, the United Kingdom, and operating under the name DRS
Hadland, the company has been a leader in ultra high-speed image capture and
analysis for over 40 years. It designs, manufactures and markets ultra
high-speed digital imaging cameras and provides avionics systems, including
airborne video recording and ground replay systems, for government and
commercial customers worldwide. The excess of cost over the estimated fair value
of net assets acquired was approximately $4.0 million and is being amortized on
a straight-line basis over 30 years.
On October 20, 1998, the Company acquired, through certain of its
subsidiaries, certain assets of the Second Generation Ground-Based
Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together,
the EOS Business) of Raytheon Company and certain of its subsidiaries
(Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998,
between the Company and Raytheon, as amended (the EOS Acquisition). The Company
paid approximately $45 million in cash at closing for the EOS Business. The
purchase price is subject to a post-closing working capital adjustment, as
provided for in the Asset Purchase Agreement, not to exceed $7 million. The
amount of such working capital adjustment currently is being determined.
Management does not expect that the final adjustment will have a material impact
on the Company's consolidated financial position or results of operations. The
excess of cost over the estimated fair value of net assets acquired and the
appraised value of certain identified intangible assets were approximately $34.5
million and $30.8 million, respectively, and are being amortized on a
straight-line basis over 20 years. DRS incurred professional fees and other
costs related to the EOS Acquisition of approximately $2.0 million, which also
were capitalized as part of the total purchase price. The Company has valued
acquired contracts in process at their remaining contract prices, less estimated
costs to complete, and an allowance for normal profits on the Company's effort
to complete such contracts (see Note 6 of Notes to Consolidated Financial
Statements). Purchase price allocation has not yet been finalized, and actual
purchase price allocation may differ from that used in these Consolidated
Financial Statements. The EOS Business provides products used in the detection,
identification and acquisition of targets based on infrared data. Primary
programs include the U.S. Army's Horizontal Technology Integration Second
Generation FLIR (Forward-Looking Infra-Red) (HTI SGF), the Long-Range Advanced
Scout Surveillance System (LRAS)(3), the Improved Bradley Acquisition System
(IBAS) and the Javelin missile programs. Ground EO, renamed DRS Sensor Systems,
Inc., has 47 employees based in El Segundo, California; and FPA, renamed DRS
Infrared Technologies, LP, has 186 employees located in Dallas, Texas.
On February 19, 1999, a wholly-owned subsidiary of the Company merged with
and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being
the surviving corporation and continuing as a direct wholly-owned subsidiary
EMPLOYEES
99 ===================================================================== 2,180
98 ===================================================== 1,470
97 ========================================= 1,107
96 =============================== 809
95 ========================565
-23-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
of DRS, for stock and other consideration valued at approximately $24.8 million
(the NAI Merger). The excess of cost over the estimated fair value of net assets
acquired was approximately $25.4 million and is being amortized on a
straight-line basis over 20 years. DRS incurred professional fees and other
costs related to the NAI Merger of approximately $2.8 million, which were
capitalized as part of the total purchase price. Purchase price allocation has
not yet been finalized, and actual purchase price allocation may differ from
that used in these Consolidated Financial Statements. NAI is a diversified,
international electronics company and a leading provider of rugged computers,
peripherals and integrated systems primarily for military and special government
applications. The company has office locations in Columbia, Maryland; Longmont,
Colorado; Farnham, Surrey, England; and Fyshwick, Australian Capital Territory,
Australia and employs approximately 200 people. NAI reported revenues from
continuing operations of approximately $48 million for the fiscal year ended
December 31, 1997 and $35 million for the nine-month period ended September 30,
1998.
The aforementioned acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the results of operations of the acquired
businesses were included in the Company's reported operating results from their
respective effective dates of acquisition. Except for the Spar Acquisition, the
EOS Acquisition and the NAI Merger, the financial position and results of
operations of these businesses were not significant to those of the Company as
of their respective effective dates of acquisition (see Note 2 of Notes to
Consolidated Financial Statements).
DRS selectively targets acquisition candidates that complement or expand
the Company's products, services or technical capabilities. As part of the
selection process, the Company assesses the potential for near-term accretion to
earnings and typically selects only those businesses which can be accretive
within twelve to eighteen months. The Spar Acquisition, the EOS Acquisition and
NAI Merger, the Company's most recent and significant acquisitions, were
immediately accretive to earnings. The Company continues to seek acquisition
opportunities consistent with its overall business strategy 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 further acquisitions will be consummated.
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:
<TABLE>
<CAPTION>
PERCENT OF REVENUES PERCENT CHANGES
- ----------------------------------------------------------------------------------------- ------------------------------
1999 vs 1998 vs
Years Ended March 31, 1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 100.0% 43.3% 32.9%
COSTS AND EXPENSES 94.8% 92.5% 91.2% 46.8% 34.8%
- ----------------------------------------------------------------------------------------- ------------------------------
OPERATING INCOME 5.2% 7.5% 8.8% (0.1%) 13.3%
INTEREST AND OTHER INCOME, NET (0.3%) (0.7%) (0.5%) (36.4%) 97.3%
INTEREST AND RELATED EXPENSES 3.4% 2.7% 2.5% 83.6% 41.9%
- ----------------------------------------------------------------------------------------- ------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM,
MINORITY INTERESTS AND INCOME TAXES 2.1% 5.5% 6.8% (45.3%) 8.8%
MINORITY INTERESTS 0.4% 0.5% 0.4% 16.8% 116.3%
- ----------------------------------------------------------------------------------------- ------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES 1.7% 5.0% 6.4% (50.9%) 4.1%
INCOME TAXES 0.6% 1.7% 2.5% (46.7%) (9.1%)
- ----------------------------------------------------------------------------------------- ------------------------------
NET EARNINGS BEFORE EXTRAORDINARY ITEM 1.1% 3.3% 3.9% (53.1%) 12.5%
- ----------------------------------------------------------------------------------------- ------------------------------
</TABLE>
The following tables set forth, by operating segment, revenues, operating
income, operating margin and the percentage increase or decrease of those items
as compared with the prior period:
<TABLE>
<CAPTION>
ESG PERCENT CHANGES
- ------------------------------------------------------------------------------------------ ---------------------------
1999 vs 1998 vs
Years Ended March 31, 1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $123,558 $95,054 $81,157 30.0% 17.1%
OPERATING INCOME BEFORE AMORTIZATION
OF GOODWILL AND RELATED INTANGIBLES $ 9,497 $ 9,481 $ 6,405 0.2% 48.0%
OPERATING INCOME $ 9,292 $ 9,454 $ 6,348 (1.7%) 48.9%
OPERATING MARGIN 7.5% 9.9% 7.8% (24.4%) 27.2%
- ------------------------------------------------------------------------------------------ ---------------------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
DSG PERCENT CHANGES
- ------------------------------------------------------------------------------------------ ---------------------------
1999 vs 1998 vs
Years Ended March 31, 1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 19,460 $25,307 $22,255 (23.1%) 13.7%
OPERATING (LOSS) INCOME BEFORE AMORTIZATION
OF GOODWILL AND RELATED INTANGIBLES $ (1,964) $ 2,252 $ 4,843 (187.2%) (53.5%)
OPERATING (LOSS) INCOME $ (2,526) $ 1,681 $ 4,541 (250.3%) (63.0%)
OPERATING MARGIN (13.0%) 6.6% 20.4% (295.4%) (67.4%)
- ------------------------------------------------------------------------------------------ ---------------------------
</TABLE>
<TABLE>
<CAPTION>
EOSG PERCENT CHANGES
- ------------------------------------------------------------------------------------------ ---------------------------
1999 vs 1998 vs
Years Ended March 31, 1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 78,186 $31,396 $25,134 149.0% 24.9%
OPERATING INCOME BEFORE AMORTIZATION OF
GOODWILL AND RELATED INTANGIBLES $ 5,296 $ 1,270 $ 1,431 317.0% (11.3%)
OPERATING INCOME $ 3,661 $ 1,134 $ 1,295 222.8% (12.4%)
OPERATING MARGIN 4.7% 3.6% 5.2% 29.6% (29.9%)
- ------------------------------------------------------------------------------------------ ---------------------------
</TABLE>
<TABLE>
<CAPTION>
FSCG PERCENT CHANGES
- ------------------------------------------------------------------------------------------ ---------------------------
1999 vs 1998 vs
Years Ended March 31, 1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 52,224 $37,387 $11,597 39.7% 222.4%
OPERATING INCOME BEFORE AMORTIZATION OF
GOODWILL AND RELATED INTANGIBLES $ 5,457 $ 2,344 $ 916 132.8% 155.9%
OPERATING INCOME $ 4,608 $ 1,847 $ 690 149.5% 167.7%
OPERATING MARGIN 8.8% 4.9% 5.9% 78.6% (17.0%)
- ------------------------------------------------------------------------------------------ ---------------------------
</TABLE>
COMPARISON OF FISCAL 1999 WITH FISCAL 1998 ESG's revenue growth was attributable
primarily to increased shipments of the Group's military display workstations
and coastal surveillance systems. Fiscal 1999 revenues included approximately
$7.0 million from NAI following the merger in February 1999. The decrease in
ESG's operating income and operating margin resulted primarily from a shift in
revenue mix in the current year to a higher percentage of revenues from the
AN/UYQ-70 Advanced Display System tactical workstation (Q-70) program with the
U.S. Navy. Margins are generally lower on the Q-70 program compared with certain
other product lines, due to its significant commercial off-the-shelf (COTS)
component content.
The decrease in revenues at DSG resulted from the continuing effects of the
sluggish global computer disk drive marketplace and competitive pricing pressure
on certain other magnetic tape head products. DSG has experienced delays in
orders expected from major customers and, more recently, postponements of
existing orders, resulting from these market conditions. The decrease in DSG's
operating income and operating margin was the result of lower revenues and
margins attributable to pricing pressure and less favorable absorption of fixed
operating expenses. These results also included charges incurred in September
1998 of approximately $0.5 million for costs relating to the closing of its
Dassel, Minnesota facility and reserves for certain receivables and inventory,
necessitated by the bankruptcy filing of a significant customer. In November
1998, DSG implemented a 25% reduction in its work force in its San Jose,
California operation in response to the decrease in sales volume. DSG intends to
continue its cost reduction efforts in general and in response to market
conditions.
The increase in revenues at EOSG was attributable to the acquisition of the
EOS Business in October 1998, and the acquisition of DRS Hadland in March 1998.
These increases were partially offset by the continued delay in shipping
boresight systems, resulting from the complaint filed against an employee of DRS
Photronics, Inc. (Photronics). To date, no claim has been made or threatened
against the Company or Photronics. The Company cannot predict when such
shipments will resume; however, these delays are expected to impact fiscal
2000's first quarter results. Operating results for the fiscal year ended March
31, 1998 reflect the effect of a second quarter restructuring charge of
$471,000, associated with the relocation of the Group's boresight operations
from Hauppauge, New York to Oakland, New Jersey. The increases in operating
income and margins in fiscal 1999 were primarily due to the acquisitions
mentioned above.
FSCG's revenue growth was attributable to shipments of the Group's flight
safety and communications products and to revenues from contract manufacturing
services, generated by the business acquired from Spar in the third quarter of
fiscal 1998. In addition, revenues for the fiscal year ended March 31, 1999
included approximately $1.7 million relating to an equitable adjustment claim
settlement between the Company and the U.S. Navy. This settlement represented a
recovery of a portion of excess costs incurred on a contract, completed in
fiscal 1994, to develop and produce a mission data recorder playback
-25-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
support system for use with the Company's AN/AQH-9 and AN/AQH-11 data recorders.
The excess costs incurred on this contract were charged to earnings in prior
periods. The increase in operating income and operating margin resulted from the
increase in revenues, as explained above, partially offset by decreases in the
Group's military data recording systems product line margins resulting from
lower revenues and a change in product mix. Operating results were impacted
adversely by a charge in the third quarter of fiscal 1999 of approximately $1.0
million for reserves against inventory in excess of current contract
requirements at the Group's DRS Precision Echo, Inc. unit.
Interest and other income, net was $0.9 million for the fiscal year ended
March 31, 1999 as compared with $1.4 million in the prior fiscal year. Interest
and other income, net in fiscal 1998 included approximately $0.3 million from
the sale of the net assets of DRS Medical Systems in September 1997.
Minority interest was approximately $1.0 million and $0.9 million in fiscal
1999 and 1998, respectively. The increase was due to higher operating income
generated by ESG's DRS Laurel Technologies unit, in which the Company has an 80%
interest.
Interest and related expenses were approximately $9.4 million and $5.1
million for the fiscal years ended March 31, 1999 and 1998. The increase was
primarily attributable to debt associated with the EOS Acquisition and the Spar
Acquisition in October 1998 and 1997, respectively. The increase in interest
expense was also due, in part, to higher average working capital borrowings in
fiscal 1999.
The Company's effective tax rate was 37% and 34% in the fiscal years ended
March 31, 1999 and 1998, respectively. The lower effective tax rate for fiscal
1998 included the effect of a one-time benefit associated with the utilization
of a U.S. Federal capital loss carryforward (see Results of Operations --
Comparison of Fiscal 1998 with Fiscal 1997). The fiscal 1999 effective tax rate
reflected the effect of U.S. tax return benefits that were not recognized
previously for financial statement purposes. The fiscal 1999 effective rate also
reflected the effect of lower average foreign statutory tax rates, as domestic
earnings were proportionately less than fiscal 1998. The Company's effective tax
rate is expected to increase as domestic earnings improve.
DRS recorded an extraordinary charge of approximately $2.3 million, net of
tax, in the fiscal quarter ended December 31, 1998 in connection with a
modification of the Company's credit facility (see Financial Condition and
Liquidity -- Working Capital).
COMPARISON OF FISCAL 1998 WITH FISCAL 1997 Revenues from ESG for the fiscal year
ended March 31, 1998 increased 17.1% to $95.1 million from $81.2 million in
fiscal 1997. The revenue growth was attributable primarily to increased
shipments of the Group's military display workstations and coastal surveillance
systems. ESG's operating income for fiscal 1998 increased 48.9% to $9.5 million,
compared with $6.3 million reported in the prior year. Operating margins were
9.9% and 7.8% for the fiscal years ended March 31, 1998 and 1997, respectively.
The increase in ESG's operating income and operating margin in fiscal 1998
resulted from the overall increase in revenues, coupled with operating
efficiencies and the net cost savings derived from the consolidation and
transfer of certain of the Group's military display product lines to its
Gaithersburg, Maryland operation.
Revenues from DSG for the fiscal year ended March 31, 1998 increased 13.7%
to $25.3 million from $22.3 million in fiscal 1997. The increase in revenues was
attributable primarily to increased shipments of the Group's computer disk drive
head products (disk head products), as well as revenues from shipments of
magnetic heads products generated by businesses acquired in fiscal 1997. DSG's
operating income for fiscal 1998 decreased 63.0% to $1.7 million, compared with
$4.5 million reported in fiscal 1997. Operating margins were 6.6% and 20.4% for
the fiscal years ended March 31, 1998 and 1997, respectively. The decrease in
DSG's operating income and operating margin was primarily the result of
increased general and administrative costs and pricing pressure on its disk head
products. Lower margins reflected the effects of declining orders in the second
half of fiscal 1998 related to the general downturn and consolidation in the
computer disk drive industry. Higher general and administrative expenses were
attributable to the Group's marketing and product development efforts, as well
as to the delayed start up of the Group's Bulgarian operation.
Revenues from EOSG for the fiscal year ended March 31, 1998 increased 24.9%
to $31.4 million from $25.1 million in fiscal 1997. The increase in revenues was
attributable primarily to increased shipments of the Group's electro-optical
systems product lines and to revenues from the acquisition of DRS Hadland in
March 1998. EOSG's operating income for fiscal 1998 decreased 12.4% to $1.1
million, compared with $1.3 million in the prior year. Operating margins were
3.6% and 5.2% for the fiscal years ended March 31, 1998 and 1997, respectively.
The decrease in EOSG's operating income and operating margin in fiscal 1998
reflected the effect of restructuring and other costs related to the closure of
the Group's Hauppauge, New York facility and relocation of its operations to
Oakland, New Jersey.
FSCG's revenues and operating income increased 222.4% and 167.7%,
respectively, in fiscal 1998. Operating margins were 4.9% and 5.6% in the fiscal
years ended March 31, 1998 and 1997, respectively. Results for fiscal 1998
include
-26
<PAGE>
those of FS&C from the date of its acquisition in October 1997. Revenues from
FS&C were $13.4 million in the fiscal year ended March 31, 1998 and were
attributable primarily to shipments of flight safety and communications products
and from contract manufacturing services. The increase in revenues was also
attributable to increased shipments of the Group's military data storage and
recording products. Operating margins decreased due mainly to higher
company-sponsored research and development expenditures during the year for new
8mm recording products.
Consolidated revenues in fiscal 1998 and 1997 included approximately $1.7
million and $3.4 million, respectively, from DRS Medical Systems. Substantially
all of the net assets of DRS Medical Systems were sold on September 12, 1997.
Operating income of the Partnership was not significant to the consolidated
results of operations of the Company in fiscal 1998 and 1997.
Interest and related expenses increased 41.9% to $5.1 million for the
fiscal year ended March 31, 1998, as compared with $3.6 million in the prior
fiscal year. The increase was attributable primarily to the increase in debt
associated with the acquisition of FS&C and higher average working capital
borrowings.
Interest and other income, net increased by approximately $0.7 million, or
97.3%, in fiscal 1998 to $1.4 million. This increase principally was due to the
interest earned on higher average cash balances primarily resulting from cash
acquired with FS&C.
Minority interest increased from $0.4 million in fiscal 1997 to $0.9
million in fiscal 1998. The increase was due to the continued growth of the DRS
Laurel Technologies partnership (DRS Laurel), in which the Company has an 80%
interest. DRS Laurel manufactures many of the Company's military display
workstations.
The Company's effective tax rates for the fiscal years ended March 31, 1998
and 1997 were 34% and 39%, respectively. The lower effective income tax rate in
fiscal 1998 reflected the benefit of the utilization of U.S. Federal capital
loss carryforwards against the capital gain resulting from the sale of the
Company's Hauppauge, New York facility, combined with the effect of lower
overall effective tax rates of newly acquired foreign operations. The provision
for income taxes included all estimated income taxes payable to federal, state
and foreign governments, as applicable.
FINANCIAL CONDITION AND LIQUIDITY Cash and Cash Flow: Cash and cash equivalents
at March 31, 1999 and 1998 represented approximately 3% and 6%, respectively, of
total assets. During the fiscal year, cash increased by approximately $0.5
million. Cash flow from operations totaled $15.2 million, which included $14.9
million in net advance payments relating to the Q-70 program. Beginning in March
1999, these advance payments are being liquidated against associated progress
billings through August 1999. Net cash flow from operations were net of
approximately $8.0 million and $3.6 million for interest and income tax
payments, respectively. Net cash provided by financing activities for the fiscal
year was $46.5 million, including net proceeds from acquisition-related
borrowings of $47.1 million. Approximately $6.2 million was used for repayments
of long-term debt, which included approximately $5.0 million for the retirement
of the Company's 8 1/2% convertible subordinated debentures at maturity. Working
capital borrowings under the Company's credit facility were $8.0 million and
$5.1 million as of March 31, 1999 and 1998, respectively. Cash used in investing
activities totaled $60.9 million, which included $54.2 million for acquisitions
and $6.9 million for capital expenditures.
Working Capital: Working capital as of March 31, 1999 was $13.5 million, a
decrease of $28.6 million, or 68.0%, from the prior year-end level. This
decrease was directly related to liabilities recorded in connection with the EOS
Acquisition. Approximately $28.5 million was provided for estimated costs in
excess of contract value on acquired contracts. In addition, approximately $10.9
million was recorded, representing management's estimate of normal profits
(operating income) to be earned in connection with the completion of acquired
contracts and related work-in-process as of the acquisition date.
In connection with the acquisition of the EOS Business on October 20, 1998,
the Company and certain of its subsidiaries entered into a $150 million secured
credit facility (Facility) with Mellon Bank, N.A., consisting of two term loans:
the first in the principal amount of $30 million (First Term Loan), and the
second in the principal amount of $50 million (Second Term Loan); and a
revolving line of credit (Line of Credit) for $70 million, subject to a
borrowing base calculation. As of March 31, 1999 and 1998, the Company had
approximately $38.4 million and $10.8 million, respectively, of additional
available credit after satisfaction of its borrowing base requirement. The
maturity dates of the First Term Loan and the Second Term Loan are October 20,
2003 and October 20, 2005, respectively, with quarterly principal payments
beginning on June 30, 1999. The Line of Credit matures on October 20, 2003. The
Facility amended, restated and replaced the Company's existing $60 million
secured credit facility consisting of a $20 million term loan and a $40 million
revolving line of credit. The Second Term Loan was used to finance a portion of
the acquisition of the EOS Business. The First Term Loan was used to refinance
the debt associated with the acquisition of DRS Flight Safety and
Communications, completed in the third quarter of fiscal 1998. The Line of
Credit is available for working capital, general corporate purposes and
acquisitions. The Facility is secured by substantially all of the assets of the
Company. Borrowings can be made in United States dollars at rates based on LIBOR
(London Interbank Offering Rate) or
-27-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
United States Prime or in Canadian dollars at rates based on LIBOR, Canadian
Prime or the Canadian Bankers Acceptance Rate. The Facility contains certain
covenants and restrictions, including maintenance of a minimum level of
consolidated net worth, a restriction on the payment of dividends on the capital
stock of the Company, a limitation on the issuance of additional debt and
certain other restrictions. As of March 31, 1999, the Company was in compliance
with all covenants.
For accounting purposes, the modification of the Facility was accounted for
as an extinguishment of debt pursuant to the guidance of the Emerging Issues
Task Force of the Financial Accounting Standards Board (Issue No. 96-19).
Accordingly, the unamortized balance of deferred financing costs relating to the
previous credit facility, plus fees paid in connection with the modification,
were recorded as an extraordinary charge in the amount of $2,306,000, net of
tax, in the third quarter of fiscal 1999.
With the new Facility described above, the Company believes that its
present working capital position and available bank financing are sufficient to
support its current operational needs, as well as its near-term business
objectives.
Total Assets: During the year, total assets increased by $166.9 million, or
102.1%, as compared with March 31, 1998, primarily due to the EOS Acquisition
and the NAI Merger. With respect to the EOS Acquisition, the Company acquired
approximately $88.1 million in total assets, including $4.4 million in net
accounts receivable, $6.5 million in net inventory and $11.9 million in fixed
assets. In accounting for this acquisition, the Company provided $39.4 million
for unearned income and future estimated costs on existing Focal Plane Array and
certain other contracts. Based on the purchase price of $45.0 million, the
excess of purchase price over net assets acquired and the appraised value of
certain identified intangible assets totaled approximately $65.3 million
(including approximately $2.0 million for closing costs). Total assets also
increased by $44.2 as a result of the NAI Merger. As of the effective date of
the merger, NAI had approximately $8.4 million in net inventory and $4.9 million
of net accounts receivable. The excess of the value of consideration exchanged
over the estimated fair value of net assets acquired was approximately $28.2
million (including approximately $2.8 million for professional fees and related
closing costs).
Accounts Receivable: Accounts receivable, net, excluding amounts from
acquired businesses, increased by approximately $20.9 million in fiscal 1999,
primarily due to increased revenues in the fourth quarter of fiscal 1999. At
March 31, 1999 and 1998, accounts receivable included $0.8 million arising from
retainage provisions in certain contracts, primarily with the Canadian and
British governments, which may not be collected within one year.
Inventories: Inventories, excluding amounts from acquired businesses,
increased by approximately $23.1 million from March 31, 1998, due primarily to
increases in production activities, particularly with respect to the EOS
Business.
Debt: Total debt outstanding increased by approximately $48.0 million
during the fiscal year ended March 31, 1998 to $117.1 million, primarily due to
the borrowings associated with the EOS Acquisition. The Company has become
increasingly leveraged in recent years, as many of its acquisitions have been
financed with convertible debt securities and bank debt. Despite the increase in
long-term debt this fiscal year, the ratio of long-term debt (excluding current
installments) to total capitalization increased only slightly from 56.0% at
March 31, 1998 to 58.2% at March 31, 1999, primarily due to the offsetting
effect of equity issued in connection with the NAI Merger.
Stockholders' Equity: Net stockholders' equity increased by approximately
$29.1 million during the fiscal year ended March 31, 1999 to approximately $73.4
million, primarily as a result of the exchange of shares in the NAI Merger.
Backlog: Backlog at March 31, 1999 was approximately $365.8 million, as
compared with $177.4 million at March 31, 1998. The Company booked $322.3
million in new orders in fiscal 1999. The increase in backlog was due to the net
effect of bookings, partially offset by revenues together with the addition of
approximately $140.4 million of backlog added as a result the EOS Acquisition
and the NAI Merger.
Due to the general nature of defense procurement and contracting, the
operating cycle for the Company's military business typically has been long
term. Military backlog currently consists of various production and development
contracts with varying delivery schedules and project timetables. However, there
has been a recent trend in the Company's backlog to include a higher percentage
of commercial product orders and COTS-based systems for the military, both of
which favor shorter delivery times. Accordingly, revenues for a particular year,
or year-to-year comparisons of reported revenues and related backlog positions,
may not be indicative of future results.
FREE CASH FLOW (Dollars in millions)
99 ====================================================================== 19.6
98 ========================================================= 15.3
97 ================================================= 12.7
96 ==================================== 6.2
95 =============================== 5.6
-28-
<PAGE>
Of the $322.3 million in new contract awards booked in fiscal 1999, ESG
secured $124.3 million in new contracts, including significant awards of
approximately $70.0 million in additional production and engineering contracts
for AN/UYQ-70 Advanced Display Systems; $6.6 million for cables and wire
harnesses for the Army's Bradley M2A3 Infantry Fighting Vehicles; $6.2 million
for AN/SPS-67 Radar Systems; $5.9 million for littoral surveillance systems;
$5.9 million for Replacement Data Storage Systems; $4.5 million for combat
display emulators; and $4.2 million on the Joint-STARS program. DSG booked $21.3
million in new business in fiscal 1999, consisting of $11.9 million for its
specialty magnetic head products and $9.4 million for tape head products. EOSG
booked awards of $121.0 million in fiscal 1999, including awards totaling $55.9
million from the U.S. Army to provide Horizontal Technology Integration Second
Generation Forward Looking Infrared (HTI SGF) Thermal Imaging Systems for the
sighting systems of the Abrams M1A2 System Enhancement Package (SEP) and Bradley
M2A3 fighting vehicles, $24.2 million for Improved Bradley Acquisition Systems
(IBAS) for the new Bradley M2A3 fighting vehicles, and $6.6 million to provide
Standard Advanced Dewar Assemblies Type II (SADA II) for the tracking and
imaging systems on a variety of platforms, including the M2A3 Bradley and the
M1A2 Abrams vehicles. These awards were booked by the Group's new DRS Sensor
Systems and DRS Infrared Technologies units. Other significant EOSG awards for
the year included $12.0 million for high-speed digital imaging systems; $2.7
million to produce upper optics modules for optical laser surgery equipment; and
$3.6 million for Multi-Platform Boresight Equipment (MPBE), including a $2.1
million award for the Hawk 100 Series Light Attack aircraft, the first
application of MPBE systems for a European fixed-wing aircraft platform. FSCG
received a total of $55.8 million in fiscal 1999, including approximately $19.4
million for advanced manufacturing services, $11.5 million for flight incident
recorders and locator beacons, $8.6 million for shipboard communications systems
and $6.3 million for 8mm military data recorders for use on F/A-18, A-10 and
other fixed-wing aircraft.
Internal Research and Development: In addition to customer-sponsored
research and development, the Company also engages in internal research and
development (IR&D). IR&D expenditures reflect the Company's continued investment
in new technology and diversification of its products. Expenditures for IR&D in
fiscal 1999, 1998 and 1997 were $5.2 million, $4.0 million and $3.9 million,
respectively.
Business Considerations: The Company primarily is engaged in the design and
manufacture of high-technology systems and products used for the processing,
display and storage of electronic data. Although DRS has diversified into
commercial products and markets, a significant portion of the Company's revenues
continues to be derived directly or indirectly from defense industry contracts
with the U.S. Government. In recent years, the Federal defense budget has been
reduced dramatically in inflation-adjusted terms. However, the overall level of
spending for defense electronics has increased, given the nature of modern
warfare and its increasing reliance on sophisticated weaponry and support
systems. In addition, the U.S. Government has determined that it is often more
cost effective to retrofit and upgrade existing weapons platforms than to
replace them. These factors have affected the nature and extent of defense
procurement and have precipitated a consolidation of the defense industry and a
focus principally on cost competitiveness and efficiency of operations. DRS has
participated successfully in this industry consolidation through strategic
business acquisitions and by streamlining its existing operations. The Company
also has focused on supporting and improving existing products and programs, as
well as identifying opportunities to develop and manufacture new products.
The defense electronics sector is characterized by rapid technological
change. The nature of modern warfare also has changed, with increasing reliance
on timely and accurate battlefield information, both to ensure that increasingly
costly assets are deployed efficiently and to minimize the destruction of
non-military targets. In response to these factors, as well as to a 1992 mandate
by the Joint Chiefs of Staff, the Company focuses on COTS product designs,
whereby commercial electronic components are integrated, adapted, upgraded and
"ruggedized" for applications in harsh military environments. Using COTS
designs, the Company is able to develop and deliver its products with
significantly less development time and expense compared with traditional
military product cycles. The COTS approach generally results in shorter lead
times, lower product costs and the employment of the latest available
information and computing technologies. The design and manufacture of COTS-based
products is a complex process requiring specific engineering capabilities,
extensive knowledge of military platforms in which the equipment will be
installed and an in-depth understanding of military operating environments and
requirements. The Company believes that it has the personnel and technical
expertise required to address the technological challenges confronting the
defense electronics sector.
INTERNAL RESEARCH AND DEVELOPMENT (Dollars in millions)
99 ======================================================================= 5.2
98 ===================================================== 4.0
97 =============================================== 3.9
96 ============== 0.6
95 ================= 0.8
-29-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company is subject to other inherent risks associated with defense
contracting, including changes in government policies and dependence on
Congressional support, primarily for appropriations and allocation of funds to
products and programs supported by the Company. In recent years, the Company's
products and programs have been well supported. However, uncertainty exists with
respect to the size and scope of future defense budgets and their possible
impact on existing or future products and programs. Further, the Company's
existing defense contracts are subject to termination, either at the convenience
of the customer or as a result of cancellation of funding. The Company's
contracts and operations also are subject to governmental oversight,
particularly with respect to business practices, contract performance and cost
accounting practices. Governmental investigations may lead to claims against the
Company, the outcome of which cannot be predicted. As described in Note 10 of
Notes to the Consolidated Financial Statements, in fiscal 1999, the Government
commenced a case against an employee of DRS Photronics, Inc., a subsidiary of
the Company, relating to the accuracy of test data. To date, no claim has been
made or threatened against the Company or the subsidiary. The subsidiary is
currently unable to ship certain equipment related to the case, resulting in
delays in the Company's recognition of revenues. At this time, the Company is
unable to quantify the effect of the delayed shipments on its future results of
operations or financial position, or to predict when such shipments ultimately
will be made, although the delays are expected to impact fiscal 2000 first
quarter results.
The additions of international businesses involve additional risks for the
Company, such as exposure to currency fluctuations, future investment
obligations and changes in foreign economic and political environments. In
addition, international transactions frequently involve increased financial and
legal risks arising from stringent contractual terms and conditions and widely
differing legal systems, customs and practices in foreign countries. The Company
expects that international sales as a percentage of the overall sales of the
Company will continue to increase in future years as a result of, among other
factors, the Company's growth strategy and continuing changes in the United
States defense industry.
DRS has continued to grow despite these circumstances and conditions.
However, future growth will be dependent on the Company's ability to adapt to
these and other changing market and industry conditions.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute
of Certified Public Accountants issued Statement of Position (SOP) No. 98-5,
"Reporting on the Costs of Start-Up Activities." This accounting standard, which
is effective for fiscal years beginning after December 15, 1998, provides
authoritative guidance on accounting and financial reporting related to costs of
start-up activities. This SOP requires that, at the effective date of adoption,
costs of start-up activities previously capitalized be expensed and reported as
a cumulative effect of a change in accounting principle, and further requires
that such costs subsequent to adoption be expensed as incurred. The Company does
not anticipate the effect of adopting this standard to be material to the
Company's consolidated results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 provides authoritative
guidance on accounting and financial reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
Statement requires the recognition of all derivatives as either assets or
liabilities in the consolidated balance sheet, and the periodic measurement of
those instruments at fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on the
intended use of the derivative and its resulting designation. Upon adoption of
this standard, existing hedging relationships, if any, must be designated anew
and documented pursuant to the provisions of the Statement. Based on the
Company's fiscal calendar and the current requirements of SFAS 133, this
standard must be adopted no later than April 1, 2000. Adoption of SFAS 133 is
not expected to have a material impact on the Company's financial position or
results of operations.
EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the
European Union established permanent, fixed conversion rates between their
existing currencies and the European Union's common currency called the "Euro".
The transition period for the introduction of the Euro is scheduled to
phase in over a period ending January 1, 2002, with existing currencies being
removed completely from circulation on July 1, 2002. The Company currently does
not have significant transactions denominated in Euro-related currencies. This
is not expected to change in the foreseeable future. Therefore, the Company
believes the introduction of the Euro and the phasing out of the other
currencies will not have a material impact on the Company's consolidated
financial statements.
-30-
<PAGE>
YEAR 2000 DRS has initiated a Year 2000 readiness plan focused on identification
and remediation of information processes which may not function correctly at the
beginning of the Year 2000. The plan, developed as a company-wide effort and
directed by a corporate Year 2000 committee, monitors the DRS operating groups'
performance as the groups proceed through the phases of awareness, assessment
and remediation.
Each DRS operating group has appointed its own Year 2000 project staff,
responsible for implementation of the plan and for reporting progress and costs
to the corporate Year 2000 committee. This committee, in turn, reports the
Company's overall Year 2000 status to the Board of Directors. The Company's
overall status is, therefore, a composite of the compliance efforts of the DRS
operating groups. On an aggregate basis, DRS estimates that the costs of its
Year 2000 readiness will total approximately $1.5 million, of which
approximately $500,000 has been spent to date. Although the various operating
groups are currently at varying phases of the readiness process, the Company
expects that information systems will be protected from material failure by
mid-1999 and that Company products will have achieved such readiness by October
1999.
Within each DRS operating group, the Year 2000 effort is directed towards:
(1) IT Systems (which examines operating systems and business application
software); (2) External Agents (which examines third-party suppliers and
customers); and (3) Product Issues (which examines Year 2000 issues inherent in
products sold by DRS).
The IT Systems section evaluates hardware and systems software. DRS has
substantially completed its evaluation of its main internal operating systems
and business application software. As a result of this evaluation, DRS has begun
the process of implementing the necessary changes in its internal systems to
achieve Year 2000 compliance in this area. Based on the current schedule, the
Company's IT Systems are expected to be Year 2000 compliant by October 1999.
The External Agents section includes the process of identifying and
prioritizing critical suppliers and customers at the direct interface level and
communicating with them about their plans and progress in addressing the Year
2000 problem. Year 2000 compliance issues at critical suppliers create risk for
DRS since their inability to operate effectively could impact our business.
Possible problems for DRS could include isolated performance problems with
manufacturing or administrative systems, isolated interruption of deliveries
from critical suppliers and product liability issues. The consequences of these
issues may include increases in manufacturing and administrative costs until the
problems are resolved, lost revenues, lower cash receipts and product liability.
DRS does not have control over these third parties and, as a result, cannot
currently estimate to what extent the future operating results of DRS's may be
adversely affected by the failure of these third parties to address successfully
their Year 2000 issues. Failure by critical suppliers and customers (in
particular, the U.S. Government, on which DRS is materially dependent), however,
to achieve Year 2000 compliance in a timely manner could have a material adverse
effect on the Company's operations. Evaluations of critical third parties have
been initiated and should be completed by mid-1999. These evaluations will be
followed by corrective actions and the development of contingency plans, if
considered necessary.
The Product Issues section includes the process of identifying any products
sold by DRS which may not be Year 2000 compliant, determining a corrective
course of action and disseminating information with respect thereto to
customers. Although many of DRS's products that have integrated software are
Year 2000 compliant, there can be no assurances that all of DRS's products are
currently Year 2000 compliant. DRS's costs to achieve Year 2000 compliance will
include the costs and expenses of fulfilling warranty obligations on
non-compliant products. Detailed evaluations of certain products have been
initiated, and completion of this phase of the Company's Year 2000 project
should be completed by mid-1999. These evaluations will be followed by
corrective actions and the development of contingency plans, if considered
necessary.
At a projected $1.5 million, total costs associated with required IT
Systems modifications to become Year 2000 compliant are not expected to have a
material effect on the consolidated results of operations, cash flows or
financial position of DRS. To the extent recoverable under the terms of
contracts with its customers, DRS's compliance costs will be included in
establishing prices for the Company's products and services, and, therefore,
will be reflected in the Company's revenues and costs and expenses.
Uncertainties exist, however, as to DRS's ability to detect in a timely manner
all Year 2000 problems, as well as its ability to achieve successful and timely
resolution of all Year 2000 issues. Consequently, there can be no assurances as
to the amount of total cost associated with implementing DRS's Year 2000 project
and, as a result, the effect of such cost on the consolidated result of
operations, cash flows or financial position of DRS.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect DRS's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, DRS is unable to
determine at this time whether the consequences of Year 2000 failure will have a
material impact on DRS's results of operations, liquidity or financial
condition. DRS implemented its Year 2000 project with the intention of
significantly reducing DRS's level of risk regarding the Year 2000 problem. DRS
expects that if its Year 2000 project is completed as scheduled, the risk of
significant interruptions of normal operations should be reduced.
-31-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 10,154,000 $ 9,673,000
ACCOUNTS RECEIVABLE, NET (NOTE 3) 76,135,000 47,273,000
INVENTORIES, NET OF PROGRESS PAYMENTS (NOTE 4) 72,907,000 38,637,000
PREPAID EXPENSES, DEFERRED INCOME TAXES AND OTHER
CURRENT ASSETS (NOTE 8) 4,316,000 1,849,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 163,512,000 97,432,000
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 5) 72,893,000 55,429,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 38,730,000 32,457,000
- --------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 34,163,000 22,972,000
- --------------------------------------------------------------------------------------------------------------------------
GOODWILL AND RELATED INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION OF $9,163,000 AND $6,061,000 AT MARCH 31, 1999
AND 1998, RESPECTIVELY 122,335,000 33,070,000
DEFERRED INCOME TAXES AND OTHER NONCURRENT ASSETS (NOTE 8) 10,334,000 9,999,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $330,344,000 $163,473,000
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT INSTALLMENTS OF LONG-TERM DEBT (NOTES 2 AND 7) $ 5,844,000 $ 7,514,000
SHORT-TERM BANK DEBT (NOTE 7) 9,169,000 5,100,000
ACCOUNTS PAYABLE 42,470,000 23,179,000
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (NOTE 6) 92,538,000 19,513,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 150,021,000 55,306,000
LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS (NOTES 2 AND 7) 102,091,000 56,532,000
DEFERRED INCOME TAXES (NOTE 8) -- 3,897,000
OTHER NONCURRENT LIABILITIES (NOTES 9 AND 10) 4,790,000 3,403,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 256,902,000 119,138,000
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTES 7 AND 9)
PREFERRED STOCK, NO PAR VALUE. AUTHORIZED 2,000,000 SHARES;
NONE ISSUED AT MARCH 31, 1999 AND 1998 -- --
COMMON STOCK, $.01 PAR VALUE PER SHARE. AUTHORIZED 20,000,000 SHARES;
ISSUED 9,615,933 AND 6,596,237 SHARES AT MARCH 31, 1999
AND 1998, RESPECTIVELY 96,000 66,000
ADDITIONAL PAID-IN CAPITAL 48,038,000 19,399,000
RETAINED EARNINGS 27,737,000 27,057,000
ACCUMULATED OTHER COMPREHENSIVE LOSSES (139,000) (135,000)
TREASURY STOCK, AT COST: 385,164 AND 402,461 SHARES OF
COMMON STOCK AT MARCH 31, 1999 AND 1998, RESPECTIVELY (1,493,000) (1,561,000)
UNAMORTIZED RESTRICTED STOCK COMPENSATION (797,000) (491,000)
- --------------------------------------------------------------------------------------------------------------------------
NET STOCKHOLDERS' EQUITY 73,442,000 44,335,000
- --------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $330,344,000 $163,473,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-32-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $273,428,000 $190,854,000 $143,578,000
COSTS AND EXPENSES (NOTE 4) 259,183,000 176,595,000 130,996,000
- --------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 14,245,000 14,259,000 12,582,000
INTEREST AND OTHER INCOME, NET (876,000) (1,377,000) (698,000)
INTEREST AND RELATED EXPENSES 9,358,000 5,098,000 3,592,000
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM, MINORITY INTERESTS
AND INCOME TAXES 5,763,000 10,538,000 9,688,000
MINORITY INTERESTS 1,021,000 874,000 404,000
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES 4,742,000 9,664,000 9,284,000
INCOME TAXES (NOTE 8) 1,756,000 3,292,000 3,621,000
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY ITEM 2,986,000 6,372,000 5,663,000
EXTRAORDINARY ITEM, NET OF TAX (NOTE 7) (2,306,000) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE OF COMMON STOCK (NOTE 1)
BASIC EARNINGS PER SHARE:
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.45 $ 1.13 $ 1.03
EXTRAORDINARY ITEM, NET OF TAX $ (0.35) $ -- $ --
NET EARNINGS $ 0.10 $ 1.13 $ 1.03
DILUTED EARNINGS PER SHARE:
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.93 $ 0.84
EXTRAORDINARY ITEM, NET OF TAX $ (0.34) $ -- $ --
NET EARNINGS $ 0.10 $ 0.93 $ 0.84
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-33-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
ACCUMULATED UNAMORTIZED
OTHER RESTRICTED
COMMON STOCK ADDITIONAL COMPRE- TREASURY STOCK STOCK
Years Ended March 31, --------------- PAID-IN RETAINED HENSIVE ---------------- COMPEN-
1999, 1998 AND 1997 SHARES AMOUNT CAPITAL EARNINGS LOSSES SHARES AMOUNT SATION TOTAL
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1996 5,963,566 $59,000 $13,639,000 $15,022,000 -- 498,434 $(1,918,000) $(236,000) $26,566,000
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE EARNINGS
NET EARNINGS -- -- -- 5,663,000 -- -- -- -- 5,663,000
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE EARNINGS 5,663,000
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS EXERCISED 44,220 1,000 101,000 -- -- 300 (3,000) -- 99,000
COMPENSATION RELATING TO
STOCK OPTIONS, NET -- -- (29,000) -- -- -- -- 109,000 80,000
RESTRICTED STOCK BONUS AWARDS -- -- 167,000 -- -- (34,575) 133,000 (217,000) 83,000
SHARES REISSUED FROM TREASURY
FOR ACQUISITIONS -- -- 330,000 -- -- (43,266) 166,000 -- 496,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1997 6,007,786 60,000 14,208,000 20,685,000 -- 420,893 (1,622,000) (344,000) 32,987,000
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE EARNINGS
NET EARNINGS -- -- -- 6,372,000 -- -- -- -- 6,372,000
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT -- -- -- -- (135,000) -- -- -- (135,000)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE EARNINGS 6,237,000
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS EXERCISED 23,480 -- 145,000 -- -- 224 (2,000) -- 143,000
COMPENSATION RELATING TO
STOCK OPTIONS, NET -- -- 199,000 -- -- -- -- (101,000) 98,000
RESTRICTED STOCK BONUS AWARDS -- -- 139,000 -- -- (18,656) 63,000 (46,000) 156,000
CONVERSION OF 9% DEBENTURES
(NOTE 7) 564,971 6,000 4,708,000 -- -- -- -- -- 4,714,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1998 6,596,237 66,000 19,399,000 27,057,000 (135,000) 402,461 (1,561,000) (491,000) 44,335,000
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE EARNINGS
NET EARNINGS -- -- -- 680,000 -- -- -- -- 680,000
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT -- -- -- -- (4,000) -- -- -- (4,000)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE EARNINGS 676,000
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS EXERCISED 63,600 1,000 143,000 -- -- -- -- -- 144,000
COMPENSATION RELATING TO
STOCK OPTIONS, NET -- -- 427,000 -- -- -- -- (314,000) 113,000
RESTRICTED STOCK BONUS AWARDS -- -- 173,000 -- -- (17,297) 68,000 8,000 249,000
CONVERSION OF 9% DEBENTURES
(NOTE 7) 97,830 1,000 855,000 -- -- -- -- -- 856,000
EQUITY ISSUED IN CONNECTION
WITH THE NAI MERGER
(NOTES 2 AND 9) 2,858,266 28,000 27,041,000 -- -- -- -- -- 27,069,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1999 9,615,933 $96,000 $48,038,000 $27,737,000 $(139,000) 385,164 $(1,493,000) $(797,000) $73,442,000
====================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-34-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31, 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET EARNINGS $ 680,000 $ 6,372,000 $ 5,663,000
ADJUSTMENTS TO RECONCILE NET EARNINGS TO CASH FLOWS
FROM OPERATING ACTIVITIES:
EXTRAORDINARY ITEM, NET OF TAX 2,306,000 -- --
DEPRECIATION AND AMORTIZATION 12,411,000 7,059,000 5,027,000
INVENTORY RESERVES AND PROVISION FOR DOUBTFUL ACCOUNTS 3,980,000 1,018,000 (335,000)
DEFERRED INCOME TAXES (3,451,000) (121,000) 701,000
OTHER, NET 373,000 (446,000) 120,000
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM
BUSINESS COMBINATIONS:
INCREASE IN ACCOUNTS RECEIVABLE (20,939,000) (17,051,000) (200,000)
INCREASE IN INVENTORIES (23,084,000) (10,985,000) (5,485,000)
(INCREASE) DECREASE IN PREPAID EXPENSES AND
OTHER CURRENT ASSETS (474,000) (393,000) 779,000
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 12,454,000 11,011,000 (5,837,000)
INCREASE (DECREASE) IN ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES 15,933,000 2,324,000 (1,057,000)
INCREASE IN CUSTOMER ADVANCES 14,613,000 683,000 --
OTHER, NET 423,000 (703,000) (1,090,000)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,225,000 (1,232,000) (1,714,000)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES (6,866,000) (6,570,000) (3,634,000)
SALES OF CAPITAL ASSETS 130,000 2,277,000 151,000
PAYMENTS PURSUANT TO BUSINESS COMBINATIONS,
NET OF CASH ACQUIRED (54,176,000) (34,183,000) (6,285,000)
PROCEEDS FROM SALE OF PARTNERSHIP NET ASSETS -- 1,890,000 --
OTHER, NET -- 227,000 --
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (60,912,000) (36,359,000) (9,768,000)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
PAYMENTS ON LONG-TERM DEBT (1,193,000) (2,294,000) (840,000)
RETIREMENT OF CONVERTIBLE SUBORDINATED DEBENTURES (4,992,000) -- --
NET PROCEEDS FROM ACQUISITION-RELATED DEBT 47,075,000 35,578,000 --
OTHER BORROWINGS (REPAYMENTS), NET 5,367,000 4,706,000 (1,107,000)
OTHER, NET 191,000 (168,000) 99,000
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 46,448,000 37,822,000 (1,848,000)
- ---------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (280,000) (13,000) --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 481,000 218,000 (13,330,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,673,000 9,455,000 22,785,000
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $10,154,000 $ 9,673,000 $ 9,455,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-35-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===================== A. ORGANIZATION DRS Technologies, Inc. (hereinafter
NOTE 1 DRS or the Company) is a leading supplier of defense
electronics systems and has served the defense
Summary of Signficant industry for over thirty years. The Company provides
Accounting Policies advanced technology products and services to
government and commercial markets worldwide and holds
leading positions in most of its markets. DRS develops and manufactures a broad
range of mission critical products -- from rugged computers and peripherals to
systems and components in the areas of communications, data storage, digital
imaging, electro-optics, flight safety and space. The Company's defense
electronics systems and subsystems are sold to all branches of the U.S.
military, selected U.S. government intelligence agencies, major
aerospace/defense prime contractors, international military forces and a wide
range of commercial customers. DRS also offers a full complement of technical
support and advanced manufacturing services.
B. BASIS OF PRESENTATION The Consolidated Financial Statements include the
accounts of DRS Technologies, Inc., its subsidiaries (all of which are wholly
or majority owned) and a joint venture consisting of an 80% controlling
partnership interest. All significant intercompany transactions and balances
have been eliminated in consolidation. Certain items in the prior years'
consolidated financial statements have been reclassified to conform to the
fiscal 1999 presentation.
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.
C. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY
TRANSACTIONS Transactions in foreign currencies are translated into U.S. dollars
at the approximate prevailing rate at the time of the transaction. The
operations of the Company's foreign subsidiaries, other than Bulgaria, are
translated from the local (functional) currencies into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." The functional currency of the Company's
Bulgarian subsidiary is the U.S. dollar. The rates of exchange at each balance
sheet date are used for translating balance sheet accounts, and an average rate
of exchange is used for translating the statement of earnings. Gains or losses
resulting from these translation adjustments are included in the accompanying
Consolidated Balance Sheets as a separate component of stockholders' equity.
D. CLASSIFICATIONS Receivables, inventories, losses and future costs accrued on
uncompleted contracts, unearned income and accruals for future costs on
uncompleted acquired contracts are primarily attributable to long-term contracts
or programs in progress for which the related operating cycles are longer than
one year. In accordance with industry practice, these items are included in
current assets and liabilities, respectively.
E. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
F. RECEIVABLES Receivables consist of amounts billed and currently due from
customers, and unbilled costs and accrued profits primarily related to revenues
on long-term contracts that have been recognized for accounting purposes, but
not yet billed to customers.
G. INVENTORIES Commercial and other non-contract inventories are stated at the
lower of cost (which includes material, labor and manufacturing overhead) or net
realizable value. Costs accumulated under contracts are stated at actual cost,
not in excess of estimated net realizable value, including, for long-term
government contracts, applicable amounts of general and administrative expenses
which include research and development costs, where such costs are recoverable
under customer contracts.
Pursuant to contract provisions, agencies of the U.S. Government and
certain other customers have title to, or a security interest in, inventories
related to such contracts as a result of progress payments and advances.
Accordingly, such progress payments and advances are reflected as an offset
against the related inventory balances. To the extent that customer advances
exceed related inventory levels, such advances are classified as current
liabilities.
-36-
<PAGE>
H. PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization have been
provided on the straight-line method. The ranges of estimated useful lives are:
office furnishings 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. Costs of assets retired, sold or otherwise disposed
of are removed from the accounts, and any gains or losses thereon are reflected
in results of operations.
I. GOODWILL AND RELATED INTANGIBLE ASSETS Goodwill and related intangible assets
consist primarily of intangible assets resulting from acquisitions and represent
the excess of cost of the investments over the fair values of the underlying net
assets at the dates of investment and certain identified acquired intangible
assets (see Note 2). Goodwill and related intangible assets are being amortized
on a straight-line basis over three to thirty years.
J. CONVERTIBLE DEBENTURES The Company's outstanding 9% Senior Subordinated
Convertible Debentures due 2003 (9% Debentures) and 12% Convertible Promissory
Notes due 2001 (12% Notes) are convertible at any time into shares of the
Company's Common Stock at the election of the holders. Upon conversion, the
Company's policy is to credit stockholders' equity for the aggregate principal
amount of debt converted, net of a pro-rata portion of unamortized issuance
costs at the conversion date. In the event the conversion occurs before an
interest payment record date, the related liability for accrued and unpaid
interest is also credited to stockholders' equity.
K. 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 from commercial product sales
also are recognized upon shipment.
Revenues on contracts with significant engineering as well as production
requirements are recorded using the percentage-of-completion method measured by
the costs incurred on each contract to estimated total contract costs at
completion (cost-to-cost) with consideration given for risk of performance and
estimated profit. Revenues 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 1999, 1998 and 1997 approximated 10%, 9% and 7% of total revenues,
respectively, with remaining revenues recognized as deliveries of finished units
are made, or as costs are incurred under cost-reimbursement contracts. Included
in revenues for fiscal 1999, 1998 and 1997 were $15,380,000, $11,774,000 and
$12,995,000, respectively, of customer-sponsored research and development.
Revisions in profit estimates are reflected in the period in which the
facts, which require the revisions, become known, and any estimated losses and
other future costs are accrued in full.
Approximately 78%, 74% and 71% of the Company's revenues in fiscal 1999,
1998 and 1997, respectively, were derived directly or indirectly from
defense-industry contracts with the United States Government. In addition,
approximately 8% in fiscal 1999 and 9% in fiscal 1998 and 1997 of the Company's
revenues were derived directly or indirectly from sales to foreign governments,
respectively.
L. STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for
Stock-based Compensation" (SFAS 123), the Company applies Accounting Principles
Board Opinion No. 25 in accounting for its stock option plans and, accordingly,
compensation cost is recognized for its stock options in the financial
statements only as it relates to non-qualified stock options for which the
exercise price was less than the fair market value of the Company's Common Stock
as of the date of grant. The Company follows the provisions of SFAS 123 and
provides pro forma disclosures of net earnings and earnings per share as if the
fair value-based method of accounting for stock options, as defined in the
Statement, had been applied (see Note 9).
M. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes",
the Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is provided when it is more likely than not that
some portion or all of a deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the period in which related temporary differences became
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
-37-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
N. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement
simplified standards for computing earnings per share (EPS), as specified in
Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under
SFAS 128, the presentation of primary EPS was replaced by the presentation of
basic EPS. For companies with complex capital structures, the presentation of
fully diluted EPS was replaced by diluted EPS. Diluted EPS is computed similarly
to fully diluted EPS, pursuant to APB 15. The Company adopted this standard in
fiscal 1998 beginning with the fiscal quarter ended December 31, 1997, and its
adoption did not have a material impact on reported earnings per share for
current or restated prior periods.
Basic earnings per share is computed by dividing net earnings by the
weighted average of Common Stock outstanding during each period. The computation
of diluted earnings per share includes the effect, when dilutive, of shares from
the assumed exercise of dilutive stock options and the effect of the assumed
conversion of the Company's outstanding 9% Debentures and 8-1/2% Debentures. The
Company's 12% Notes were antidilutive in fiscal 1999. The following table
provides the components of the per-share computations:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986 $ 6,372 $ 5,663
EXTRAORDINARY ITEM, NET OF TAX (2,306) -- --
- -------------------------------------------------------------------------------------------
NET EARNINGS $ 680 $ 6,372 $ 5,663
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,618 5,626 5,525
BASIC EARNINGS (LOSSES) PER SHARE:
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.45 $ 1.13 $ 1.03
EXTRAORDINARY ITEM, NET OF TAX (0.35) -- --
- -------------------------------------------------------------------------------------------
NET EARNINGS $ 0.10 $ 1.13 $ 1.03
- -------------------------------------------------------------------------------------------
DILUTED EPS COMPUTATION
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 2,986 $ 6,372 $ 5,663
INTEREST AND EXPENSES RELATED TO CONVERTIBLE DEBENTURES -- 2,071 1,795
- -------------------------------------------------------------------------------------------
ADJUSTED NET EARNINGS BEFORE EXTRAORDINARY ITEM 2,986 8,443 7,458
EXTRAORDINARY ITEM, NET OF TAX (2,306) -- --
- -------------------------------------------------------------------------------------------
ADJUSTED NET EARNINGS $ 680 $ 8,443 $ 7,458
- -------------------------------------------------------------------------------------------
DILUTED COMMON SHARES OUTSTANDING:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,618 5,626 5,525
STOCK OPTIONS 214 283 228
CONVERTIBLE DEBENTURES:
8 1/2% DEBENTURES -- 333 333
9% DEBENTURES -- 2,803 2,824
- -------------------------------------------------------------------------------------------
DILUTED COMMON SHARES OUTSTANDING 6,832 9,045 8,910
- -------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSSES) PER SHARE:
NET EARNINGS BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.93 $ 0.84
EXTRAORDINARY ITEM, NET OF TAX (0.34) -- --
- -------------------------------------------------------------------------------------------
NET EARNINGS $ 0.10 $ 0.93 $ 0.84
- -------------------------------------------------------------------------------------------
</TABLE>
O. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS Whenever events or changes in
circumstances indicate that the carrying amount of a long-lived or intangible
asset may not be recoverable, the Company's policy is to evaluate the
realizability of such assets based upon the expectations of non-discounted cash
flows or of operating income for each subsidiary or acquired business having a
material acquisition-related intangible asset balance. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, a loss would be recognized for the difference between the fair value and
the carrying amount.
P. FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1999 and 1998 of the Company's convertible debt are disclosed herein (see
Note 7).
Q. OTHER COMPREHENSIVE EARNINGS In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes new standards
for reporting and display of comprehensive income in a full set of general-
-38-
<PAGE>
purpose financial statements. The Company adopted SFAS 130 this fiscal
year, and the components of Comprehensive Income are disclosed within the
Consolidated Statements of Stockholders' Equity and Comprehensive Earnings.
- ---------------- On June 18, 1996, DRS Ahead Technology, Inc. (DRS Ahead
NOTE 2 Technology) acquired, through a wholly-owned subsidiary,
substantially all the assets of Vikron, Inc. (Vikron)
Business Combinations for approximately $3.7 million in cash. The excess of
cost over the estimated fair value of net assets
acquired was approximately $1.6 million and is being amortized on a
straight-line basis over fifteen years. Vikron, located in St. Croix Falls,
Wisconsin, manufactures data and recording heads.
On October 24, 1996, DRS Ahead Technology acquired, through a wholly-owned
subsidiary, certain assets of Nortronics Company, Inc. (Nortronics) for
approximately $2.4 million in cash. In September 1998, DSG closed Nortronics'
sole production facility in Dassel, Minnesota, and transferred related assets
and products to its Plymouth, Minnesota and Razlog, Bulgaria plants.
On October 30, 1996, Pacific Technologies, Inc., a California corporation,
merged with and into a wholly-owned subsidiary of the Company for stock and cash
valued at approximately $0.5 million. Based in San Diego, California and renamed
DRS Technical Services, Inc., it provides systems and software engineering
support to the U.S. Navy for the testing of shipboard combat systems.
On May 13, 1997, a subsidiary of the Company acquired approximately 80% of
the outstanding equity of Magnetic Heads Company Ltd. (MHC) for approximately
$0.3 million in cash. Located in Razlog, Bulgaria, MHC, now known as DRS Ahead
Technology, Inc. (Bulgaria) AD (Ahead Technology -- Bulgaria), is a manufacturer
and supplier of magnetic recording heads used primarily for commercial
applications. In connection with this acquisition, the Company has agreed to
make additional investments in DRS Ahead Technology -- Bulgaria totaling
approximately $2.3 million over a five-year period. For purposes of this
agreement, investments include transfer of technology and related intangible
assets, transfer of inventory and other productive assets, employee training and
other similar transfers and expenditures.
On September 12, 1997, the Company sold substantially all of the net assets
of DRS Medical Systems (a partnership formed in February 1996 in which the
Company held a 90% interest) to United States Surgical Corporation for
approximately $1.9 million in cash. The sale resulted in a gain of approximately
$0.1 million and the reversal of accrued obligations of $0.3 million. The
results of operations of this partnership were not material to the consolidated
operating results of the Company during the periods presented.
On October 29, 1997 (the Closing Date), DRS acquired, through certain of
its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace
Limited (Spar), a Canadian corporation, and 100% of the stock of Spar Aerospace
(UK) Limited, incorporated under the laws of England and Wales (the Spar
Acquisition), pursuant to a purchase agreement (the Agreement) dated as of
September 19, 1997 between DRS and Spar. The Company paid approximately $35.4
million in cash for the Acquisition (which included $6.9 million for cash
acquired in connection with the transaction), subject to a certain working
capital adjustment as provided for in the Agreement. The amount of such working
capital adjustment, if any, remains the subject of dispute between DRS and Spar.
Although the Company cannot, at this time, predict the outcome of such dispute,
management does not expect that its resolution will have a material impact on
the Company's consolidated results of operations or financial position. The
excess of cost over the estimated fair value of net assets acquired was
approximately $20.0 million and is being amortized on a straight-line basis over
30 years. DRS incurred professional fees and other costs related to the Spar
Acquisition of approximately $1.5 million, which were capitalized as part of the
total purchase price. Headquartered in Carleton Place, Ontario, Canada, and
operating under the name DRS Flight Safety and Communications, the company has
been an international provider of aviation and defense systems for over 30
years. It designs, manufactures and markets sophisticated flight safety systems,
naval communications systems and other advanced electronics for government and
commercial customers around the world. It also provides custom manufacturing
services for complex electronic assemblies and systems.
On March 10, 1998, a subsidiary of the Company acquired Hadland Photonics
Ltd. and subsidiaries for approximately $6.5 million in cash. Headquartered in
Tring, Hertfordshire, the United Kingdom, and operating under the name DRS
Hadland, the company has been a leader in ultra high-speed image capture and
analysis for over 40 years. It designs, manufactures and markets ultra
high-speed digital imaging cameras and provides avionics systems, including
airborne video recording and ground replay systems, for government and
commercial customers worldwide. The excess of cost over the estimated fair value
of net assets acquired was approximately $4.0 million and is being amortized on
a straight-line basis over 30 years.
On October 20, 1998 the Company acquired, through certain of its
subsidiaries, certain assets of the Second Generation Ground-Based
Electro-Optical (Ground EO) and Focal Plane Array (FPA) businesses (together,
the EOS Business) of Raytheon Company and certain of its subsidiaries
(Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28, 1998,
between the Company and Raytheon, as amended (the EOS Acquisition). The Company
paid approximately $45 million in cash for the acquisition at closing; the
purchase price is subject to a post-closing working capital adjustment, as
provided for in
-39-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
the Asset Purchase Agreement, not to exceed $7 million. The amount of such
working capital adjustment is currently being determined. Management does not
expect that the final adjustment will have a material impact on the Company's
consolidated financial position or results of operations. The excess of cost
over the estimated fair value of net assets acquired and the appraised value of
certain identified intangible assets were approximately $34.5 million and $30.8
million, respectively, and are being amortized on a straight-line basis over 20
years. DRS incurred professional fees and other costs related to the EOS
Acquisition of approximately $2.0 million, which also were capitalized as part
of the total purchase price. The Company has valued acquired contracts in
process at their remaining contract prices, less estimated costs to complete,
and an allowance for normal profits on the Company's effort to complete such
contracts (see Note 6). Purchase price allocation has not yet been finalized,
and actual purchase price allocation may differ from that used in these
Consolidated Financial Statements. The EOS Business provides products used in
the detection, identification and acquisition of targets based on infrared data.
Primary programs include the U.S. Army's Horizontal Technology Integration
Second Generation FLIR (Forward-Looking Infra-Red) (HTI SGF), the Long-Range
Advanced Scout Surveillance System (LRAS3), the Improved Bradley Acquisition
System (IBAS) and the Javelin missile programs. Ground EO, renamed DRS Sensor
Systems, Inc., has 47 employees based in El Segundo, California; and FPA,
renamed DRS Infrared Technologies, LP, has 186 employees located in Dallas,
Texas.
On February 19, 1999, a wholly-owned subsidiary of the Company merged with
and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being
the surviving corporation and continuing as a direct wholly-owned subsidiary of
DRS, for stock and other consideration valued at approximately $24.8 million
(the NAI Merger). The excess of cost over the estimated fair value of net assets
acquired was approximately $25.4 million and is being amortized on a
straight-line basis over 20 years. DRS incurred professional fees and other
costs related to the NAI Merger of approximately $2.8 million, which were
capitalized as part of the total purchase price. Purchase price allocation has
not yet been finalized, and actual purchase price allocation may differ from
that used in these Consolidated Financial Statements. NAI is a diversified,
international electronics company and a leading provider of rugged computers,
peripherals and integrated systems primarily for military and special government
applications. The company has office locations in Columbia, Maryland; Longmont,
Colorado; Farnham, Surrey, England; and Fyshwick, Australian Capital Territory,
Australia and employs approximately 200 people. NAI reported revenues from
continuing operations of approximately $48 million for the fiscal year ended
December 31, 1997 and $35 million for the nine-month period ended September 30,
1998.
The aforementioned acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the results of operations of the acquired
businesses were included in the Company's reported operating results from their
respective effective dates of acquisition. Except for the Spar Acquisition, the
EOS Acquisition and the NAI Merger, the financial position and results of
operations of these businesses were not significant to those of the Company as
of their respective effective dates of acquisition.
The following unaudited pro forma financial information shows the results
of operations for the years ended March 31, 1999 and 1998, as though the Spar
Acquisition, the EOS Acquisition and the NAI Merger had occurred at the
beginning of each period presented. In addition to combining the historical
results of operations of the companies, the pro forma calculations include:
amortization of the excess of cost over the estimated fair value of net assets
acquired and other identified intangible assets; additional interest expense on
the debt associated with the Spar and EOS Acquisitions; estimated costs
associated with certain master service agreements between DRS and Raytheon,
negotiated in connection with the EOS Acquisition; elimination of interest and
related expenses associated with NAI's 12% Notes and other short-term
borrowings, converted and liquidated, respectively, in connection with the NAI
Merger; the disposal of NAI's Telecommunications segment (Wilcom, Inc.)
immediately prior to the NAI Merger; an increase in the average shares
outstanding used in earnings per share computations, based on equity issued in
connection with the NAI Merger; adjustments to conform accounting practices,
particularly with respect to revenue recognition (except with respect to the
Spar Acquisition, as it was not practicable to conform the revenue recognition
method); and the related tax effect of these adjustments for each pro forma
period presented. For purposes of this pro forma financial information, an
adjustment to conform the treatment of general and administrative expenses
between DRS and the businesses acquired in the Spar Acquisition was not made, as
management believes that the effect of any such adjustment would be immaterial.
Years Ended March 31, 1999 1998
- --------------------------------------------------------------------------------
REVENUES $327,632,000 $284,228,000
NET LOSSES BEFORE EXTRAORDINARY ITEM $ (6,806,000) $ (2,927,000)
LOSSES PER SHARE:
BASIC $ (0.74) $ (0.34)
DILUTED $ (0.74) $ (0.34)
- --------------------------------------------------------------------------------
-40-
<PAGE>
The pro forma financial information is not necessarily indicative either of the
results of operations that would have occurred had the acquisitions and the
merger been made at the beginning of the period, or of the future results of
operations of the combined companies.
- -------------------- The component elements of accounts receivable, net of
NOTE 3 allowances for doubtful accounts of $1,254,000 and
$486,000 at March 31, 1999 and 1998, respectively,
Accounts Receivable are as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
U.S. GOVERNMENT:
AMOUNTS BILLED $14,831,000 $10,042,000
RECOVERABLE COSTS AND ACCRUED PROFIT
ON PROGRESS COMPLETED, NOT BILLED 7,229,000 1,592,000
- --------------------------------------------------------------------------------
22,060,000 11,634,000
- --------------------------------------------------------------------------------
OTHER DEFENSE CONTRACTS:
AMOUNTS BILLED 42,963,000 24,058,000
RECOVERABLE COSTS AND ACCRUED PROFIT
ON PROGRESS COMPLETED, NOT BILLED 5,558,000 4,925,000
- --------------------------------------------------------------------------------
48,521,000 28,983,000
- --------------------------------------------------------------------------------
OTHER TRADE RECEIVABLES 5,554,000 6,656,000
- --------------------------------------------------------------------------------
TOTAL $76,135,000 $47,273,000
- --------------------------------------------------------------------------------
Included in accounts receivable are $848,000 and $784,000 at March 31, 1999 and
1998, respectively, arising from retainage provisions in certain contracts with
the Canadian and British governments which may not be collected within one year.
The Company receives progress payments on certain contracts between 75-90% of
allowable costs incurred; the remainder, including profits and incentive fees,
if any, is billed upon delivery and final acceptance of the product. In
addition, the Company may bill based upon units delivered.
- -------------------- Inventories are summarized as follows:
NOTE 4
Inventories
March 31, 1999 1998
- --------------------------------------------------------------------------------
WORK-IN-PROCESS $ 95,392,000 $63,000,000
RAW MATERIAL AND FINISHED GOODS 14,309,000 5,813,000
- --------------------------------------------------------------------------------
109,701,000 68,813,000
LESS PROGRESS PAYMENTS (36,794,000) (30,176,000)
- --------------------------------------------------------------------------------
TOTAL $ 72,907,000 $38,637,000
- --------------------------------------------------------------------------------
General and administrative costs included in work in process were $13,604,000
and $9,855,000 at March 31, 1999 and 1998, respectively. General and
administrative costs included in costs and expenses amounted to $51,105,000,
$38,783,000 and $34,569,000 in fiscal 1999, 1998 and 1997, respectively.
Included in these amounts are expenditures for internal research and
development, amounting to approximately $5,228,000, $4,049,000 and $3,852,000 in
fiscal 1999, 1998 and 1997, respectively.
- -------------------- Property, plant and equipment at March 31, 1999 and
NOTE 5 1998 are summarized as follows:
Property, Plant
and Equipment
March 31, 1999 1998
- --------------------------------------------------------------------------------
LABORATORY AND PRODUCTION EQUIPMENT $ 42,717,000 $29,279,000
COMPUTER EQUIPMENT 12,562,000 10,329,000
LAND, BUILDINGS AND IMPROVEMENTS
AND LEASEHOLD IMPROVEMENTS 11,480,000 10,787,000
OFFICE FURNISHINGS, EQUIPMENT AND OTHER 6,134,000 5,034,000
- --------------------------------------------------------------------------------
TOTAL $ 72,893,000 $55,429,000
- --------------------------------------------------------------------------------
-41-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Depreciation and amortization of plant and equipment amounted to $7,559,000,
$4,983,000 and $3,542,000 in fiscal 1999, 1998 and 1997, respectively.
- -------------------- The component elements of accrued expenses and other
NOTE 6 current liabilities are as follows:
Accrued Expenses and
Other Current Liabilities
March 31, 1999 1998
- --------------------------------------------------------------------------------
PAYROLLS, OTHER COMPENSATION AND RELATED EXPENSES $ 9,323,000 $ 5,693,000
INCOME TAXES PAYABLE (NOTE 8) 3,666,000 1,342,000
DEFERRED INCOME TAXES (NOTE 8) -- 697,000
CUSTOMER ADVANCES 15,973,000 118,000
LOSSES AND FUTURE COSTS ACCRUED ON
UNCOMPLETED CONTRACTS 8,119,000 4,120,000
UNEARNED INCOME AND ACCRUAL FOR FUTURE
COSTS RELATED TO ACQUIRED CONTRACTS (NOTE 2) 38,167,000 --
OTHER 17,290,000 7,543,000
- --------------------------------------------------------------------------------
TOTAL $92,538,000 $19,513,000
- --------------------------------------------------------------------------------
- -------------------- A summary of debt is as follows:
NOTE 7
Debt
March 31, 1999 1998
- --------------------------------------------------------------------------------
9% SENIOR SUBORDINATED CONVERTIBLE
DEBENTURES DUE OCTOBER 1, 2003 $ 19,134,000 $20,000,000
8 1/2% CONVERTIBLE SUBORDINATED
DEBENTURES DUE AUGUST 1, 1998 -- 4,992,000
TERM NOTES 80,000,000 19,794,000
REVOLVING LINE OF CREDIT 15,683,000 23,556,000
OTHER OBLIGATIONS 2,287,000 804,000
- --------------------------------------------------------------------------------
117,104,000 69,146,000
LESS:
CURRENT INSTALLMENTS OF LONG-TERM DEBT 5,844,000 7,514,000
SHORT-TERM BANK DEBT 9,169,000 5,100,000
- --------------------------------------------------------------------------------
TOTAL $102,091,000 $56,532,000
- --------------------------------------------------------------------------------
The 9% Debentures were issued in fiscal 1996 for an aggregate principal amount
of $25,000,000. These Debentures are convertible at their face amount any time
prior to maturity into shares of Common Stock, unless previously redeemed, at a
conversion price of $8.85 per share, subject to adjustment under certain
circumstances. In fiscal 1999 and 1998, $866,000 and $5,000,000 aggregate
principal amount of these Debentures were converted into 97,830 and 564,971
shares of Common Stock, respectively, at the election of the bondholders.
The 9% Debentures are currently 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 the fifth anniversary of the initial redemption date (October 1, 1998).
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. The indenture for the 9%
Debentures contains certain restrictions, including a restriction on the payment
of dividends on the capital stock of the Company, a limitation on the issuance
of additional debt and certain other restrictions. Under the indenture, the
Company also is required to maintain a minimum level of consolidated net worth.
As of March 31, 1999, the Company was in compliance with all covenants.
The 9% Debentures are listed for trading on the American Stock Exchange.
The aggregate market values, based on closing prices, of the outstanding
principal amount was approximately $19,517,000 and $25,400,000 as of March 31,
1999 and 1998, respectively.
At March 31, 1998, $4,992,000 aggregate principal amount of the Company's
8 1/2% Debentures remained outstanding. These Debentures were redeemed at
maturity on August 1, 1998.
In connection with the acquisition of the EOS Business (see Note 2) on
October 20, 1998, the Company and certain of its subsidiaries entered into a
$150 million secured credit facility (Facility) with Mellon Bank, N.A.,
consisting of two term
-42-
<PAGE>
loans: the first in the principal amount of $30 million (First Term Loan), and
the second in the principal amount of $50 million (Second Term Loan); and a
revolving line of credit (Line of Credit) for $70 million, subject to a
borrowing base calculation. As of March 31, 1999 and 1998, the Company had
approximately $38.4 million and $10.8 million, respectively, of additional
available credit after satisfaction of its borrowing base requirement. The
maturity dates of the First Term Loan and the Second Term Loan are October 20,
2003 and October 20, 2005, respectively, with quarterly principal payments
beginning on June 30, 1999. The Line of Credit matures on October 20, 2003. The
Facility amended, restated and replaced the Company's existing $60 million
secured credit facility consisting of a $20 million term loan and a $40 million
revolving line of credit, obtained in fiscal 1998 in connection with the Spar
Acquisition. The Second Term Loan was used to finance a portion of the
acquisition of the EOS Business. The First Term Loan was used to refinance the
debt associated with the acquisition of DRS Flight Safety and Communications in
the third quarter of fiscal 1998, and the Line of Credit is available for
working capital, general corporate purposes and acquisitions. The Facility is
secured by substantially all of the assets of the Company. Borrowings can be
made in United States dollars at rates based on LIBOR (London Interbank Offering
Rate) or United States Prime or in Canadian dollars at rates based on LIBOR,
Canadian Prime or the Canadian Bankers Acceptance Rate. The Facility contains
certain covenants and restrictions, including maintenance of a minimum level of
consolidated net worth, a restriction on the payment of dividends on the capital
stock of the Company, a limitation on the issuance of additional debt and
certain other restrictions. The Company was in compliance with all covenants
under its credit agreements at March 31, 1999 and 1998.
For accounting purposes, the modification of the Facility was accounted for
as an extinguishment of debt pursuant to the guidance of the Emerging Issues
Task Force of the Financial Accounting Standards Board (Issue No. 96-19).
Accordingly, the unamortized balance of deferred financing costs relating to the
previous credit facility, plus fees paid in connection with the modification,
were recorded as an extraordinary charge in the amount of $2,306,000, net of tax
of $1,347,000 (see Note 8), during the period.
As of March 31, 1999, approximately $95,683,000 was outstanding against the
Facility, in addition to which $5,922,000 was contingently payable under letters
of credit, as compared with amounts outstanding and contingently payable under
the previous revolving line of credit at March 31, 1998 of $43,350,000 and
$4,944,000, respectively. Weighted average borrowings under revolving lines of
credit for the fiscal years ended March 31, 1999 and 1998 were approximately
$22,977,000 and $11,325,000, respectively. The weighted average interest rates
on outstanding revolving line of credit borrowings as of March 31, 1999 and 1998
were 8.1% and 7.8%, respectively. As of March 31, 1999, the effective interest
rates on the First and Second Term Loans were 8.25% and 9.25%, respectively.
Cash payments for interest during fiscal 1999, 1998 and 1997 were $7,978,000,
$3,874,000 and $3,032,000, respectively. The aggregate maturities of long-term
debt for the five years ending March 31, 2004 are as follows: 2000, $5,844,000;
2001, $5,250,000; 2002, $7,250,000; 2003, $9,250,000 and 2004, $31,400,000.
- ------------------- Earnings before extraordinary item and
NOTE 8 income taxes and income tax expense
consist of the following:
Income Taxes
Years Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM
AND INCOME TAXES:
DOMESTIC EARNINGS $ 2,903,000 $9,118,000 $9,284,000
FOREIGN EARNINGS 1,839,000 546,000 --
- --------------------------------------------------------------------------------
TOTAL $ 4,742,000 $9,664,000 $9,284,000
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT:
FEDERAL $ 2,363,000 $2,186,000 $2,673,000
STATE 431,000 698,000 247,000
FOREIGN 2,413,000 529,000 --
- --------------------------------------------------------------------------------
5,207,000 3,413,000 2,920,000
- --------------------------------------------------------------------------------
DEFERRED:
FEDERAL (2,014,000) 117,000 596,000
STATE 39,000 34,000 105,000
FOREIGN (1,476,000) (272,000) --
- --------------------------------------------------------------------------------
(3,451,000) (121,000) 701,000
- --------------------------------------------------------------------------------
TOTAL $ 1,756,000 $3,292,000 $3,621,000
- --------------------------------------------------------------------------------
-43-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, 1999 and 1998 are as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
ACQUIRED FEDERAL NET OPERATING
LOSS (NOL) CARRYFORWARDS $ 5,575,000 $ --
STATE NOL CARRYFORWARDS 3,085,000 2,840,000
COSTS ACCRUED ON UNCOMPLETED CONTRACTS 1,860,000 1,112,000
DEFERRED FINANCING COSTS (NOTE 7) 1,066,000 --
INVENTORY CAPITALIZATION 3,217,000 1,984,000
OTHER 3,426,000 1,503,000
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX ASSETS 18,229,000 7,439,000
LESS VALUATION ALLOWANCE (6,886,000) (1,455,000)
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 11,343,000 5,984,000
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
DEPRECIATION AND AMORTIZATION 1,120,000 4,255,000
GENERAL AND ADMINISTRATIVE COSTS 5,795,000 4,248,000
FEDERAL IMPACT OF THE STATE BENEFITS 498,000 749,000
FOREIGN DEFERRED REVENUES -- 863,000
OTHER (16,000) 463,000
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES 7,397,000 10,578,000
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS (LIABILITIES) $3,946,000 $(4,594,000)
- --------------------------------------------------------------------------------
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 U.S. Federal and state net operating loss carryforwards, due to
the uncertainty of future Company earnings and the status of applicable
statutory regulation that could limit or preclude utilization of these benefits
in future periods. Based upon the level of historical taxable income and
projections for future taxable income over the period in which the Company's
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at March 31, 1999.
Current and noncurrent deferred tax assets of $984,000 and $2,962,000,
respectively, are included in the Consolidated Balance Sheets as of March 31,
1999 and 1998, respectively. There were no net deferred tax assets as of March
31, 1998. At March 31, 1999, approximately $16,398,000 of U.S. Federal and
$39,519,000 of state NOL carryforwards, which will expire between fiscal years
2000 and 2019, were available in various tax jurisdictions. All of the Company's
U.S. Federal and $984,000 of its state NOL carryforwards were acquired in
connection with the NAI Merger (see Note 2).
A reconciliation of the expected U.S. Federal income tax expense to the
effective income tax expense follows:
<TABLE>
<CAPTION>
Years Ended March 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPECTED U.S. INCOME TAX EXPENSE $ 1,613,000 $3,286,000 $3,157,000
DIFFERENCE BETWEEN U.S. AND FOREIGN TAX RATES (74,000) (97,000) --
STATE INCOME TAX, NET OF FEDERAL INCOME TAX BENEFIT 310,000 483,000 232,000
UTILIZATION OF CAPITAL LOSS CARRYFORWARD -- (193,000) --
NONDEDUCTIBLE EXPENSES 492,000 262,000 270,000
U.S. TAX, NET OF FOREIGN TAX CREDIT UTILIZED 196,000 -- --
U.S. TAX BENEFITS NOT PREVIOUSLY RECOGNIZED (629,000) -- --
OTHER (152,000) (449,000) (38,000)
- -----------------------------------------------------------------------------------------------------------------
TOTAL $ 1,756,000 $3,292,000 $3,621,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes includes all estimated income taxes payable to
Federal, state and foreign governments, as applicable.
Cash payments for income taxes, net of refunds received, during fiscal
1999, 1998 and 1997 amounted to $3,577,000, $4,449,000 and $2,813,000,
respectively.
-44-
<PAGE>
- ------------------------ On February 19, 1999, DRS Merger Sub, Inc., a New
York corporation and wholly-owned subsidiary of
NOTE 9 DRS Technologies, Inc., a Delaware Corporation
("DRS"), merged (the "Merger") with and into NAI
Common Stock, Stock Technologies, Inc., a New York corporation
Option Plans and ("NAI"), with NAI being the surviving corporation
Employee Benefit Plans and continuing as a direct wholly-owned subsidiary
of DRS (see Note 2). As a result of the Merger:
holders of NAI common stock received 0.25 of a share of DRS common stock for
each share of NAI common stock; each NAI 12% Convertible Subordinated Promissory
Note due January 15, 2001 is convertible into 0.25 of a share of DRS common
stock; each issued and outstanding NAI warrant to purchase NAI common stock at
an exercise price of $2.50 per share was converted into DRS warrants at a
conversion ratio of 0.25 of a share of DRS common stock to one share of NAI
common stock; each NAI stock option outstanding under the NAI 1991 Stock Option
Plan, 1993 Stock Option Plan for Directors, and 1996 Stock Option Plan
("Option"), whether vested or unvested, was assumed by DRS and now constitutes
an option to acquire, on the same terms and conditions as were applicable under
such Option prior to the Merger, the number of DRS common stock equal to the
product (rounded down to the nearest whole number) of 0.25 and the number of
shares of NAI common stock, subject to such Option prior to the merger at a
per-share exercise price equal to four times the exercise price of such Option
prior to the Merger.
In connection with the Merger, the Company issued 2,858,266 shares of
Common Stock, including 546,187 shares issued upon conversion of approximately
$4.4 million of then outstanding 12% Notes. In addition, the Company issued
stock options and warrants to purchase a total of 161,230 and 603,175 shares,
respectively, of DRS Common Stock (as adjusted for the exchange ratio). The
terms of the NAI stock options assumed, except for the exercise price and number
of shares, were not amended. As of March 31, 1999, the warrants assumed in the
Merger remained outstanding. These warrants are exercisable at $10.00 per share
and expire February 15, 2002.
On February 7, 1991, the Company's Board of Directors (Board) adopted the
1991 Stock Option Plan (Stock Option Plan), which authorized the issuance of up
to 600,000 shares of Common Stock. The Company's stockholders approved the Stock
Option Plan on August 8, 1991. Under the terms of the Stock Option Plan, options
to purchase shares of 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 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. As of March 31, 1999, 156,550 shares were reserved for future grants
under the Stock Option Plan.
On June 17, 1996, the Board adopted, and on August 7, 1996, the
stockholders approved the 1996 Omnibus Plan (Omnibus Plan). On November 20,
1998, the Board adopted, and on February 11, 1999, the stockholders approved an
amendment to the Omnibus Plan, increasing the number of shares of Common Stock
reserved for issuance under the Omnibus Plan from 500,000 to 1,400,000 shares,
subject to adjustment under certain circumstances. Awards under the Omnibus Plan
are at the discretion of the Stock Option Committee and may be made in the form
of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock, (v) phantom stock, (vi) stock
bonuses and (vii) other awards. Awards may be granted to employees, officers,
directors and consultants of the Company. The total number of shares of the
Company's stock subject to awards granted to any participant of this plan during
any tax year of the Company may not exceed 200,000 shares. The Omnibus Plan also
provides for automatic grants of non-qualified stock options to non-employee
directors of the Company. Unless the Stock Option Committee expressly provides
otherwise, options granted under the Omnibus Plan are not exercisable prior to
one year after the date of grant and become exercisable as to 25% of the shares
granted on each of the first four anniversaries of the date of grant. The Stock
Option Committee will determine each option's expiration date, provided,
however, that no incentive stock option may be exercised more than ten years
after the date of grant. Additionally, the Stock Option Committee will establish
the option price, provided, however, that in the case of an incentive stock
option, the option price may not be set below the market value of a share of the
Company's Common Stock on the date of grant. As of March 31, 1999, 600,800
shares were reserved for future grants under the Omnibus Plan. Pursuant to the
terms of exercise under the grant, the excess of the fair-market value of shares
under option at the date of grant over the option price may be charged to
unamortized restricted stock compensation or to earnings as compensation expense
and credited to additional paid-in capital. The unamortized restricted stock
compensation, if any, is charged to net earnings as the options become
exercisable, in accordance with the terms of the grant. The amount of
compensation charged to earnings in fiscal 1999, 1998 and 1997 was $67,000,
$98,000 and $80,000, respectively, and related solely to options granted under
the Stock Option Plan.
-45-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Board may, at its discretion, grant equity-based compensation awards,
subject to certain regulatory restrictions. In fiscal 1999, the Board issued
options to purchase up to 250,000 shares of DRS Common Stock with vesting terms
similar to awards issued in fiscal 1999 under the Omnibus Plan at exercise
prices in excess of the market price on the date of grant. The per share
weighted-average fair value and exercise price of these options were $1.89 and
$10.44, respectively.
When stock is issued on exercise of options, the par value of each share
($.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 stock option transactions follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
OF COMMON STOCK EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OUTSTANDING AT MARCH 31, 1996 (OF WHICH 137,100 SHARES WERE EXERCISABLE) 436,800 $ 4.52
GRANTED 165,900 $ 9.88
EXERCISED (44,220) $ 2.29
EXPIRED (17,700) $ 5.03
- ----------------------------------------------------------------------------------------------------------------
OUTSTANDING AT MARCH 31, 1997 (OF WHICH 218,280 SHARES WERE EXERCISABLE) 540,780 $ 6.33
GRANTED 204,800 $ 9.72
EXERCISED (23,480) $ 3.70
EXPIRED (16,000) $ 9.41
- ----------------------------------------------------------------------------------------------------------------
OUTSTANDING AT MARCH 31, 1998 (OF WHICH 303,100 SHARES WERE EXERCISABLE) 706,100 $ 7.33
GRANTED 893,930 $ 9.34
EXERCISED (63,600) $ 2.24
EXPIRED (45,200) $ 10.27
- ----------------------------------------------------------------------------------------------------------------
OUTSTANDING AT MARCH 31, 1999 (OF WHICH 461,579 SHARES WERE EXERCISABLE) 1,491,230 $ 8.66
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Information regarding all options outstanding at March 31, 1999 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OF AVERAGE AVERAGE REMAINING OF AVERAGE
0PTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES LESS THAN $5.00 170,000 $ 2.92 1.1 YEARS 158,000 $ 3.14
$5.00 - $9.99 805,662 $ 8.41 8.6 YEARS 140,687 $ 8.11
GREATER THAN $9.99 515,568 $10.95 7.0 YEARS 162,892 $10.91
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 1,491,230 $ 8.66 7.2 years 461,579 $ 7.39
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma information regarding net earnings and earnings per share, as required
by SFAS 123, has been determined as if the Company had accounted for its
employee stock options under the fair-value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free interest rate
of 5.0%, 6.0% and 6.5% in fiscal 1999, 1998 and 1997, respectively; dividend
yield of 0%; volatility factor related to the expected market price of the
Company's Common Stock of 0.2974 in fiscal 1999, 0.2824 in fiscal 1998, and
0.2764 in fiscal 1997; and weighted-average expected option life of five years.
The weighted-average fair values of options granted at market during fiscal
1999, 1998 and 1997 were $2.95, $3.94 and $3.68 per share, respectively. The per
share weighted-average fair value and exercise price of options granted with an
exercise price less than market value during 1999 and 1998 were $3.96 and $8.20,
and $9.99 and $0.01, respectively. For purposes of pro forma disclosures, the
options' estimated fair values are amortized to expense over the options'
vesting periods. Accordingly, the pro forma results for fiscal 1999, 1998 and
1997 presented below include 49%, 67% and 49%, respectively, of the total pro
forma expense for options awarded in each year. The pro forma amounts may not be
representative of the effects on reported earnings for future years. The
Company's pro forma information follows:
1999 1998 1997
- --------------------------------------------------------------------------------
PRO FORMA NET EARNINGS $7,000 $5,869,000 $5,446,000
PRO FORMA EARNINGS PER SHARE:
BASIC $ -- $ 1.04 $ 0.99
DILUTED $ -- $ 0.88 $ 0.81
- --------------------------------------------------------------------------------
The Company maintains defined contribution plans covering substantially all
domestic full-time eligible employees. The Company's contributions to these
plans for fiscal 1999, 1998 and 1997 amounted to $1,184,000, $743,000 and
$629,000, respectively.
-46-
<PAGE>
Certain employees of DRS Hadland and DRS Flight Safety and Communications
participate in defined benefit pension plans sponsored by the Company. Plan
assets are invested in publicly traded equity and fixed-income securities.
Retirement benefits are based on various factors, including remuneration and
years of service. DRS funds these plans based on independent actuarial
valuations. The net pension obligations and related expenses associated with
these plans are not material to the consolidated financial position and results
of operations of the Company.
On February 1, 1996, the Company established a Supplemental Executive
Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant
to the SERP, the Company will provide retirement benefits to each key executive,
based on years of service and final average annual compensation as defined
therein. In addition, the Company will advance premiums for life insurance
policies providing a death benefit equal to five times the participants' salary
at time of death. In the event of a change in control, as defined therein,
benefits become fully vested. The SERP is non-contributory and unfunded.
Benefits under the SERP currently are being funded from working capital. As of
March 31, 1999 and 1998, the Company's liability for benefits accrued under the
SERP was approximately $1,494,000 and $1,377,000, respectively, and is included
in Other Noncurrent Liabilities in the Consolidated Balance Sheets. Charges of
$462,802, $436,000 and $270,000 relating to the SERP were included in the
results of operations for fiscal 1999, 1998 and 1997, respectively.
- ------------------------ At March 31, 1999, the Company was party to
NOTE 10 various noncancellable operating leases
(principally for administration, engineering and
Commitments, production facilities) with minimum rental
Contingencies payments as follows:
and Related Party
Transactions
- --------------------------------------------------------------------------------
2000 $ 8,325,000
2001 8,368,000
2002 8,230,000
2003 5,821,000
2004 4,613,000
THEREAFTER 11,440,000
- --------------------------------------------------------------------------------
TOTAL $ 46,797,000
- --------------------------------------------------------------------------------
It is not certain as to whether the Company will negotiate new leases as
existing leases expire. Determinations to that effect will be made as existing
leases approach expiration and will be based on an assessment of the Company's
capacity requirements at that time.
Total rent expense aggregated $4,924,000, $3,585,000 and $3,237,000 in
fiscal 1999, 1998 and 1997, 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.
In August 1997, the lease was amended, extending the term of the lease through
June 2002. The Company pays an annual rent of $233,000 and 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) 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 $750,000 as consideration for a five-year
non-compete arrangement. The payments are being charged to expense over the
five-year term 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,
commencing in July 1999, as deferred compensation. The approximate net present
value of the deferred compensation payments to be made to Mr. Gross is included
in Other Noncurrent Liabilities in the Consolidated Balance Sheets.
The Company's Flight Safety and Communications segment receives assistance
from the Canadian Government for research and development activities which is
applied to reduce the cost of the related expenditures. Government assistance in
the amount of approximately $2.4 million is repayable through royalties in the
event the related research and development projects successfully are
commercialized. The royalties are calculated on the basis of 2 to 3% of total
related sales and continue in effect until the assistance received has been
repaid or until the technology ceases to contribute to commercialization of
related products.
-47-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
In the first quarter of fiscal 1999, subpoenas were issued to the Company
by the United States Attorney for the Eastern District of New York seeking
documents related to certain equipment manufactured by DRS Photronics, Inc.
(Photronics), a subsidiary of the Company. These subpoenas were issued in
connection with United States v. Tress, a case involving a product substitution
allegation against an employee of Photronics. On June 26, 1998, the complaint
against the employee was dismissed without prejudice.
The Company itself is a party to various legal actions and claims arising
in the ordinary course of its business. In management's opinion, the Company has
adequate legal defenses for each of the actions and claims and believes that
their ultimate disposition will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Since a substantial amount of the Company's revenues are derived from
contracts or subcontracts with the U.S. Government and foreign governments,
future revenues and profits will be dependent upon continued contract awards,
Company performance and volume of Government business. The books and records of
the Company are subject to audit and post-award review by the Defense Contract
Audit Agency and similar foreign agencies.
- ------------------------ DRS is organized into operating segments on the
NOTE 11 basis of products and services offered: the
Electronic Systems Group (ESG), the Data Systems
Operating Segments Group (DSG), the Electro-Optical Systems Group
(EOSG), the Flight Safety and Communications Group
(FSCG); and Corporate operations. Each operating unit is comprised of separate
and distinct businesses.
During the current fiscal year, DRS's military recording systems
subsidiary, DRS Precision Echo, Inc., was combined with DRS Flight Safety and
Communications for management purposes, based on business and product synergies.
DRS Precision Echo, Inc. previously had been managed, together with DRS Ahead
Technology, Inc., as part of DSG. DSG now consists solely of the operations of
DRS Ahead Technology, Inc., which principally serves commercial markets.
Prior-year balances and results of operations for both FSCG and DSG have been
restated to give effect to this management change. In addition, as a result of
acquisitions completed in fiscal 1999, ESG and EOSG now include the operations
of NAI Technologies, Inc. and the EOS Business of Raytheon, respectively (see
Note 2).
ESG designs, manufactures and integrates complex systems using advanced
commercial technology to meet the performance and environmental requirements of
military customers. Current products include tactical display and processing
systems for military ships and aircraft, surveillance systems for coastal and
harbor regions, radar and acoustic sensor systems, and low-cost emulators of
legacy military systems for test and training support. ESG also provides
manufacturing services and technical support services for both DRS products and
those of other suppliers.
DSG provides a variety of magnetic head products and services used in the
commercial aviation, airline, television broadcast, computer disk drive,
security, banking, transportation and retail sales industries. Many of these
products test or read and write information on magnetic data storage media,
including magnetic tapes, strips and ink. The Group's magnetic heads are used in
commercial and military flight recorders, in computer back-up systems and in
every day uses, such as medical monitoring devices, fare and toll collection,
vending machine operation, airline ticketing, debit and phone cards, and
airplane phones. The Group also produces magnetic head components used in the
manufacturing process of computer disk drives, which burnish and verify the
quality of disk surfaces.
EOSG integrates advanced commercial technology with military requirements
to design and manufacture advanced electro-optical sighting, targeting, weapons
and aircraft optical alignment systems, assemblies and components used primarily
in the aerospace and defense industries. The Group is a leader in ultra
high-speed digital imaging systems for a variety of industrial, laboratory and
military applications and in aircraft boresighting equipment. EOSG also produces
night vision and directional devices, as well as eye-safe, laser-based products
for military applications.
FSCG designs and manufactures advanced flight safety systems, naval
communications systems and other advanced electronics primarily for defense and
commercial aerospace applications. FSCG is a prominent global supplier of
deployable aircraft locator beacons and flight data recorders used in
emergencies to locate aircraft; its shipboard communications systems integrate
commercial technology and are used in conjunction with surveillance satellites.
FCSG also utilizes advanced commercial technology to design and manufacture
multi-sensor digital, analog and video capture and recording products, as well
as high-capacity data storage devices for the harsh environments of aerospace
and defense applications.
Corporate operations include the activities of the parent company, DRS
Corporate Headquarters, and several non-operating subsidiaries of the Company.
Included in this segment are the results of operations from the Company's DRS
Medical Systems partnership. This partnership was formed in February 1996; the
net assets of the partnership were subsequently sold in September 1997 (see Note
2). The results of operations of this partnership were not material to the
consolidated operating results of the Company during this period.
-48-
<PAGE>
The accounting policies of the segments are consistent with those described
in the summary of significant accounting policies (see Note 1). The Company
evaluates segment level performance based on revenues and operating income as
presented in the consolidated statements of earnings. Operating income, as
shown, includes amounts allocated from Corporate operations.
Information about the Company's operations in these segments for the three
years ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
CORPORATE
AND
(In thousands) ESG DSG EOSG FSCG OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1999:
REVENUES $ 123,558 $ 19,460 $ 78,186 $52,224 $ -- $273,428
OPERATING INCOME (LOSS) BEFORE
AMORTIZATION OF GOODWILL
AND RELATED INTANGIBLES $ 9,497 $ (1,964) $ 5,296 $ 5,457 $ (743) $ 17,543
OPERATING INCOME (LOSS) $ 9,292 $ (2,526) $ 3,661 $ 4,608 $ (790) $ 14,245
IDENTIFIABLE ASSETS $ 84,475 $ 14,015 $161,217 $56,369 $14,268 $330,344
DEPRECIATION AND AMORTIZATION $ 1,356 $ 2,279 $ 5,356 $ 2,648 $ 772 $ 12,411
CAPITAL EXPENDITURES $ 1,916 $ 538 $ 1,906 $ 2,091 $ 415 $ 6,866
- ---------------------------------------------------------------------------------------------------------------
FISCAL 1998:
REVENUES $ 95,054 $ 25,307 $ 31,396 $37,387 $ 1,710 $190,854
OPERATING INCOME BEFORE
AMORTIZATION OF GOODWILL
AND RELATED INTANGIBLES $ 9,481 $ 2,252 $ 1,270 $ 2,344 $ 218 $ 15,565
OPERATING INCOME $ 9,454 $ 1,681 $ 1,134 $ 1,847 $ 143 $ 14,259
IDENTIFIABLE ASSETS $ 35,706 $ 17,355 $ 42,401 $57,000 $11,011 $163,473
DEPRECIATION AND AMORTIZATION $ 923 $ 1,897 $ 2,037 $ 1,217 $ 985 $ 7,059
CAPITAL EXPENDITURES $ 1,091 $ 1,569 $ 2,461 $ 383 $ 1,066 $ 6,570
- ---------------------------------------------------------------------------------------------------------------
FISCAL 1997:
REVENUES $ 81,157 $ 22,255 $ 25,134 $11,597 $ 3,435 $143,578
OPERATING INCOME BEFORE
AMORTIZATION OF GOODWILL
AND RELATED INTANGIBLES $ 6,405 $ 4,843 $ 1,431 $ 916 $ (288) $ 13,307
OPERATING INCOME (LOSS) $ 6,348 $ 4,541 $ 1,295 $ 690 $ (292) $ 12,582
IDENTIFIABLE ASSETS $ 27,354 $ 17,666 $ 21,755 $16,546 $14,352 $ 97,673
DEPRECIATION AND AMORTIZATION $ 1,310 $ 1,058 $ 1,286 $ 611 $ 762 $ 5,027
CAPITAL EXPENDITURES $ 1,766 $ 1,899 $ 449 $ 574 $ 540 $ 5,228
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues, total assets and long-lived assets by geographic location are
presented in the table below. Revenues were attributed to countries based on the
physical location of the operating unit generating the revenues. Information
about the Company's operations in these geographic locations for the three years
ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
ALL OTHER
(In thousands) TOTAL UNITED STATES CANADA COUNTRIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1999:
REVENUES $273,428 $229,061 $29,554 $14,813
TOTAL ASSETS $330,344 $272,013 $30,679 $27,652
LONG-LIVED ASSETS $ 34,163 $ 30,454 $ 2,240 $ 1,469
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1998:
REVENUES $190,854 $176,392 $12,216 $ 2,246
TOTAL ASSETS $163,473 $114,442 $33,694 $15,337
LONG-LIVED ASSETS $ 22,972 $ 19,384 $ 1,755 $ 1,833
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1997:
REVENUES $143,578 $143,578 $ -- $ --
TOTAL ASSETS $ 97,673 $ 97,673 $ -- $ --
LONG-LIVED ASSETS $ 19,987 $ 19,987 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- -------------------- The following table sets forth unaudited quarterly
NOTE 12 financial information for fiscal 1999 and 1998:
Quarterlly Financial
Information (Unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1999:
REVENUES $45,988,000 $46,126,000 $76,991,000 $104,323,000
OPERATING INCOME $ 2,066,000 $ 1,749,000 $ 4,006,000 $ 6,424,000
EARNINGS BEFORE
EXTRAORDINARY ITEM $ 324,000 $ 57,000 $ 664,000 $ 1,941,000
NET EARNINGS (LOSSES) $ 324,000 $ 57,000 $(1,642,000) $ 1,941,000
BASIC EARNINGS PER SHARE
EARNINGS BEFORE
EXTRAORDINARY ITEM $ 0.05 $ 0.01 $ 0.10 $ 0.25
NET EARNINGS (LOSSES) $ 0.05 $ 0.01 $ (0.26) $ 0.25
DILUTED EARNINGS PER SHARE:
EARNINGS BEFORE
EXTRAORDINARY ITEM $ 0.05 $ 0.01 $ 0.10 $ 0.22
NET EARNINGS (LOSSES) $ 0.05 $ 0.01 $ (0.25) $ 0.22
- -------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31, 1998:
REVENUES $38,997,000 $38,738,000 $49,915,000 $ 63,204,000
OPERATING INCOME $ 2,899,000 $ 3,285,000 $ 3,715,000 $ 4,360,000
NET EARNINGS $ 1,343,000 $ 1,467,000 $ 1,560,000 $ 2,002,000
BASIC EARNINGS PER SHARE $ 0.24 $ 0.26 $ 0.28 $ 0.35
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.21 $ 0.22 $ 0.29
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
COMMON STOCK
FISCAL 1999 FISCAL 1998
- --------------------------------------------------------------------------------
AS TRADED ON THE AMERICAN STOCK EXCHANGE HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------
FIRST QUARTER 15 3/8 11 5/8 11 3/8 9 5/8
SECOND QUARTER 12 1/16 9 1/16 15 1/8 10 1/4
THIRD QUARTER 11 7 14 13/16 11 7/8
FOURTH QUARTER 11 7 5/8 14 7/8 11 1/4
- -------------------------------------------------------------------------------
As of June 9, 1999, the Common Stock of the Company was held by 982 and 3,291
stockholders of record and beneficial owners, respectively.
-50-
<PAGE>
DRS TECHNOLOGIES INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
DRS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of DRS
Technologies, Inc. and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive earnings, and cash flows for each of the years in the three-year
period ended March 31, 1999. 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 DRS Technologies,
Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
May 11, 1999
EXHIBIT 21
DRS TECHNOLOGIES, INC.
SUBSIDIARIES OF THE COMPANY AS OF MARCH 31, 1999
SUBSIDIARY PLACE OF INCORPORATION
- ----------- ----------------------
DRS Electronic Systems, Inc. United States of America
(Delaware)
DRS Technical Services, Inc. United States of America
(Delaware)
DRS Systems Management Corporation United States of America
(Delaware)
DRS Laurel Technologies United States of America
(Delaware)
DRS Precision Echo, Inc. United States of America
(Delaware)
DRS Ahead Technology, Inc. United States of America
(Delaware)
DRS Photronics, Inc. United States of America
(New York)
DRS Optronics, Inc. United States of America
(Delaware)
DRS Technologies Canada, Inc. United States of America
(Delaware)
DRS Technologies Canada Company Canada (Nova Scotia)
DRS Technologies (Europe) Ltd. United Kingdom
DRS Technologies (UK) Ltd. United Kingdom
DRS Hadland Ltd. United Kingdom
DRS Hadland GmbH Federal Republic of Germany
DRS Hadland, Inc. United States of America
(Delaware)
DRS Air, Inc. United States of America
(Delaware)
DRS/MS, Inc. United States of America
(Delaware)
DRS International, Inc. United States of America
(Delaware)
Diagnostic/Retrieval Systems (DRS) Technologies Netherlands
Parsippany B.V.
DRS Ahead Technology, Inc. Republic of Bulgaria
(Bulgaria) AD
NAI Technologies, Inc. United States of America
(New York)
DRS Rugged Systems (Europe) Ltd. United Kingdom
DRS Rugged Systems (Australia) Pty. Ltd. Australia
DRS Rugged Systems, Inc. United States of America
(Colorado)
DRS Advanced Programs, Inc. United States of America
(New York)
DRS FPA, Inc. United States of America
(Delaware)
DRS Infrared Technologies, LP United States of America
(Delaware)
DRS Sensor Systems, Inc. United States of America
(Delaware)
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors,
DRS Technologies, Inc.:
We consent to the incorporation by reference in the registration statements
(No. 2-87303, No. 2-99986, No. 333-14487 No. 33-33125, No. 33-42886, and No.
333-69751) on Form S-8 and (No. 33-64641, and No. 333-04929) on Form S-3 of DRS
Technologies, Inc. of our reports dated May 11, 1999, relating to the
consolidated balance sheets of DRS Technologies, Inc. as of March 31, 1999 and
1998, and the related consolidated statements of earnings, stockholders' equity
and comprehensive earnings, and cash flows and related consolidated financial
statement schedule for each of the years in the three-year period ended March
31, 1999, which reports appear or are incorporated by reference in the March 31,
1999 Annual Report on Form 10-K of DRS Technologies, Inc.
KPMG LLP
Short Hills, New Jersey
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DRS TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL PERIOD
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,154,000
<SECURITIES> 0
<RECEIVABLES> 77,389,000
<ALLOWANCES> (1,254,000)
<INVENTORY> 72,907,000
<CURRENT-ASSETS> 163,512,000
<PP&E> 72,893,000
<DEPRECIATION> 38,730,000
<TOTAL-ASSETS> 330,344,000
<CURRENT-LIABILITIES> 150,021,000
<BONDS> 102,091,000
0
0
<COMMON> 96,000
<OTHER-SE> 73,346,000
<TOTAL-LIABILITY-AND-EQUITY> 330,344,000
<SALES> 273,428,000
<TOTAL-REVENUES> 273,428,000
<CGS> 259,183,000
<TOTAL-COSTS> 259,183,000
<OTHER-EXPENSES> (876,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,358,000
<INCOME-PRETAX> 4,742,000
<INCOME-TAX> 1,756,000
<INCOME-CONTINUING> 2,986,000
<DISCONTINUED> 0
<EXTRAORDINARY> 2,306,000
<CHANGES> 0
<NET-INCOME> 680,000
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
